Legislature(2003 - 2004)
04/14/2003 03:32 PM Senate RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 151-REGULATION OF NATURAL GAS PIPELINES
MS. MARY JACKSON, staff to Senator Tom Wagoner, sponsor of SB
151, told members this legislation is a housekeeping measure and
provided the following background.
In 2000, the legislature amended the Alaska Pipeline
Act. In there we stuck in this term, 'North Slope'
because, at that time, that was the only natural gas
pipeline that we ever saw on the horizon. We didn't
anticipate another pipeline to come along. Since then,
another pipeline has come along and, in fact, it's the
only one that we have and it's on the Kenai Peninsula
- it's the Kenai Kachemak Pipeline - we call it the
KKPL. It was initially going to go from the Kachemak
Bay area back to Kenai. What they drilled at the far
end of the Peninsula didn't pan out so it actually now
goes from Ninilchik up to the Kenai area.... It's
being constructed right now and that's why there's an
immediate effective date on the bill.
What happened is they went to the RCA to ask for the
authority to provide for their carriage in the
pipeline and the RCA said, well, it just says North
Slope natural gas pipeline and we're not frankly sure
whether or not we can do that. So this bill takes out
North Slope and leaves it natural gas pipeline so it's
throughout the state of Alaska. And that's why it is a
housekeeping measure. There are people, I believe,
online from Marathon to speak to how they're going to
go about doing it but it's a pretty straightforward
bill.
Regarding the fiscal notes, MS. JACKSON said the RCA submitted
two zero fiscal notes. The DNR fiscal note amount is
indeterminate; the last line of the analysis explains why, "For
the Kenai Kachemak pipeline these dynamics are unlikely as only
63 percent of the line's total capacity has been contracted
for."
CHAIR OGAN said he begs to differ that this legislation is
merely a housekeeping measure because the state has common
carrier pipelines. The legislature made an exception for the gas
line to the Lower 48 because the producers would own the
pipeline. He expressed concern that if the legislature shifts
away from a policy of common carrier pipelines, it could have
the unintended consequence of inhibiting development. He
explained that pipeline owners would control who can transport
gas in that line and the open seasons based on when their
development is planned to come on line, in effect, eliminating
other users and stranding gas.
MS. JACKSON said she understands that concern. An alternative
was discussed and that was to specifically name KKPL in the
legislation so that it would only apply to the North Slope and
KKPL. She pointed out the length of the KKPL pipeline is 30
miles.
TAPE 03-28, SIDE B
CHAIR OGAN said he has been told there are shallow gas leases on
the Kenai Peninsula. His concern is that SB 151 could lock out
and discourage other development.
MS. JACKSON referred to minutes from a House Resources Committee
hearing in which Mr. Schoffmann of Marathon Oil talked about
support from Aurora Gas, Forest Oil and Evergreen, smaller
producers.
CHAIR OGAN noted he has not heard from the smaller producers.
SENATOR ELTON said his understanding is that without this bill,
the only company allowed to use the pipeline would be Marathon
Oil because it could not contract to others for firm or
interruptible service.
CHAIR OGAN said his understanding is that if SB 151 does not
pass, the pipeline will be a common carrier pipeline. In that
case, if there is more gas than the pipeline can carry, the gas
will be prorated. SB 151 would allow companies to contract for
space in the pipeline, whether or not that space is used.
SENATOR ELTON asked if the RCA would regulate whose gas is
carried in the common carrier pipeline.
CHAIR OGAN said that is correct.
MR. BEN SCHOFFMANN told members he is employed by Marathon Oil
and is the Vice President of KKPL, which is jointly owned by
Marathon and Unocal. He told members he provided background
information on this bill to the committee [in writing]. He asked
to address some of the members' previous questions.
He told members the modifications proposed to the pipeline act
are to the common carrier section of that act. SB 151 would
allow, under the common carrier section, a pipeline to offer
both firm and interruptible service. However, that full offering
of service is still under the purview of the RCA. The RCA is
authorized to ensure that the process of accessing that pipeline
is fair and balanced and that no party is favored. In the event
the RCA finds that companies are being excluded, it has the
ability to direct the pipeline to expand capacity to make room
for others who want to ship gas.
