Legislature(1999 - 2000)
02/01/2000 10:05 AM House O&G
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HB 290 - STRANDED GAS PIPELINE CARRIERS CHAIRMAN WHITAKER announced that the committee would again discuss 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." CHAIRMAN WHITAKER reminded members that, in his opinion, it is a necessary piece of legislation because it will determine the method of regulation of a natural gas pipeline. The bill also deals with pipeline access for North Slope producers, the availability of natural gas to Alaskan communities, and the availability of natural gas to Alaskan industry. He said the committee's task is to ensure that the method by which these determinations are made is equitable and in the state's best interest. "Simply put," he said, "this is a big deal, and we, this committee, need do it right." Number 0204 ROGER MARKS, Petroleum Economist, Department of Revenue, presented a preliminary analysis by the Administration on HB 290. This analysis included input from the Department of Law, the Department of Revenue, the Department of Natural Resources (DNR), the DNR State Pipeline Coordinator's office, and the Department of Community and Economic Development's Regulatory Commission of Alaska. In his prepared remarks, Mr. Marks said: In-state use of gas would be a very valuable benefit of an Alaska North Slope Liquefied Natural Gas (LNG) project. However, if the gas is commercialized, most of its volume will be for export, and the financing of this multi-billion dollar project will require establishment of long-term contracts with buyers. A set amount of pipeline capacity will need to be reserved for contractual obligations. At the same time, the economics of the proposed export projects appear to be financially marginal. Project sponsors cannot afford to take North Slope gas to market if they have to bear the cost of pre-investing to provide substantial excess capacity if there were a risk the capacity would not be used. To do so could affect the economics such that there would be no project and no one would get gas. Whereas it is straightforward to arrange for a pipeline capacity and gas supplies for intrastate use before construction starts, attaining pipeline capacity after operation begins may be difficult and expensive. Consequently, the question of how to allocate space and gas needs to be addressed before the line is built. What this bill does is provide a possible way to reduce the potential gas supply risks perceived by the foreign market, facilitating the marketing of the gas while providing a mechanism for communities to procure gas. The Administration supports this broad intent. This said, the bill raises some complex issues that could have significant long-term impacts. Some of these include: (1) local jurisdictions committing in advance to secure pipeline capacity without knowing what the cost will be, especially if the gas purchase contracts are not also in place - there may be, however, mechanisms available to reduce risk to buyers without unduly harming the pipeline sponsors; (2) allocation of capacity between intrastate and export use in the event of shortages or excesses of capacity; (3) exclusion of the pipeline from the Alaska Public Utility Regulatory Policies Act and subjection to the Pipeline Act, and at the same time mixing common carrier provisions with utility provisions and what the law of unintended consequences might be as a consequence. Number 0388 MR. MARKS continued: We are still analyzing the extent to which the differences between the two may be material and the chair of the Regulatory Commission of Alaska, Nan Thompson, will address this. Exclusion of marine terminal facilities from the Right of Way Leasing Act may affect the ability of the state to lease state land for such facilities and oversee land management. It could also affect intrastate shipments of LNG, should they be desired. Thus, we are not yet sufficiently comfortable with the measures in HB 290 to endorse them at this time. The multi-agency team will continue to analyze the bill and to provide recommendations to the legislature. MR. MARKS said he was available to answer questions, and that Jeff Landry, Assistant Attorney General, Commercial Section, Civil Division (Anchorage), Department of Law, was standing by to address legal questions that might arise. Number 0479 REPRESENTATIVE GREEN inquired about the ongoing multi-agency review team to which Mr. Marks had referred. He asked if the committee could "get a feel for how the Administration is going on this." MR. MARKS replied that by a reasonable date, the review team could accommodate the committee on that. REPRESENTATIVE GREEN said he was not trying to put undue pressure on them. However, as this is a sine die year, the committee needs the input as quickly as possible if the legislature is to move the legislation through. CHAIRMAN WHITAKER asked if the agency group would be amenable to a reasonable request with regard to time. MR. MARKS said the agency group would. CHAIRMAN WHITAKER asked him to define "reasonable." MR. MARKS indicated that the agency group could get back