Legislature(1999 - 2000)

02/21/2000 03:12 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
              SB 226-STRANDED GAS PIPELINE CARRIERS                                                                         
CHAIRMAN HALFORD announced SB 226 to be up for consideration.                                                                   
MR.  MIKE HURLEY,  ARCO Alaska  ANS  Gas Commercialization  Group,                                                              
said  he has  been assigned  to manage  the commercial  regulatory                                                              
efforts of  the Alaska North  Slope Sponsor Group,  which supports                                                              
SB  226.   For  the  last year  and  a  half, the  sponsor  group,                                                              
comprised  of ARCO Alaska,  BP Amoco,  Foothills Pipelines,  Ltd.,                                                              
Phillips Petroleum,  and Marubeni  Corporation, has  been actively                                                              
pursuing the development  of a new design for a  market viable LNG                                                              
export project.   It will  include a commercial  regulatory regime                                                              
to provide long  term customers with regulatory  certainty and, at                                                              
the same  time, it will meet  state and federal  regulators' needs                                                              
for adequate access and commercial  oversight.  SB 226 strikes the                                                              
balance that  provides the Regulatory  Commission of  Alaska (RCA)                                                              
with   clear  and   unambiguous   oversight   of  intrastate   gas                                                              
MR. HURLEY explained the provisions of SB 226 as follows.                                                                       
Section  1 clarifies  that the  current  Right-of-way Leasing  Act                                                              
common  carriage requirements  apply  only to  the intrastate  gas                                                              
shipments. Sections  2 and 3 clarify that a stranded  gas pipeline                                                              
system's  intrastate  shipments   would  be  regulated  under  the                                                              
Pipeline Act  (AS 42.06) rather than  under the Utilities  Act (AS                                                              
Section 4 adds  a new subsection to the Pipeline  Act that creates                                                              
a process in RCA's existing certification  procedures to determine                                                              
the  amount of  pipeline  capacity that  should  initially be  set                                                              
aside  for  intrastate  transportation.   That  process  sets  out                                                              
distinct criteria  for capacity  for local distribution  companies                                                              
that must  submit their  gas purchase contracts  to the  RCA under                                                              
the  current  regulations.    It   contains  a  different  set  of                                                              
procedures  for  industrial gas  users  who must  provide  written                                                              
commitments   to  transport  intrastate   gas  volumes   that  are                                                              
supported by  take-or-pay purchase  commitments with  stranded gas                                                              
Under Section 5, an expansion of  the stranded gas pipeline may be                                                              
ordered  by  the  RCA,  only  if   such  requests  for  additional                                                              
intrastate   capacity   are   supported    by   firm   contractual                                                              
Section 6 allows the RCA to consider  and approve a reservation or                                                              
similar  charge  in  the intrastate  tariff  for  firm  intrastate                                                              
Finally, section 7  contains the definitions of  terms referred to                                                              
in other  sections of the  bill in an  effort to increase  clarity                                                              
and understanding.                                                                                                              
In  closing, MR.  HURLEY  said the  companion  bill,  HB 290,  was                                                              
recently amended in  its first committee of referral  in the other                                                              
body.   He  offered  to answer  questions about  the  bill or  the                                                              
CHAIRMAN HALFORD asked him to review the amendments.                                                                            
MR.  HURLEY  stated the  first  amendment  that  the Oil  and  Gas                                                              
Committee  took up  changed  the reference  to  "stranded gas"  to                                                              
"North Slope  natural gas (NS gas)"  throughout the bill.    There                                                              
was  concern  about the  use  of the  term  "stranded  gas" as  it                                                              
applied to  HB 393 (the  stranded gas  development act,  which was                                                              
discussed a couple of years ago.                                                                                                
Number 2504                                                                                                                     
The second amendment that was adopted  made a change to Section 4.                                                              
It was based  on discussions with the RCA about  the standards for                                                              
building capacity  in the  initial build  of the pipeline  system.                                                              
The concern  was that  the standards  for small communities  along                                                              
the  line were  too  high  to meet.    The amendment  changed  the                                                              
standards  so  that  there  are  no  take-or-pay  commitments  for                                                              
communities, but there  would still be a fairly  high standard for                                                              
large industrial consumers.                                                                                                     
CHAIRMAN HALFORD asked  if it was a rewrite of  the entire section                                                              
and it limits take-or-pay to large customers.                                                                                   