Most pipelines in Alaska have been built by producer affiliates.
They have the capital and incentive to do so. Building pipelines
spurs investment activity by majors and by independents. Aurora
Gas has written a letter in support of SB 151, part of which
says:
Aurora Gas would not avoid exploring and developing
acreage in the vicinity of producer owner pipelines.
However, Aurora can and would substantially discount
the value of exploring and developing acreage with no
infrastructure whatsoever.
He said he believes the pipeline would spur investments and,
rather than shutting out smaller independents, they seem to say
they will look for gas where there is infrastructure.
Furthermore, the RCA has the authority to ensure the process is
executed fairly.
SENATOR SEEKINS said his understanding is that the owner of a
gas field who knows how much gas will be produced can get a firm
commitment to transfer that gas through this pipeline. That is
considered to be non-interruptible gas. However, if the gas
field's potential is unknown, the owner could contract on an
interruptible basis if there is capacity within the pipeline,
which would give him the opportunity to start producing the
field. If, at a later time, he found the parameters of that
field were great enough to overcome the capacity of this
pipeline, he would have the option of building his own pipeline
or entering into a non-interruptible contract. He asked if his
understanding is correct.
SENATOR WAGONER said that is correct to a point. The carrying
capacity of the pipeline can be increased with additional
compression.
SENATOR SEEKINS said that at least allows the owner to get his
product into the market on an interruptible basis. However,
because the pipeline does not have infinite capacity, there
would come a point where he would have to build his own pipeline
if his supply was large enough.
CHAIR OGAN asked Mr. Strandberg if Alaska has any regulations on
open seasons.
MR. STRANDBERG, Regulatory Commissioner of Alaska (RCA), said
the RCA does not currently have a regulation that speaks to the
open season process.
CHAIR OGAN asked if that is by virtue of the fact that pipelines
are either utility or common carrier pipelines.
MR. STRANDBERG said that is correct. Currently two gas pipelines
are in operation in Alaska, the Beluga pipeline and Enstar's
pipeline. Those are both certificated under the public utilities
statute.
CHAIR OGAN asked Mr. Strandberg if the RCA intends to promulgate
regulations to regulate open seasons if pipelines offer firm
transportation.
MR. STRANDBERG thought the RCA has the ability to promulgate
regulations through its own motion or through a petition. He
said it is unclear whether the state immediately needs open
season regulations at this time. However, if pipeline companies
see a need for them, they could petition the RCA and it would
get involved in a regulation project.
CHAIR OGAN asked if open season is not an issue now because
Alaska does not have any pipelines built that require them.
MR. STRANDBERG said that is correct and a lot of it has to do
with the responsibility of the company conducting offerings. He
said he believes the RCA considered open seasons on the KKPL
project.
CHAIR OGAN asked if a producer-owned pipeline company purchased
all of the available capacity on a line to reserve it for the
future, whether the RCA has the authority to require that
capacity to be released to a party that needs it now.
MR. STRANDBERG said the RCA believes it has that authority under
the existing statute. The RCA regards the proposed contract
carriage statute language to embed itself in the overriding
common carrier language of the Alaska Pipeline Act. The RCA
believes it has the flexibility, even with these changes, to
regulate in the public interest.
CHAIR OGAN asked if an independent shipper wanted the RCA to
order capacity expansion, but the producer-affiliated pipeline
did not want to expand, which party would have the burden of
proof before the RCA.
MR. STRANDBERG said that is a difficult question. The RCA has to
look at the specific circumstances to establish where the burden
of proof lies. Some of the considerations are who has the
information, whether the party is a utility that is required to
prove something is in the public interest, and who is the moving
party. He noted the RCA employs some rules of thumb but it has
to look at each specific case.
CHAIR OGAN asked if the RCA has a position on the bill.