to the committee by the end of the week. At that time, the agency group would let the committee know when the analysis would be complete. Number 0603 CHAIRMAN WHITAKER stated that sooner was better than later. However, he was not going to allow the committee to be pressured into moving a bill through that might not be as good as it should be. He said it was his intention that the committee would move HB 290 through and that it would pass the legislature this year in its best possible form. Number 0648 REPRESENTATIVE KEMPLEN referred to Mr. Marks' statement that the economics of the proposed export projects could be financially marginal. He asked if he was making that statement with reference to both of the proposed LNG projects. MR. MARKS said yes. Both export projects face big marketing challenges. In response to Representative Kemplen's request for elaboration, Mr. Marks explained that the gas exported as LNG is going to go into the East Asian market, probably to Japan, Taiwan and Korea. If one looks at the projections of increasing demand for LNG over the next 10 years, an Alaskan project producing 7-14 million tons per year would have to capture about 80 percent of the incremental demand between now and 2010. That is a big marketing challenge, and Alaskans are competing with a many other jurisdictions that are closer to the market. These other jurisdictions have existing projects that are up and running, and the cost of adding incremental supply is cheaper than starting from scratch, as Alaska is doing. CHAIRMAN WHITAKER said there are those, including himself, who think that the incremental demand of market share is more on the order of 20 percent. There also are many who would disagree with the assertion that an Alaskan project is "starting from scratch." The infrastructure is in place with the exception of an 800-mile pipeline, but it is not a green field project. Furthermore, the gas is available and the reserves are known. Number 0812 REPRESENTATIVE KEMPLEN asked about Mr. Marks' reference to local jurisdictions committing in advance to secure pipeline capacity, and saying that there may be mechanisms available to address risks to buyers. He asked if the Department of Revenue analysts had reason to expect that such mechanisms might be forthcoming. MR. MARKS said those mechanisms are just rough ideas that have not yet been explored in depth. The agency task force questions whether this bill would be the appropriate venue for institutionalizing those mechanisms. As an example of a mechanism, if a community did not want to pre-commit without knowing the price, it might be possible for the carrier and the community to negotiate some sort of price ceiling in exchange for a risk premium. If the pipeline sponsors thought they could get the gas to Fairbanks for $1.50, the community could agree to sign on for $1.70. In that case, if it cost $1.80, Fairbanks would pay $1.70; if it cost $1.50, Fairbanks would pay $1.70. With this mechanism, Fairbanks would know what it is paying. And if the actual price were to be only $1.20, it might be possible to negotiate something like a 20 cent price premium over the actual cost, so the community would pay $1.40 up to a maximum of $1.70. Another possible mechanism, used in the Lower 48, is called an incentive rates of return. The less it costs sponsors to build the project, the higher the rate of return they receive on their capital through the tariff mechanism. CHAIRMAN WHITAKER asked Mr. Marks to repeat the explanation of the incentive rate of return. MR. MARKS explained that the incentive rate of return gives the project sponsors an incentive to bring the cost down. The lower the cost, the higher the rate of return. And that way, everybody wins. Sponsors receive a higher rate of return, but since the costs are low, the capital costs are lower, and the purchaser of the gas pays a lower price for it. Number 0990 NAN THOMPSON, Commissioner/Chair, Regulatory Commission of Alaska (RCA), Department of Community and Economic Development, said that the RCA agrees with Mr. Marks' comments. She explained that the purpose of her testimony was neither to support nor oppose the bill, but to highlight some of the issues raised by the current draft of the bill in hopes the committee will be able to address them. Although she does not believe that any of the issues are unsolvable, they are issues this committee should carefully consider. MS. THOMPSON said she is not concerned about wording in Section 1 that limits RCA authority to the intrastate portion of the pipeline. That is true now as a matter of law for all the other pipelines in the state, she said. She does not view it as either necessary or harmful; she characterized the provision as redundant of current law. Number 1060 MS. THOMPSON told members that she has two concerns. One deals with the creation of a hybrid entity, something between a common carrier and a utility. It was her understanding that the goal of the bill's sponsors was to create certainty in the regulatory environment so that investors would be certain of recovering that investment. She expressed concern that the bill, as