MR.  HURLEY  said  that  is  correct.     He  explained  that  the                                                              
definition  was set  at 20 million  standard cubic  feet per  day.                                                              
Anything larger  than that still has  a high bar to it.   Only two                                                              
facilities in Alaska use more than  20 million cubic feet a day of                                                              
gas; the  Beluga Power  Plant and  ML&P's main  plant.   They were                                                              
interested in  making sure that  any large industrial  usage would                                                              
have  some kind  of commitment  in place  before space  for it  is                                                              
built in the system.                                                                                                            
Amendment 2(b) added  a new section to the bill at  the request of                                                              
the chairman. It  changes the determinations that need  to be made                                                              
under the AS 38.05 royalty statutes.   It changes the requirements                                                              
for the commissioner of the Department  of Natural Resources (DNR)                                                              
when determining whether to take  royalty in kind or in value.  It                                                              
then  provides for  legislative approval  before the  commissioner                                                              
can take action with regard to taking royalty in value.                                                                         
CHAIRMAN HALFORD commented that was a significant rewrite, too.                                                                 
MR.  HURLEY responded  it  was and  it required  a  change in  the                                                              
MR. HURLEY stated  that Amendment three was written  with the RCA.                                                              
It addresses  section five  of the  bill.   The RCA was  concerned                                                              
that  some language  in the  bill created  a hybrid  that was  not                                                              
under AS 42.06  or AS 42.05.   The amendment stripped out  some of                                                              
the  language  in 310.(d)1(A)  and  revised  (B),  so that  it  is                                                              
clearly under the Pipeline Act.                                                                                                 
A fourth amendment was proposed,  but did not pass.  It referenced                                                              
the changes in AS 38.35.                                                                                                        
The fifth  amendment, which  did pass, was  the addition of  a new                                                              
section to  the bill  that changes the  rate structure,  such that                                                              
tariffs  for  the  North  Slope  natural  gas  pipeline  would  be                                                              
calculated as if it was a public utility.                                                                                       
SENATOR LINCOLN  referenced Mr. Ross Coen's letter  dated February                                                              
21, 1000, which  asks for the removal of language  on line 9, page                                                              
8, which excludes marine terminal  facilities, including pollution                                                              
control  equipment.   She  asked  Mr. Hurley  to  comment on  that                                                              
MR.  HURLEY  explained   that  the  intent  behind   changing  the                                                              
definition of a pipeline to exclude  those facilities was that the                                                              
sponsor  group  recognized  that   gas  will  be  transported  for                                                              
intrastate use  all along the pipeline  system.  The  actual plant                                                              
that makes LNG  is expected to be dedicated to  the export market.                                                              
The  existing  intrastate  usage, under  the  proposed  regulatory                                                              
regime,  is a  regular  common carriage  system.    If the  entire                                                              
system was kept common carriage,  the plant, which is dedicated to                                                              
export,  would  be  accessible  to  people who  want  to  use  LNG                                                              
instate.   That  would  impinge on  the  export  volumes and  they                                                              
wouldn't be able to satisfy contracts  for export of LNG overseas.                                                              
It doesn't  prevent anyone  from building  another LNG  plant next                                                              
door and barging  LNG around the state.  The group  wanted to keep                                                              
the  plant  and the  marine  terminal  out  of a  common  carriage                                                              
situation so  they defined the  system subject to  common carriage                                                              
so that it included only the pipeline and the upstream pieces.                                                                  
The  State  Pipeline   Coordinator's  Office  (SPCO)   has  become                                                              
concerned  that   this  definition   will  eliminate   the  SPCO's                                                              
oversight of that  plant.  The group's intent was  never to change                                                              
SPCO's  regulatory authority  one  way  or the  other.   They  are                                                              
working  with the  Department of  Law and  the SPCO  to find  some                                                              
other language to take care of that.                                                                                            
Number 2909                                                                                                                     
MR. MIKE BARNHILL,  Department of Law, said he  is also testifying                                                              
for   Roger   Marks,   Department   of   Revenue,   who   is   the                                                              
Administration's  lead on  the  bill.   He  circulated Mr.  Marks'                                                              
written comments.                                                                                                               