MR. STRANDBERG replied, "We take no position other than to note
that there's a zero fiscal note and we feel we can certainly
accommodate the statute changes within our current statute."
SENATOR LINCOLN referred to the fiscal note from the Department
of Community and Economic Development and read from the
analysis:
There are no fiscal impacts on RCA for this bill....
However, it is expected that where producers elect to
own and operate a pipeline, which is allowed, the
contract carriage with service under these statutory
terms will be proposed to RCA in a pipeline tariff
filing.
She asked Mr. Strandberg to elaborate on that statement.
MR. STRANDBERG said perhaps the "however" is slightly misplaced.
The RCA does not foresee any fiscal impact from the bill. A
company may petition the RCA for the contract carriage but that
would be considered part of the RCA's normal course of business.
The RCA expects that the cost would be absorbed in its current
budget through the regulatory cost charge.
CHAIR OGAN asked why Alaska disallowed contract carriage in the
past.
MR. STRANDBERG said that is a good question. He said he has
learned from some of the corporate memory within the RCA the
Pipeline Act and Right-of-Way Leasing Act were passed together
in 1972. The Legislature wanted to establish a policy of equal
and unfettered access to oil and gas in Alaska. At that time,
the common carrier mechanism appeared to be an excellent vehicle
to use to avoid any discrimination. He pointed out that act pre-
dates the TransAlaska Pipeline Act. He said he believes, in
terms of the specific circumstances surrounding the need to
assure delivery, a contract carriage approach does not establish
that discrimination will occur. He believes offering the choice
of either vehicle that a pipeline company can approach this
under is effective. It is important that the RCA consider each
application or proposal for contract carriage in the public
interest.
SENATOR ELTON commented that he finds it bothersome that the RCA
does not have a preference and takes no position on the bill. He
said it almost sounds as though Mr. Strandberg's argument is an
argument for the common carrier approach. He remarked that SB
151 addresses a fairly significant public policy issue.
MR. STRANDBERG said he was attempting to give the committee the
best factual information about possible outcomes. He said when
pressed, he would say the RCA does have a position. It feels
these statute changes will still allow the RCA to protect the
public interest and to accommodate and work with the pipeline
companies to certificate and bring pipelines into operation
under either contract or common carriage.
SENATOR SEEKINS asked Mr. Strandberg if the RCA sees any
downside to the proposed legislation in terms of the public
interest.
4:45 p.m.
MR. STRANDBERG said he sees no downside to this legislation with
the caveat that the RCA can continue to discharge its
responsibility to look at each application and its specific
circumstances and determine how that particular application
works within its statute.
SENATOR SEEKINS asked if SB 151 will help the state get its
resources to market sooner and more efficiently. He then asked,
if no downside exists in terms of the public interest, what the
upside is.
MR. STRANDBERG told members the RCA's mission is to regulate for
the public interest. Implicit in that mission is providing an
environment to make the investment climate as good as possible
and to protect ratepayer interests. He said the dynamics of a
gas pipeline under the common carrier portion of the act does
not allow a definite commitment for the conveyance of gas. As a
commodity, gas is time-sensitive. He said he spoke earlier about
the need for having the ability to fulfill a production
contract. He believes the upside of this legislation is that it
will increase surety for investors in a pipeline. They will know
that a pipeline company will be able to comply with the terms of
the contract it signs for the delivery of gas.
SENATOR SEEKINS commented that the upside to SB 151 is that it
encourages development and increases surety for those who put up
the capital to build the line and there is no foreseeable
downside.
CHAIR OGAN asked Mr. Schoffmann to give his presentation.
MR. BEN SCHOFFMANN, Vice-President of KKPL, gave a PowerPoint
presentation and offered the following highlights.
SB 151 will provide an additional option to offer firm or
interruptible service. It allows other pipelines to operate
under the same methods provided to the North Slope gas line
during the 2000 legislative session. SB 151 is consistent with
policy elsewhere in the United States, where the Federal Energy
Regulatory Commission (FERC), since deregulation, has been very
accustomed to granting firm and interruptible transportation or
contract carriage. This issue has not arisen in Alaska because
there has not been pipeline construction here.
