Legislature(1999 - 2000)
02/10/2000 10:08 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 290-STRANDED GAS PIPELINE CARRIERS Number 0025 CHAIRMAN WHITAKER announced that the committee would hear 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 said his intent is for the committee to vote on the bill on February 17, dealing with concerns or amendments by then. He introduced those scheduled to testify and called on the first witness. Number 0201 ROGER MARKS, Petroleum Economist, Department of Revenue, testified by teleconference from Anchorage. In a prepared statement, he expressed the Administration's concerns about HB 290 as the legislation is now drafted. He began by repeating four concerns he had expressed on behalf of the Administration the previous week: 1) the problem of pre-committing to secure pipeline capacity without knowing the cost; 2) the allocation of capacity between in-state and export use in the event of shortages or excesses of capacity; 3) the exclusion of the marine terminal from the Right-of-Way Leasing Act; and 4) the jurisdictional issue of whether the pipeline should be regulated under the Public Utilities Act or the Pipeline Act. MR. MARKS said that while the Administration continues to support the intent of the bill, and while the Administration's concerns about the first three issues have not abated, the Administration's thinking over the past week has focused on the last issue, since it is difficult to deal with the other three issues with their jurisdictional context undefined. MR. MARKS explained that the bill puts the pipeline under the jurisdiction of AS 42.06, the Pipeline Act. Regarding that jurisdiction, the Administration has the following concerns. First, the Pipeline Act may only have applicability to common carrier pipelines. However, as the Administration understand the bill, the pipeline may not be operating as a common carrier. Second, a common carrier pipeline must carry gas that is tendered to it by all prospective gas shippers. If the tendered shipments exceed the available capacity of a common carrier line, then the common carrier must pro-rate on an equal basis the tendered gas. This could potentially mean that in-state utilities that have committed to use a certain amount of capacity on the gas line could have some of their gas pro-rated or "bumped off" the line when a new shipper comes on. MR. MARKS continued with the Administration's concerns. Third, a common carrier requirement is ill-suited for gas pipelines because utilities, especially home heating utilities, must have assurance that their gas supply will not be diminished to allow pipeline access to a new gas shipper. Moreover, unlike crude oil, natural gas is very difficult to store, so it is very difficult for utilities to react to a sudden pro-ration of gas shipments. Therefore, gas pipelines are typically contract carriers that can assure utilities of a certain amount of the pipeline's capacity. MR. MARKS continued. Fourth, as HB 290 is structured - where the pipeline may function as a common carrier insofar as the pre- construction commitment is concerned - the expansion provisions may be troublesome. As the Administration understands HB 290, if a party wants additional capacity after the pipeline is operational, but none is available, it could only procure the capacity after requesting construction of additional capacity and waiting for the time consuming process of the construction. Number 0398 MR. MARKS gave an example in which Fairbanks and Valdez pre- commit for 10 and 5 cubic feet of gas, respectively, for a total of 15 cubic feet of the pipeline's capacity. Supposing that after the pipeline is operational, Anchorage wants 85 cubic feet of gas, for a total of 100 cubic feet, when there is only 15 feet of capacity for in-state use. If the pipeline were truly a common carrier, Anchorage would get 85 percent of the 15 cubic feet, and Fairbanks and Valdez would be drastically scaled down. However, under the bill, Anchorage would have to request and await construction of additional capacity for its needs. While the Administration believes this would make sense, it also believes that this may not constitute a "common carrier" as the term has been used in case law. This could create ambiguities, which would reduce certainty rather than enhancing it. MR. MARKS reiterated that the Administration continues to support the basic intent of the bill. However, he said, this pipeline is very different from anything previously seen in the state, and the existing body of law has not addressed anything like it. It is difficult to know how laws that were written for something else will apply to it. He drew the analogy of deciding to play the game of baseball with a football, saying one has a choice of leaving the rules alone, modifying them, or creating a whole new set of rules for a new sport. Mr. Marks concluded by saying that the Administration will continue to analyze the bill. Number 0583 REPRESENTATIVE DYSON asked Mr. Marks if he could propose any solutions to the dilemmas he had raised. MR. MARKS said one could modify the Pipeline Act, put this pipeline into the jurisdiction of the Public Utilities Act, or draft a whole new Act that addresses the idiosyncracies of this pipeline. He noted that the latter would be a time-consuming process. Number 0646 REPRESENTATIVE GREEN asked Mr. Marks if the