MR. BARNHILL said  the Administration applauds the  efforts of the                                                              
sponsor group and  others to bring the commercialization  of North                                                              
Slope natural gas closer to reality.   The Administration supports                                                              
that  intent.    Nevertheless,  the   Administration  has  certain                                                              
concerns that he hoped could be resolved.                                                                                       
He read the comments of Roger Marks:                                                                                            
     This    represents   a    preliminary    analysis   by    the                                                              
     Administration,  including the  Departments of Law,  Revenue,                                                              
     and  Natural  Resources,  and the  Regulatory  Commission  of                                                              
     Alaska, and the State Pipeline Coordinator's Office.                                                                       
     Instate use of  natural gas would be a very  valuable benefit                                                              
     of  an Alaska  North  Slope  liquefied natural  gas  project.                                                              
     However,  if the gas  is commercialized,  most of  the volume                                                              
     will  be for  export.   The financing  of this  multi-billion                                                              
     dollar  project  will  require  establishment  of  long  term                                                              
     contracts with  buyers. The  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.   They could not                                                              
     afford to take the 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 instate excess  capacity                                                              
     would not be used.  To do so  would affect the economics such                                                              
    that there would be no project and no one would get gas.                                                                    
MR. BARNHILL said the desire of the  Administration is to maximize                                                              
the instate access to natural gas  without jeopardizing the export                                                              
economics  of the  project.   He  thought the  goal  of this  bill                                                              
should  be to  strike  that balance.    He continued  reading  Mr.                                                              
Marks' comments.                                                                                                                
     Whereas  it  is  straightforward   to  arrange  for  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.                                                                            
TAPE 00-03, SIDE B                                                                                                            
MR. BARNHILL continued.                                                                                                         
     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 complex  issues that  could have                                                              
     significant  long-term   impacts.    Some  of   these  issues                                                              
     1.  Local  jurisdictions  committing  in  advance  to  secure                                                              
     pipeline  capacity without  knowing  what the  cost will  be,                                                              
     especially  if the  gas purchase  contracts are  also not  in                                                              
     place.  (There  may,  however,  be  mechanisms  available  to                                                              
     reduce risks  to buyers without  unduly harming  the pipeline                                                              
He  said that  an  attempt  was made  in  the  House Oil  and  Gas                                                              
Committee to  address the  Administration's concerns  in amendment                                                              
two.   Although it  was a step  in the  right direction,  there is                                                              
more to  be done  to protect  the interests  of instate  users. He                                                              
continued reading Mr. Mark's comments.                                                                                          
     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                                                              
     Utilities Regulatory Act and  subjection to the Pipeline Act.                                                              
     The  Administration  is analyzing  the  extent  to which  the                                                              
     differences  between  these  two  statutory  regimes  may  be                                                              
     4.   Finally - exclusion  of marine terminal  facilities from                                                              
     the Right-of-Way-Leasing  Act.   This may affect  the ability                                                              
     of the  State Pipeline Coordinator's  Office to  oversee land                                                              
     management of marine terminal facilities.                                                                                  
MR.  BARNHILL  noted  the  Administration,  the  pipeline  sponsor                                                              
group, and Yukon Pacific have been  working together over the past                                                              
few  days to  come  up with  satisfactory  language.   Making  the                                                              
marine facilities  and LNG common carriers is  a principal concern                                                              
of the pipeline sponsor group.  He continued reading.                                                                           
     In  conclusion, the  Administration is  not yet  sufficiently                                                              
     comfortable with  the measures in  SB 226 to endorse  them at                                                              
     this time.   The multi-agency  team will continue  to analyze                                                              
    the bill and provide recommendations to the legislature.                                                                    
CHAIRMAN HALFORD noted that there  wasn't anyone else signed up to                                                              
testify on SB 226 and announced that  the committee would continue                                                              
to work on it.                                                                                                                  

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