The difference between firm and interruptible service is as
follows. For firm service, the shipper agrees to pay a monthly
reservation charge for a set level of capacity, which is due and
payable whether or not that capacity is used. The pipeline, in
turn, agrees to make that capacity available. The shipper only
pays interruptible service if and when the service is used, and
the pipeline makes best efforts to provide capacity.
MR. SCHOFFMANN told members SB 151 has two important benefits.
It will give pipeline investors the opportunity to see the
demand for the services, thereby reducing the risk. It also
helps to establish a minimum level of what people are willing to
pay.
Prospective shippers will be able to choose the type of gas
transportation service which best aligns their gas supplies and
customer contracts. Gas contracts are typically entered into
between producers and end users on a firm or interruptible
basis. Those with firm gas sales contracts may be more likely to
want firm transportation and be willing to pay for that
transportation. Those with interruptible supply contracts would
be more likely to be biased toward selecting interruptible
transportation services. The key word associated with SB 151 is
"alignment." It allows companies to align gas contracts with
transportation services.
SB 151 does not change the open access status of pipelines under
the Pipeline Act. He agreed with Mr. Strandberg that the RCA
will still act in the public interest to make sure that
suppliers have access to the system either through open season
or forced expansion. SB 151 will not have an adverse fiscal
impact on the state or on smaller shippers. The smaller shippers
like the idea of building pipelines because they will be assured
that if their exploration efforts are successful, they will be
able to transport that gas. He told members he is speaking on
behalf of Aurora Gas and Forest Oil. He added that the RCA will
be looking at individual situations to make sure the smaller
producers do not get locked out. Maximizing throughput is
advantageous to smaller companies. There is no incentive for
them to artificially constrain throughput. He said other
agencies do not seem to have a concern with producer
affiliation. FERC has not prohibited that sort of situation, nor
did the 2000 amendments to AS 42.06. Two entities have built
pipelines in Alaska: the public utilities (Enstar) and the
producers. Those entities have the capital, resources and
incentives. He believes SB 151 will accelerate investments by
allowing firm and interruptible transportation services.
KKPL's contention is that pipelines are good for business. It
believes SB 151 will spur activity. It will give pipeline
investors more assurance that their investments will be
efficiently utilized and in demand. It will give the producers
and gas suppliers the assurance that if they have firm gas sale
commitments, they can transport that gas to market to meet their
contracts. KKPL has two tentative contracts for firm shipment of
gas. It would like to offer that service as the pipeline goes
into operation later this year. This is a timely issue for KKPL
but it believes SB 151 will also encourage pipeline investment
and development activities.
CHAIR OGAN asked Mr. Schoffmann why KKPL needs contract carriage
if it is already a producer and owns the gas it wants to ship on
the pipeline.
MR. SCHOFFMANN said Marathon and Unocal have formed a separate
pipeline entity, Kenai Kachemak Pipeline (KKPC), whose sole
business is to own and operate this pipeline so it is a stand-
alone business venture that will be regulated by the RCA. He
stated:
It is in our interest to make sure that that pipeline
company we created is not a loser of money but is
financially viable in its own right. So, we have
attempted to conduct the open season and set up the
pipeline tariffs treating everyone equally, inviting
other people to nominate gas or book for services, but
the real issue is, because of a variety of reasons, it
made the most business sense to set up a separate
company for this aspect and that company would like to
be - have some financial underpinning to it.
CHAIR OGAN commented that is a moot point if KKPL had an open
season and invited participation but no one else had gas.
MR. SCHOFFMANN said KKPL anticipated that others might have gas.
Others with leases had the opportunity to express interest or
make commitments. The open season at least helped KKPL identify
the minimum size line. KKPL wants to be financially stable but,
in addition, the producers, Marathon and Unocal, have
commitments to ship firm gas to various supply contracts. They
want to be assured they have the ability to do so and are
willing to pay for it.