currently drafted, does not accomplish that goal because it has taken a middle road between common carrier and utility regulation. There is an established body of law that tells regulators how to administer a pipeline as either a common carrier or a utility, she explained. Common carrier pipelines are required to take all the product offered, and if the demand is greater than the available space, an allocation is made on a pro-rata basis among shippers. There also is a body of law that tells regulators how to make a decision about expansion of capacity. MS. THOMPSON explained that regulators use somewhat different standards and principles for allocating space if a pipeline is a utility. In that case, they use public interest standards and allow utilities to recover the cost of increasing capacity under tariffs. Basically, there is a body of law that tells regulators how to operate under either circumstance. MS. THOMPSON said HB 290 creates a kind of hybrid. It specifically says this pipeline will not be a utility and it calls it a common carrier, but then it alters some of the existing case law about common carriers. Ms. Thompson surmised that the bill drafters did so because they want more certainty in the environment. Her concern is that by treading new ground, they are not accomplishing the goal of creating certainty. She suggested that the bill drafters and the committee should determine whether the intrastate portion of the pipeline should be regulated as a common carrier, a utility, or a new hybrid with a new scheme of regulation. Call it that, she said, and give regulators some clear rules on how to administer; allocate the space between competing users. It is a policy decision for the committee to decide how regulators determine which of the intrastate can use space on the pipeline. Number 1192 MS. THOMPSON turned to her second concern, regarding how HB 290 will treat and allow use by intrastate users. It has been [the RCA's] role, as a regulatory agency in looking at pipelines, to protect the interests of intrastate users and make sure that folks who want access to products going through pipelines in the state have a chance to do that. She did not believe the bidding mechanism similar to the one used for gas pipelines in the Lower 48 would be realistic for some of the communities along the pipeline, specifically some of the smaller users who might truly benefit from being able to get gas from this line. MS. THOMPSON pointed out that Mr. Marks had discussed some pricing alternatives that could allow communities the opportunity to bid. The basic problem is that the community would have to project its need far into the future and make a financial commitment based on a rate that has not yet been determined, and therefore, might be more than a small community could afford to pay. She suggested that there might be a way to group those users together or to use a different pricing mechanism that could minimize the uncertainty on both sides. Another alternative is to define a fixed percentage of the line that is going to be intrastate and figure out a way to guarantee to the bill's sponsors that [the defined percentage] would be used or made available for export, and then to have the RCA allocate that. Ms. Thompson urged the committee to carefully consider both of the concerns she had articulated. Number 1292 REPRESENTATIVE GREEN said both concerns Ms. Thompson raised had been discussed with other testifiers and that creating a hybrid would lead right into her second concern. He asked Ms. Thompson if it might be workable to allocate a percentage or an amount of the gas to intrastate users. He said shippers on the Trans- Alaska Pipeline System (TAPS) line allocate percentages to the various owners. He also asked Ms. Thompson what she, as a regulator, would do if 10 percent were allocated as intrastate and the balance were being shipped, and the intrastate demand increased to the point that additional compression would be required to meet their needs, but not those of the Outside users. He further asked: Should there be something included in the bill that would allow for expansion to satisfy the intrastate need if it does not adversely affect the interstate portion? MS. THOMPSON restated Representative Green's question, to her understanding: If it is decided to allocate a certain percentage of the pipeline capacity to the intrastate [market], should there be a provision to increase that capacity and fairly allocate the cost of that increase in case intrastate needs increase in the future? She said the answer would be yes. How [the RCA] would allocate that and would allocate costs depends, again, on whether [the RCA] is regulating it as a common carrier or a utility. There is a body of utility regulatory law that tells [the RCA] how to do that. Future expansion of intrastate need is something the committee needs to consider. Number 1457 REPRESENTATIVE KEMPLEN recalled Ms. Thompson's concern about a hybrid that may create uncertainty. He asked whether the regulatory commission would be the entity that would have to answer questions growing out of that environment of