Legislature(2011 - 2012)BUTROVICH 205

02/09/2012 03:30 PM RESOURCES


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03:32:49 PM Start
03:33:34 PM SB153
04:08:09 PM Judge Gleason's Decision: an Alternative Perspective by Bradford Keithley, Perkins Coie, Llp,
05:02:13 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Gleason Decision Alternate Perspective
Uniform Rule 23 Waived
*+ SB 153 NATURAL GAS STORAGE TAX CREDIT/REGULATION TELECONFERENCED
Heard & Held
Bills Previously Heard/Scheduled
        SB 153-NATURAL GAS STORAGE TAX CREDIT/REGULATION                                                                    
                                                                                                                                
3:33:34 PM                                                                                                                    
CO-CHAIR PASKVAN announced SB 153 to be up for consideration.                                                                   
                                                                                                                                
3:33:38 PM                                                                                                                    
SENATOR JOE  THOMAS, sponsor of SB  153, said the cost  of energy                                                               
in  much  of Alaska  is  crippling  communities' economies.  It's                                                               
still  the middle  of  winter in  Alaska,  and more  specifically                                                               
Fairbanks  pays  $4/gallon for  heating  oil;  they are  spending                                                               
approximately  $666  million  annually   on  energy  costs.  This                                                               
averages  out to  about $6,667  for  every man,  woman and  child                                                               
annually. Much of  this money leaves the  community. Fairbanks is                                                               
currently paying  $23.35 for 1000  cubic feet of natural  gas and                                                               
$.23/kilowatt  hour.  Individual bills  run  $1,000  to $1,500  a                                                               
month  during   the  heating  season  (September   through  April                                                               
generally). Natural gas  is the lowest cost fuel,  but it's three                                                               
times  the price  of gas  in Southcentral  and only  available to                                                               
approximately  1,100  customers. No  more  gas  is available  for                                                               
Fairbanks Natural Gas,  the local distributor, due  to Cook Inlet                                                               
contracts that provide  for Cook Inlet towns being  taken care of                                                               
first.                                                                                                                          
                                                                                                                                
He said that  lines that have been built to  various parts of the                                                               
town  in Fairbanks,  but have  not  been able  to be  distributed                                                               
because gas isn't contemplated being  available. SB 153 addresses                                                               
this  problem   by  incenting  the  private   sector  to  deliver                                                               
additional trucked  natural gas to  Fairbanks in the next  two to                                                               
three years.  SB 153 would also  extend up to $15  million of tax                                                               
credits to  an LNG trucking project  such as the one  proposed by                                                               
partnerships  between Golden  Valley Electric  Association (GVEA)                                                               
and  Flint Hills  Resources. This  is  the same  $15 million  tax                                                               
credit that  is applicable to  Cook Inlet's gas  storage projects                                                               
(CINGSA),  but  in Fairbanks  it  would  be above-ground  storage                                                               
rather  than  filling depleted  wells  (because  they don't  have                                                               
any). He said  GVEA and Flint Hills are the  two largest Interior                                                               
tenants for  gas and it  makes sense for them  to buy the  gas to                                                               
make use of it, but they  may also be willing to accept someone's                                                               
delivery.                                                                                                                       
                                                                                                                                
3:38:22 PM                                                                                                                    
SENATOR  THOMAS  said  the  credits   are  limited  to  regulated                                                               
utilities, so the savings will  be passed through to consumers as                                                               
the RCA looks at their business  plans. GVEA and Flints are still                                                               
narrowing down their  cost estimates and once they get  to a plus                                                               
or minus  30 percent estimate,  their board will make  a decision                                                               
when to  go forward and that  is expected this spring  or summer.                                                               
If  that doesn't  happen, it's  possible that  an entity  such as                                                               
Fairbanks  Natural Gas  or Enstar  and/or  their Canadian  parent                                                               
company,   AltaGas,  might   move   on  the   project.  He   said                                                               
negotiations  between Foot  Hills and  GVEA are  ongoing and  are                                                               
positive, and  that is another reason  that the timing of  SB 153                                                               
is important.                                                                                                                   
                                                                                                                                