CHAIR OGAN commented that one cannot nominate gas if there are
no "bookable" reserves.
MR. SCHOFFMANN said in this instance, other investments are tied
to the old development program - the Ninilchik gas discovery.
Millions of dollars are being spent. It is incumbent upon the
suppliers to ensure that money spent will result in their
ability to ship the gas they believe they are in the process of
proving up and deliver as early as the end of this year.
CHAIR OGAN asked if the KKPL pipeline is contracted for 100
percent capacity at this point.
MR. SCHOFFMANN said it is not. He explained the gas line will
not come on stream at full capacity. The gas supplies will ramp
up to a certain level and then begin to decline. At its peak
rate, the anticipated throughput that has been contracted is 90
million cubic feet. Under a reasonable operating scenario, that
being the inlet pressure of about 1,050 pounds and the outlet
pressure of about 750 pounds, the gas line capacity would be in
the neighborhood of 120 to 130 million cubic feet per day. On
that basis, at the peak, there will be about 25 percent excess
capacity that is not contracted for. The line could be expanded
if other supplies are proved up and firm commitments are made.
CHAIR OGAN asked if the pipeline would be expanded by
compression or looping.
MR. SCHOFFMANN said it would be expanded by compression or
changing the inlet or outlet conditions. The compression could
be put at the beginning, middle or end. Looping would be the
last resort but it is possible.
5:03 p.m.
SENATOR SEEKINS noted that Mr. Schoffmann said this is a common
scenario in other states and asked how common.
MR. SCHOFFMANN clarified that he said this is commonly used by
FERC in the Lower 48 states. KKPL did look at what other gas
producing states, notably Oklahoma, Texas, and Louisiana, are
doing. They each have slightly different statutory schemes but
they all permit gas to be transported on a firm and
interruptible basis.
SENATOR SEEKINS asked if KKPL is building some flexibility into
its pipeline to allow other producers a structured rate process
that may help them get their product on line.
MR. SCHOFFMANN said that is essentially correct with the caveat
that under the common carrier regulations, the RCA is concerned
about two things: making sure the pipeline has enough capacity
to let others in while making sure it is not too big. He
explained the nature of pipeline design being what it is, a
change in pipeline size creates a large amount of incremental
capacity. He noted that an increase of one diameter size can
create an increase in capacity of 50 to 100 percent. Pipeline
capacity is the function of a lot of factors, but an increase in
diameter from 8 inches to 12 inches almost doubles the capacity.
SENATOR SEEKINS asked Mr. Schoffmann if anything in the proposed
rate structure in SB 151 would put a potential competitor with
either Marathon or Unocal at a disadvantage.
MR. SCHOFFMANN said he does not see how that would result.
Everyone has been offered the same two options, firm or
interruptible transportation. The RCA will be ruling on a
tariff, assuming SB 151 passes, that sets the rates for each
form of transportation. Everyone will know what those rates are
in advance. The rates will not discriminate between producers
and independents. Therefore, Marathon and Unocal will have to
contract with KKPL under the same exact terms as others.
CHAIR OGAN said that is assuming no one finds more quantities of
gas than they can ship through the excess capacity.
MR. SCHOFFMANN said at the point extra capacity is needed, there
would be a new RCA rate case to determine the cost, how that
capacity will be provided, and who will pay for it.
CHAIR OGAN said he hopes that happens. He then asked Mr. Myers
to testify.
MR. MARK MYERS, Director of the Division of Oil and Gas, DNR,
told members that Kevin Banks and Anthony Scott were with him
and available to answer questions.
SENATOR ELTON asked Mr. Myers if DNR has taken a position on SB
151.
MR. MYERS said DNR has taken no position on SB 151.
SENATOR SEEKINS asked Mr. Myers his view of the downside and
upside of SB 151.