uncertainty. MS. THOMPSON replied that the answer to the question would depend on what authority the bill gives to the RCA. If the bill gives regulators the authority to resolve questions, but a question arises in an uncertain area of law and the legislation has not clearly define what the RCA is to do, the commission's decision is likely to be appealed or the question will likely be taken to court or to the Federal Energy Regulatory Commission (FERC). Her concern is that lack of a clear definition will result in delays as people take their interpretations to court. It is not that creating some kind of hybrid is necessarily a bad idea - that may be the best solution in this case - but if that is what the committee decides to do, she thinks it is important to clearly define what it is doing. Calling the hybrid a common carrier, when it really is not in some important respects, is what is creating the confusion. CHAIRMAN WHITAKER asked Mr. Landry to comment on that JEFF LANDRY, Assistant Attorney General, Commercial Section, Civil Division (Anchorage), Department of Law, answered via teleconference. He agreed with Ms. Thompson, saying the commission obviously has only the authority that the legislature gives it, and the clearer the legislature can be regarding the authority given to the agency, the better off the agency will be. Number 1600 REPRESENTATIVE KEMPLEN asked if there were any other instances in the utility business or pipeline industry where there are two distinct categories for use of a product like this. Or is Alaska really treading new ground? MS. THOMPSON said she did not know of any other state that has regulated an interstate and an intrastate portion differently. She said most pipelines in the Lower 48 are regulated very differently from those in Alaska. Number 1746 BRADLEY EVANS, System Dispatch Manager, Golden Valley Electric Association, Fairbanks, was the next to testify. In prepared remarks, he said: Golden Valley Electric Association supports the work of everyone involved and development of the gas pipeline that would potentially deliver gas to the Interior. We represent 37,000 consumers who are potential users of the pipeline through our cooperative association. As such, we have concern over development of the legislation governing the access, capacity, allocations, and charges for intrastate use of the gas pipeline and other issues of interstate use that may impact those concerns. Specifically, our concerns are the methods used for allocation of capacity in access to the line, the methodology for rate design. We favor an approach that would be based on a cost-causer, cost-payer - versus a postage stamp - rate design. We believe that the Regulatory Commission of Alaska should have some review status of the design of the line such that intrastate users needs are fairly met in the overall design of the pipeline. We think that the jurisdiction of the commission should include interstate matters as they impact the rate access design [for] intrastate users. And, finally, we ask for an opportunity to provide more input after we study the pipeline issues and the Pipeline Act as it specifically relates to public interest standards versus those under which we operate. We are in favor of the intentions of this legislation, but have concern over the current form and would like to withhold our endorsement until some of those concerns are addressed. Number 1835 REPRESENTATIVE DYSON speculated that in the future, if gas becomes available at a reasonable rate, Golden Valley Electric Association would begin the conversion of its gas or power generation to gas turbines. MR. EVANS said that was a good assumption. But everything is based on price, and the association has a limit on what it would pay for gas and making the conversion to turbines. The conversion is a simple matter, since all of the association's combustion turbine units are designed for dual-fuel use, and other plants also could be converted with a bit more effort. REPRESENTATIVE DYSON asked if the association would use its existing steam turbines and just fire the boilers differently. MR. EVANS replied that would be possible, but the first task would be to convert the combustion turbines to gas, because they are rated for dual fuel and can be run on gas. REPRESENTATIVE DYSON asked whether, if the gas pipeline project were to materialize quickly, in three to four years, it would affect Golden Valley's's decisions about the Healy Clean Coal Project. MR. EVANS indicated he chose not to hypothesize regarding that. REPRESENTATIVE KEMPLEN asked Ms. Thompson if she thought the RCA should have some say in the design of the facility, MS. THOMPSON said the RCA's goal is to assure that intrastate users have access and that there is adequate capacity for intrastate use, but she was not sure that doing so would require involvement in the design process. Number 1965 REPRESENTATIVE GREEN asked Mr. Evans if a Golden Valley Electric Association decision to use gas would be driven entirely by price or to some degree by environmental concerns. MR. EVANS said it would be better environmentally to use natural gas, but