He said this  will also ensure that the North  Slope producers or                                                               
LNG export  facilities that  are not  regulated utilities  and do                                                               
not provide for  consumption of gas in state will  not be able to                                                               
access  these credits.  Further, with  the gas  line still  years                                                               
away, it appears  the only project that could bring  gas into the                                                               
Interior in a quick manner is  trucking projects such as this one                                                               
that would be an expansion of an existing trucking project.                                                                     
                                                                                                                                
CO-CHAIR WAGONER  moved CSSB 153( ),  27-LS1187\I, for discussion                                                               
purposes.                                                                                                                       
                                                                                                                                
CO-CHAIR PASKVAN objected for discussion purposes.                                                                              
                                                                                                                                
3:41:56 PM                                                                                                                    
GRIER HOPKINS, Legislative Aide to  Senator Thomas, said there is                                                               
a  fundamental  difference between  storing  natural  gas in  its                                                               
gaseous  form and  storing it  in  its liquid  form; the  volumes                                                               
don't match. He explained that the  credits in HB 280 had a floor                                                               
of 500  mmcf because Cook  Inlet has underground  reservoirs, but                                                               
Fairbanks  is looking  at storing  approximately 240  mmcf/gas in                                                               
two separate  tanks. The sponsor  found a  way to apply  the same                                                               
$15 million in  gas storage tax credits that Cook  Inlet has to a                                                               
Fairbanks  project or  50  percent of  construction  costs for  a                                                               
storage  facility, whichever  is  less.  Storage facilities  have                                                               
been estimated to cost about $30 million.                                                                                       
                                                                                                                                
He said  the changes between version  M and version I  are rather                                                               
simple. The  project is  still up  in the air,  but they  want to                                                               
make  sure  that any  project  bringing  gas to  Fairbanks  would                                                               
receive those credits. Therefore,  language was included allowing                                                               
for the  expansion of an  existing facility that was  in business                                                               
before 2011.  It removes  the date  restrictions that  a facility                                                               
must start commercial operations for the same reason.                                                                           
                                                                                                                                
A new  subsection in AS  42.05.990 says only  regulated utilities                                                               
can  take advantage  of the  tax  credits so  their benefits  get                                                               
passed  on to  the customers,  but it  currently doesn't  include                                                               
LNG, and that language is being worked on now.                                                                                  
                                                                                                                                
CO-CHAIR PASKVAN asked him to go through the bill by section.                                                                   
                                                                                                                                
MR.  HOPKINS  said section  1  establishes  that the  AOGCC  must                                                               
certify  the 1  million  gallon  threshold for  a  project to  be                                                               
eligible to  receive the credits.  Section 2 addresses  the lease                                                               
exemption  and makes  it the  same as  Cook Inlet  provisions. It                                                               
might be  applied differently for  the North Slope, but  GVEA has                                                               
been in contact  with the administration and  they understand how                                                               
it is moving forward.                                                                                                           
                                                                                                                                
3:46:55 PM                                                                                                                    
Section  3   amends  the  definition  of   "natural  gas  storage                                                               
facility" and "facility"  in AS 42.05.990(3) to  assure that tank                                                               
storage  or storage  in a  depleted or  nearly depleted  well can                                                               
apply for this  tax credit (as opposed to Cook  Inlet Natural Gas                                                               
Storage Association's project).                                                                                                 
                                                                                                                                
3:47:27 PM                                                                                                                    
Section 4 amends the existing  gas storage facility tax credit by                                                               
bifurcating  it  into two  separate  credits:  a nontank  storage                                                               
facility and a tank storage  facility. The nontank storage uses a                                                               
volumetric  equation  that  is   necessary  for  the  underground                                                               
storage, but the  tank storage uses $15 million or  50 percent of                                                               
the  cost of  building  an LNG  storage facility  of  at least  1                                                               
million gallons, whichever is less.                                                                                             
                                                                                                                                
Section 5  amends the terms  of what  storage qualifies as  a tax                                                               
credit  by  adding the  1  million  gallon threshold  similar  to                                                               
section 1.  Sections 6 and 7  added "or payment" to  the language                                                               
as opposed to  just a tax refund  in order to make  it easier and                                                               
clearer within statute that GVEA,  a non-profit that does not pay                                                               
any taxes to the state, could have access to that credit.                                                                       
                                                                                                                                
