Legislature(1999 - 2000)
02/21/2000 03:12 PM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 transportation. 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 42.05). 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 producers. 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 commitments. Section 6 allows the RCA to consider and approve a reservation or similar charge in the intrastate tariff for firm intrastate transportation. 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 amendments. 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 title. 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 request. 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 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 also not in place. (There may, however, be mechanisms available to reduce risks to buyers without unduly harming the pipeline sponsors.) 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 material. 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.