thrust of his concern was using the term "common carrier," which has a particular connotation in case law. MR. MARKS said the Administration believes the entire Pipeline Act is directed at common carrier pipelines. Because this pipeline is not being treated as a common carrier in the strict sense, the question is whether it really belongs under the Pipeline Act. REPRESENTATIVE GREEN observed that the wording seems to be the biggest hangup. He said he agrees that what is being created is a hybrid. He asked Mr. Marks if the Administration could suggest an appropriate jurisdiction. MR. MARKS replied that the Administration has not yet determined the most appropriate jurisdiction. REPRESENTATIVE PORTER said he could not resist commenting with another baseball analogy, that the American League has a designated hitter and the National League does not, yet they manage to play a World Series. REPRESENTATIVE PHILLIPS advocated looking into modifying the Pipeline Act before the committee passes the bill. Number 0834 NAN THOMPSON, Commissioner/Chair, Regulatory Commission of Alaska, Department of Community and Economic Development, observed that Mr. Marks' analogy was a good one. She said she had been working with the Alaska North Slope Gas Commercialization Sponsor Group, talking about language, and is pleased with the progress being made. However, she has one remaining concern regarding the methodology that the regulatory agency is to use to design the tariff. There is a fundamental difference between the way that is done for common carrier pipelines and for utilities. Ms. Thompson suggested that the utility approach would be more appropriate in this case. REPRESENTATIVE KEMPLEN asked Ms. Thompson if she meant that the project should be regulated under the Public Utilities Act. MS. THOMPSON clarified that the she was advocating following the public utility formula for setting tariffs. One way to achieve that might be to put the whole project under the Public Utilities Act. Another solution might be to keep the project under the Pipeline Act but to specify that the tariff be set according to the methodology of the Public Utilities Act. CHAIRMAN WHITAKER asked Ms. Thompson to explain the differences between the two tariff-setting methodologies. MS. THOMPSON said that utility rate making is quite straightforward in considering revenue requirements, capital and operating expenses, and a reasonable rate of return through the setting of rates. The approach provides certainty for the utility that it is going to recover on its investment. Utility pipeline tariff-setting structure is tighter than that for common carriers. Regulators require a higher degree of proof and some certainty that a utility actually is going to incur costs; they allow fewer estimates. In response to a question from Chairman Whitaker, Ms. Thompson confirmed that both methodologies provide for return on investment. CHAIRMAN WHITAKER turned attention to testimony by representatives of ENSTAR Natural Gas Company, a division of SEMCO Energy, Inc. Number 1173 DANIEL DIECKGRAEFF, Vice President of Finance and Rates, ENSTAR Natural Gas Company, began by explaining that ENSTAR is a natural gas utility company serving more than 102,000 customers in Southcentral Alaska. ENSTAR understands the purpose of HB 290 and does not object to the overall concept. ENSTAR supports bringing North Slope natural gas to Interior Alaska. Natural gas reserves in Cook Inlet are declining, and utilities need to look to other sources to meet future needs. MR. DIECKGRAEFF informed members that ENSTAR has some concerns regarding HB 290, as currently drafted. He did not anticipate significant utility use of North Slope Gas because, as the bill is now written, buyers will need to commit to purchase gas farther in advance than is practical. ENSTAR and other utilities that now rely on gas from Cook Inlet cannot convert from that source overnight, but will need a blend-in, changeover time that would be problematic under the type of contracting now mandated by the bill. He expects that total in-state use would amount to only about 10 percent of the total pipeline throughput, and he recommended that the bill be revised to give in-state users better access. MR. DIECKGRAEFF explained that ENSTAR sees three uses for North Slope gas: (1) export, probably in the form of liquefied natural gas (LNG); (2) in-state industrial projects such as an iron ore reduction plant, a smelter or a chemical plant; and (3) in-state utility use. Bill provisions appropriately address the two larger uses, but not the utility use. As now drafted, the bill lumps in-state utilities and large in-state projects together, when in reality they are very dissimilar. He suggested that the bill be revised to allow open access for local utility gas. Because that is unlikely to amount to more than 5 to 10 percent of pipeline capacity, he would not expect that to cause problems for pipeline sponsors. Number 1540 REPRESENTATIVE DYSON asked Mr. Dieckgraeff to comment on what ENSTAR foresees as its expanding market, its future need for natural gas, and its projected date for when more supply will be needed. MR. DIECKGRAEFF said ENSTAR has contracts in place for all of the natural gas it will need through 2001. Those contracts include a step down in the amount of gas supplied beginning in 2002, and ENSTAR now is negotiating with