3:48:29 PM                                                                                                                    
Section 8 sets forth how a  company not subject to tax under this                                                               
chapter would still be liable  to pay back any erroneous payments                                                               
made by the  state. So the state receives some  of its money back                                                               
if  the organization  stops commercial  operation of  the storage                                                               
facility or if an error  was made in calculating the construction                                                               
cost for  the facility as  determined by  the Alaska Oil  and Gas                                                               
Conservation Commission (AOGCC).                                                                                                
                                                                                                                                
Section 9  amends AS 43.20.046(i)  to clarify that a  person that                                                               
receives the  payment under this  title must also  repay interest                                                               
to  the  state  as  the  determined  under  AS  43.05.225  (under                                                               
calculation of  erroneous payment). Sections 10-13  make a number                                                               
of  conforming language  changes, especially  including the  word                                                               
"payment" going  back to the  non-profit status of  GVEA. Section                                                               
14 establishes an effective date.                                                                                               
                                                                                                                                
CO-CHAIR PASKVAN opened public testimony.                                                                                       
                                                                                                                                
3:50:00 PM                                                                                                                    
LUKE HOPKINS,  Mayor, Fairbanks North  Star Borough, said  SB 153                                                               
is very important for Fairbanks.  Increasing storage capacity for                                                               
the  community would  allow more  people to  take advantage  of a                                                               
resulting increased gas supply. He said  cars are lined up at the                                                               
lowest-priced  gas  pump for  home  heating  oil and  people  are                                                               
buying it 5  gallon cans, because they may not  have enough money                                                               
to make to the next delivery. He  said this is one of the fastest                                                               
short term improvements  in space heating fixes that  can be seen                                                               
and that GVEA  and Flint Hills are  already considering expanding                                                               
an existing trucking project with Fairbanks Natural Gas.                                                                        
                                                                                                                                
3:53:20 PM                                                                                                                    
JIM  DODSON, Fairbanks  Economic Development  Council, Fairbanks,                                                               
said he supported SB 153.  It's a crucial component to Fairbanks'                                                               
infrastructure in moving from staggering  home heating fuel costs                                                               
($4 gallon) to  a natural gas system. He said  the high costs are                                                               
devastating families,  homes and businesses and  making Fairbanks                                                               
an economically unsuccessful community.                                                                                         
                                                                                                                                
3:54:45 PM                                                                                                                    
BRIAN  NEWTON,   President  and   CEO,  Golden   Valley  Electric                                                               
Association  (GVEA), said  it the  largest  producer of  electric                                                               
power in  Interior Alaska and  serves roughly  44,000 residential                                                               
and industrial customers. Their  service territory covers greater                                                               
Fairbanks and the North Pole  area, extending down the Richardson                                                               
Highway  to Delta  Junction, and  down  to the  Parks Highway  to                                                               
Cantwell.                                                                                                                       
                                                                                                                                
He said  the cost of  electricity is extremely high  in Fairbanks                                                               
and  now it  is being  exacerbated by  the high  cost of  oil. It                                                               
produces only 36  percent of their power needs, but  in 2011, oil                                                               
accounted  for  60 percent  of  their  fuel bill.  Although  they                                                               
secure  as much  gas fire  generation out  of the  Cook Inlet  as                                                               
possible, and purchase  and spin as much power from  coal as they                                                               
can, they  still rely on  oil for  35-40 percent of  their yearly                                                               
fuel needs.                                                                                                                     
                                                                                                                                
He said  that GVEA is  aggressively pursuing ways to  replace its                                                               
oil-fired  generation  with  alternative  sources  of  power.  In                                                               
anticipation  that  affordable  natural   gas  would  someday  be                                                               
available in  the Interior they installed  an "LM6000," basically                                                               
a 737  jet engine at  their North  Pole expansion plant.  This 60                                                               
megawatt unit  is currently run  on naphtha  (Jet A), but  it can                                                               
easily be converted to natural gas  and SB 153 may help determine                                                               
whether such a conversion is economically feasible.                                                                             
                                                                                                                                