that the question asked was a difficult one to answer. He suggested that it came down to whether consumers would be willing to pay a premium for fuel that would reduce air contamination. Number 2040 KEITH HAND, Chief Financial Officer, Fairbanks Natural Gas, Fairbanks, was the next witness. He said: I'd like to say I represent the current and future users of natural gas in the Interior. The Interior citizens and all Fairbanks Natural Gas employees are strong advocates of the development of a natural gas pipeline, naturally. And I hope that we soon see North Slope gas delivered to the Interior. We have just become familiar with this bill and have not actually spent a great deal of time analyzing it. But we do understand and applaud the effort to advance this foundational framework for the proposed pipeline project. However, with that said, we do have some concerns with the bill in its current state, and I think these have been mentioned by several people already. But based on a limited review, we have the following comments. Obviously, the biggest issues to come to the table has been the pricing of these intrastate rates. What kind of scheme is envisioned? Is it going to be a pro rata, mileage-based scheme; a postage stamp, rate pricing scheme; or a fixed rate from Prudhoe down to Valdez with Interior customers paying a fraction because the gas they buy has been transported just part of the way? That is an issue that needs to be dealt with. Another big issue, obviously, is allocation of the capacity between the intrastate gas and the gas for export abroad. Directly related to that is an issue that might be unique to Fairbanks Natural Gas, the local distribution companies, and the communities that use space heating. The Interior faces a seasonally peaking demand, a swing of three to one between winter and summer consumption. Granted, volumes like those used for space heating are not that great an overall percentage of the whole pipeline [capacity], but that percentage that Fairbanks Natural Gas will be using will really vary during the season because of space heating, so we need to put some thought at this time into measures that will assure that we can handle the winter season without being charged for excess capacity during the summer. What kind of cost structure can we institute without having an overly burdensome cost to pass on to the consumer? We would also like to be sure that the intrastate gas consumers have adequate representation during the planning and design phases, and we are not sure if that will be delegated to the RCA, but some review is justified to meet the concerns of intrastate gas consumers ahead of time before we get to the final construction phase. Overall we are in favor of the intentions of the bill and the direction in which it is heading at this time, but we need to withhold our support of the bill in its current form. However, we are optimistic that an equitable solution is possible, and that all parties involved can have a good outcome. We are looking forward to resolving all of the issues that are out there. Number 2201 CHAIRMAN WHITAKER asked Michael Hurley to come forward, explaining that Mr. Hurley had been deeply involved in the original authoring of the bill. MICHAEL HURLEY, Commercial Regulatory Manager, Alaska North Slope Gas Commercialization Sponsor Group, ARCO Alaska, Inc., Anchorage, said: There are issues out there that need to be dealt with. If they were not important issues, we would not be in front of the legislature. In our view, as we look toward trying to build this regulatory regime and set it in place, we are looking at trying to make sure that we satisfy the known needs of the intrastate users. We recognize that [issue] is out there. You heard some concerns mentioned about things that need to be addressed, and perhaps it might help if I walk through those briefly. With respect to local jurisdictions having access to gas, we fully expect that local jurisdictions will have access to gas. One of the concerns that we had when we were originally drafting the legislation was that we did not want to be in the position of a public utility, and one of the reasons we drafted it the way we did was that we did not want to be selling to the public. There [already] are companies that do that, including Enstar Natural Gas Company, Fairbanks Natural Gas, and Golden Valley Energy Association. One of the reasons we set up the exemption from the Public Utilities Act was that we believed that we would be better served operating as a common carrier in the kind of jurisdiction that common carriage has within the RCA. We did not want to be trying to usurp the business of the existing local distribution companies. MR. HURLEY continued: We did get into an odd situation and it may have caused the confusion that comes up around common carriage versus the Public Utilities Act because in the effort to try to determine the initial capacity that the pipeline needs to have available, in the initial bill, what we decided to do was rather than fix a number (because then we would spend all of our time arguing over what the number was), we tried to set in