suppliers to fill that shortfall. Regarding the amount of gas remaining in Cook Inlet, he said experts estimate between 2.4 and 4.5 trillion cubic feet of remaining reserves, enough to continue to meet buyers' need for 10-20 more years. Consequently, all utilities now using gas from Cook Inlet will gradually need to find other supplies. MR. DIECKGRAEFF pointed out that major industrial users will not locate in Alaska unless they are certain of gas supply to meet their needs. He emphasized that public utility companies like ENSTAR can deliver gas to those who need it so long as they have an adequate supply. ENSTAR expects to see the demand for gas for utility use to continue increasing at the rate of one and a half to two percent each year. Number 1742 REPRESENTATIVE GREEN inquired whether ENSTAR now has take-or-pay contracts with suppliers or if the utility's purchases can fluctuate in response to demand. MR. DIECKGRAEFF said ENSTAR now has what are essentially "requirements contracts." One of those, with producers on the Beluga field, is, in a technical sense, a take-or-pay contract that requires ENSTAR to take a certain amount. That amount is reduced by "market out" provisions, which means that if ENSTAR loses contracts with its customers and needs less gas as a consequence, the utility can reduce what it is taking from suppliers accordingly. The current contract (originally with Shell Oil Company) for gas from the Beluga gas field now provides about 20 percent of ENSTAR's total supply. MR. DIECKGRAEFF said the utility also has a contract with Marathon Oil Company that is a requirements contract. ENSTAR takes what it is obligated to take under the Beluga contract and Marathon supplies the remainder, meeting about 75-80 percent of ENSTAR's need for the coming year. The result is that ENSTAR does not need to buy any more gas than its market requires. Take-or-pay contracts that did not include provision for reductions recently caused some utility bankruptcies in the Lower 48, he noted, and ENSTAR watched and learned from that. MR. DIECKGRAEFF responded to a question from Representative Green, saying ENSTAR's contract with Beluga gas field suppliers expires in 2009, and the contract with Marathon is volume-related and expected to last until 2015-16. REPRESENTATIVE GREEN asked: If ENSTAR were to find a significant new source, could the utility commit to a take-or-pay contract from the new source and rely on the Marathon contract to accommodate fluctuation? MR. DIECKGRAEFF explained that the existing Marathon contract would have to be restructured to accommodate that, since it is based on a set amount in 2002, thereby becoming a take-or-pay contract. In response to questions from Representative Phillips, Mr. Dieckgraeff said ENSTAR supports HB 290 and that the Alaska North Slope Gas Commercialization Sponsor Group has discussed amendments with ENSTAR that alleviate the utility's concerns. [Discussion followed concerning a set of suggested amendments that committee members had received in their packets. Chairman Whitaker said those amendments address ENSTAR's concerns in part; Mr. Dieckgraeff concurred.] REPRESENTATIVE PHILLIPS requested that the committee be certain that an adequate amount of gas is assured to utility customers. Number 2088 REPRESENTATIVE SMALLEY wondered if potential industrial expansion on the Kenai Peninsula would generate more demand than can be met with the amount of gas now provided by HB 290. MR. DIECKGRAEFF explained that ENSTAR does not supply gas to industrial customers. However, ENSTAR hauls gas that those large consumers have purchased, and their consumption is significant. REPRESENTATIVES KEMPLEN AND PHILLIPS expressed concern about assuring adequate supplies to military power plants that use gas to produce steam and electricity. CHAIRMAN WHITAKER said that as the committee deals with initial access to North Slope gas, it will be important to provide for future utility and industrial growth. But in the process of doing so, the committee needs to make sure it does not kill a pipeline project. Number 2255 MR. DIECKGRAEFF began ENSTAR's broader presentation by distributing a graph and three maps. He said the presentatio would include an overview of ENSTAR, its new parent company, and the overall Cook Inlet gas situation. MR. DIECKGRAEFF explained that the company now known as ENSTAR was established as a new company and began service in 1961. Its service area now reaches more than half of the state's population, serving 102,000 customers in Southcentral Alaska, from the Kenai Peninsula to to the Elmendorf Air Force Base. ENSTAR's residential rates are less than half the cost of fuel oil. He referred to ENSTAR system maps showing the original pipeline and subsequent growth. TAPE 00-11, SIDE B Number 2440 MR. DIECKGRAEFF continued describing the history of system expansion, saying that ENSTAR now is adding 30-40 more miles of main lines each year. He explained that ENSTAR consists of two separate legal entities. ENSTAR Natural Gas Company is the distribution company and Alaska Pipeline Company is the transmission arm. The divisions are regulated and operated as a single entity. The reason for the distinction is something known only to tax accountants and public utility lawyers, he observed. MR. DIECKGRAEFF reported that the total length of ENSTAR's high- pressure pipeline is about 370 