MR. MYERS said he believes contract carriage can provide more
certainty, which helps with financing. The downside is that an
affiliated pipeline may not have the same motivations as an
independent pipeline. An independent pipeline will always want
to expand. An affiliated pipeline owner could find itself in a
competitive situation for the gas market with a company with a
new discovery. He said affiliation can be an issue but, in this
case, the RCA can compel expansion, help allocate production,
work out clear rule making and put together rules for conducting
open seasons. The RCA has more authority than FERC. He said some
contract carriage pipelines might be built that would not be
built under common carrier so the infrastructure will be there.
However, one's ability to get into that infrastructure will not
be as clear as it would be in an non-affiliated pipeline that
might want to expand. He is not saying that anti-competitive
behavior will happen, but there is concern that those who make
the initial investment have priority in the market place. He
repeated Alaska has more protection with the RCA. On the federal
side, the Minerals Management Service has had some problems with
access to offshore pipelines. They are more akin to the Alaska
situation than Oklahoma or Texas, where there are a lot of
competing pipelines.
SENATOR SEEKINS asked, "If this was not an affiliated pipeline,
if this was simply a common contract carrier, do you think they
would be looking for the same kind of flexibility that this
pipeline is?"
MR. MYERS said he does. He added that contract carriage is a
"take or pay" contract. He explained in an affiliated producer
built pipeline, the producer has a good idea of the amount of
gas going into the line and understands the market, and the
pipeline is self financed. However, in the case of someone else
going to the market to try to get financing, the fact that
contracts are locked in for a long period of time would be
helpful.
SENATOR SEEKINS asked if it is a good flexibility component in
general so, by looking at it as an affiliated pipeline, the
legislature may be reading more into it than just seeing this as
a common procedure used in other places and a better way to get
gas to market.
TAPE 03-29, SIDE A
MR. MYERS said that is basically correct. He said affiliation
could create a problem when there are no alternatives, but he is
not saying that is the case with KKPL. He said when there is a
single pipeline coming out of a basin and no one knows how much
gas is in that basin, there could potentially be more demand
than that pipeline can deliver and it will require expansion.
Regarding the point of expansion, if the burden of demonstrating
the need not to expand is on the pipeline company, that is one
thing. If the burden to show the need to expand is on the
explorer, that places more risk on the explorer. He said a lot
depends on how the RCA weighs the evidence as far as mandating
expansion.
CHAIR OGAN asked Mr. Myers if he would suggest clarifying in the
statutes where the burden of proof should fall.
MR. MYERS said he is not qualified to say whether that should be
in the RCA rule making or in statute. He deferred to Anthony
Scott for an answer.
MR. ANTHONY SCOTT, Division of Oil and Gas, DNR, told members
that Commissioner Strandberg mentioned if the RCA had the
authority to weigh these matters on a case-by-case basis, it
would be able to protect the public interest. He said he thinks
rule making could potentially be quite useful.
CHAIR OGAN referred to DNR's fiscal note analysis
and quoted the following sentence:
Meanwhile, contract carriage on a pipeline owned by an
affiliated producer could potentially be used to
impede pipeline access for non-affiliated producers.
This could hinder natural gas exploration and
development and ultimately result in a negative fiscal
impact for the State. For the Kenai-Kachemak pipeline,
however, these dynamics are unlikely, as only 63
percent of the line's total capacity has been
contracted for.
He said he is trying to reconcile that with Mr. Myers' earlier
comment that there could be more supply than capacity sometime
in the future. He then asked if the legislature should consider
narrowing this legislation to this specific pipeline.
MR. MYERS said that is a policy call. He said if the RCA has the
ability to mandate expansion and the burden of proof lies on the
pipeline company, he thinks it's okay. He said since this
applies to all pipelines, there is the potential for pipelines
to be built for a specific project with a limited amount of
capacity. The RCA could mandate expansion but explorers would
have to go to the RCA and take the risk they would or would not
succeed. In that case, there is additional risk but there is
still a remedy. He said affiliation is not a huge issue in his
mind but he had to bring the committee's attention to the fact
that affiliation could change pipeline behaviors.
CHAIR OGAN announced he would hold the bill in committee until
Wednesday. He then announced a brief at-ease.
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