place a process overseen by the RCA that would ... [ends midspeech because of tape change.] TAPE 00-8, SIDE B [Numbers run backward] MR. HURLEY continued: ... criteria, and if that has blurred the lines between common carriage and public utility regulation -- I was going to say I am sorry that happened, but I guess I am not; it may need to be done that way. Our concern is going to be to make sure that the gas commitments that we build in up front are real gas needs, and not speculative industrial projects or speculative uses that are not really there, because if you get into a situation where additional capacity that is not being used is built, then someone ends up having to pay for it. Either it falls onto the export [customer] or, if you are in a true common carriage situation, the other intrastate users end up picking it up. So we were trying to blend something that we thought would be useful in this type of unique project. Number 2308 MR. HURLEY, in response to Representative Green, confirmed that the bill drafters intended any blurring to be in the planning phase rather than later on, in the regulatory phase. REPRESENTATIVE SMALLEY commented that there is some wording in the bill that the committee will have to address. MR. HURLEY said Section 4 of the bill sets up a process to clarify the jurisdiction of the RCA. REPRESENTATIVE SMALLEY indicated interest in examining the bill in relation to Ms. Thompson's concern about dedicating percentages for local use. Number 2232 REPRESENTATIVE KEMPLEN asked where the bill addresses expanding pipeline capacity. MR. HURLEY said Section 5 deals with expansions and the RCA's ability under current law to order expansions. Mr. Hurley also clarified a question that had arisen in a committee meeting the previous week. The maximum capacity of a 30-inch pipeline has been estimated by engineers to be about 2.5 bcf a day. He addressed concerns about growing needs throughout the state by saying that he believes the project can accommodate needed expansions. REPRESENTATIVE KEMPLEN asked Mr. Hurley to explain how an expansion would work. MR. HURLEY replied that an expansion for intrastate use would come under the common carrier system. REPRESENTATIVE KEMPLEN inquired about expansion for interstate use. MR. HURLEY explained that export use is regulated by the United States Department of Energy (DOE) Office of Fossil Energy, and that is the reason for setting up a jurisdictional split in the proposed legislation. REPRESENTATIVE KEMPLEN asked about a hypothetical increase in demand for natural gas for export. MR. HURLEY said the Department of Energy would have approval authority over increasing exports, and exports could not be increased to an extent that would impinge on intrastate use. The RCA would be regulating the intrastate gas, and they will tell pipeline sponsors how much room is needed for intrastate use; however, the export piece of it is regulated by the federal government. REPRESENTATIVE KEMPLEN referred to the concerns raised by Ms. Thompson about creating a hybrid between a common carrier and a utility. MR. HURLEY explained that regarding gas for intrastate use, there are differences between the ways in which public utilities and common carriers are regulated, and there may be some blending going on between those two in the bill. Number 1942 CHAIRMAN WHITAKER observed that the day's discussion had pointed out that there are some questions that have not been answered. One option would be to form a subcommittee, but he was hesitant to do so without additional input that is forthcoming from Cook Inlet users. REPRESENTATIVE SMALLEY asked if it would be possible to have printed testimony from the individuals who had testified. CHAIRMAN WHITAKER said that he would make sure that all information is sent to the interested parties. REPRESENTATIVE GREEN wondered if the Administration's feedback might be available by February 10. MR. MARKS said he could not promise a complete review by then. CHAIRMAN WHITAKER pointed out that the committee's actions need not be contingent upon the Administration completing its review, since the bill has other committees of purview and the Administration has veto power. REPRESENTATIVE GREEN said he concurred, but this committee might be the best one in which to address whatever points the Administration may raise. He added, "What we don't want to have happen is to go down the track and get derailed because of something that we might have been able to solve early on." CHAIRMAN WHITAKER said that was a good point. REPRESENTATIVE BRICE said he thought the committee needed to clarify the language within the bill. He voiced support for setting up a working group to do a quick mark-up of the bill, making recommendations to the committee about how to clarify some of the questions that have been raised. CHAIRMAN WHITAKER said he appreciated that suggestion, but the committee first needs additional input, particularly from Cook Inlet users, and he would be hesitant to have decisions made without that input. REPRESENTATIVE BRICE concurred. [HB 290 was held over.]
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