miles. The original line has been looped to increase its capacity. Adding a line to the Beluga field doubled ENSTAR's pipeline capacity and extended the service area to Palmer and Wasilla in the Matanuska-Susitna Valley. ENSTAR lines also tie in with producer-owned pipelines, creating a system that encircles Cook Inlet and connects the inlet's east and west sides. ENSTAR purchased 24.9 billion cubic feet of gas from the producers in 1999. Ihe utility also transported an additional 22.8 billion cubic feet of gas for power plant customers. Number 2089 BARRETT HATCHES, President, ENSTAR Natural Gas Company, said ENSTAR's new parent company, SEMCO Energy, Inc., brings to Alaska a leadership team than understands the utility business; SEMCO is the third utility business in which the key leaders have worked together. He said, "One thing we do better than anything else is to operate a utility business. We are staying in the energy business, staying in our niche, staying with what we know, where we have expertise." MR. HATCHES explained why a company in Michigan would want to acquire a company in Alaska. Michigan has gone through three unseasonably warm winters, and SEMCO considers Alaska one of the best places in the United States for operating a utility business. SEMCO operates in the Upper Peninsula of Michigan, which has a climate similar to that of Alaska's Interior. From the company's Port Huron, Michigan, headquarters, it takes 12 hours to drive to the Upper Peninsula. One can get on a plane in Detroit and get to Juneau in 6.5 hours, so distance does not concern those involved. SEMCO's goal is to continue expanding the business, including developing unregulated enterprises that are utility and energy related. He emphasized that they have no intention of coming to Alaska and raising rates. Number 1865 MR. HATCHES said SEMCO, like ENSTAR, is committed to being a very good corporate citizen, with employees involved in the communities served. SEMCO has a reputation for being supportive of nonprofit organizations and for encouraging its employees to be involved in the political process to the extent that they want to be. He said he does not envision trying to make ENSTAR into a SEMCO, but thinks some of the things that have worked in Michigan might be worth trying in Alaska. In Michigan, SEMCO has taken a small utility company and developed it into the third largest in the state. Mr. DIECKGRAEFF noted that SEMCO moved in January from the NASDAQ to the New York Stock Exchange. CHAIRMAN WHITAKER invited questions. Number 1580 REPRESENTATIVE DYSON complimented Mr. Hatches on an enthusiastic sales presentation and expressed pleasure that SEMCO wants to invest in Alaska. MR. HATCHES, when asked if he is now living in Alaska, said that he is, and that his family will be joining him at the end of the school year. REPRESENTATIVE DYSON explained that Alaskans tend to be sensitive about people from Outside who come to this state and take profits somewhere else. He also cautioned about making sure that Alaskan jobs do not migrate out of state and that construction takes advantage of Alaskan firms and Alaska's workforce. Number 1463 MR. DIECKGRAEFF then turned to the presentation on Cook Inlet, saying the only other major player that he had not mentioned earlier was Phillips Petroleum Company. Phillips and Marathon jointly own the LNG export facility at Nikiski. ENSTAR is interconnected with Phillips, but does not take Phillips' gas except in an emergency. MR. DIECKGRAEFF said Cook Inlet produces 200 to 225 billion cubic feet of gas per year. There have been no new major gas discoveries there since 1979, and natural gas utilities all are drawing from the large fields discovered while looking for oil. Total reserves in Cook Inlet are declining, and new gas sources will be needed. Before that time, he predicted, expect to see a growing need for storage to meet the seasonal peak demand for Cook Inlet gas. He explained that utilities have been using in- field storage to accommodate the winter demand. Alaskans use much more gas in the winter than in the summer because, unlike communities in Lower 48, Alaska does not make extensive summer use of air conditioning, so there is not a seasonal peak in the summer to offset the winter load. Consequently, gas producers need storage, either back in the fields or in the form of LNG. MR. DIECKGRAEFF used maps to illustrate the interconnection of lines in ENSTAR's gas distribution system. He said the utility has looked into adding a route to Fairbanks and a spur line to Valdez. ENSTAR could carry gas in two directions, taking North Slope gas down its line to Nikiski industrial users and allowing for additional industrial development on Cook Inlet. In addition, ENSTAR already has pipe access to Whittier and has considered a spur line to Seward. North Slope gas could be gradually phased in to offset ENSTAR's declining supply from Cook Inlet. He said North Slope use gas could be a realistic solution to ENSTAR's needs and those of Alaskan industries. Therefore, the utility supports HB 290 in concept and wishes to emphasize the importance of natural gas to Alaska's future. [HB 290 was held over.] ADJOURNMENT Number 1104 CHAIRMAN WHITAKER, hearing no further questions, adjourned the House Special Committee on Oil & Gas meeting at 11:20 a.m.
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