MR. NEWTON said  GVEA watched as the Cook Inlet  Recovery Act was                                                               
debated  and passed  in  2010; it  established  an incentive  for                                                               
creation  of natural  gas  storage around  the  state to  satisfy                                                               
regional  energy needs.  At the  time  of its  passage, GVEA  was                                                               
investigating  trucking LNG  to Fairbanks  from the  North Slope,                                                               
but the trucking concept for a  large volume of gas was not fully                                                               
developed at the time. Despite  this fact, the Interior relied on                                                               
statewide  provisions in  the legislation  and  hoped that  would                                                               
accommodate future  Interior energy needs. As  GVEA established a                                                               
partnership with  Flint Hills  to advance  the development  of an                                                               
LNG  project, they  reviewed the  provisions of  the gas  storage                                                               
incentive statutes and determined  some slight modifications were                                                               
needed to be applicable to their proposed project.                                                                              
                                                                                                                                
He explained  that at  the time  HB 280 was  passed in  2010, the                                                               
primary focus  was on  creating an  incentive that  would trigger                                                               
the development of  geologic storage in the Cook  Inlet to handle                                                               
seasonal peaks of natural gas  demand. The legislation referenced                                                               
both  geologic  below  ground  storage   and  tank  above  ground                                                               
storage. SB  153 clarifies  the same level  of support  for above                                                               
ground tank storage facilities.                                                                                                 
                                                                                                                                
3:58:51 PM                                                                                                                    
MR. NEWTON said GVEA didn't  consider the establishment of an LNG                                                               
trucking project  from the  North Slope  as being  in competition                                                               
with a  future pipeline.  In fact, they  believe that  bringing a                                                               
large  volume of  natural gas  to  the community  via truck  will                                                               
allow a local  distribution and customer base  to develop thereby                                                               
underpinning the  economics of the future  pipeline. He concluded                                                               
that GVEA  is prepared to  work with  the committee to  make sure                                                               
that  natural gas  incentives are  available to  the Interior  as                                                               
well as to other areas of the state.                                                                                            
                                                                                                                                
3:59:50 PM                                                                                                                    
DOUG  ISAACSON,  Mayor,  City  of North  Pole,  Alaska,  said  he                                                               
supported SB  153 for all  the reasons already mentioned,  but he                                                               
wanted  to add  that  natural  gas do  something  else for  their                                                               
communities that  no one had mentioned.  He said that there  is a                                                               
need for  clean air; North Pole  has been rated the  dirtiest air                                                               
this  winter  - largely  because  they  have two  refineries  and                                                               
GVEA's  180 megawatts  of diesel  powered  generation along  with                                                               
many wood stoves. He said people  are paying on average of $1,500                                                               
each month  for fuel,  space heating  and electricity  during the                                                               
winter.  This is  not sustainable;  there  is pain  and they  are                                                               
asking for  solutions both  immediate and  long term.  This would                                                               
show people that something credible was going to happen.                                                                        
                                                                                                                                
MR. ISAACSON  said they  have been told  that the  handshake from                                                               
the municipalities to the legislature  looks like a hand out, but                                                               
this  project will  mitigate  that by  allowing  them to  attract                                                               
larger stores that presently won't  come to North Pole because of                                                               
the high cost  of space heating. Then they would  have more of an                                                               
economy and be able to do more for themselves.                                                                                  
                                                                                                                                
4:04:16 PM                                                                                                                    
DAN BRITTON,  President and CEO,  Fairbanks Natural Gas,  said he                                                               
supported SB 153 for the reasons already stated.                                                                                
                                                                                                                                
SENATOR  STEDMAN  said  he  wasn't sure  this  wasn't  a  regular                                                               
capital  appropriation  request  being   coined  in  a  piece  of                                                               
legislation. It sounds similar to  conversations with hydros that                                                               
want help  with 50 percent  of their costs.  He said he  would be                                                               
concerned   if  they   started  legislating   appropriations  and                                                               
reimbursements on capital projects  in legislation in general and                                                               
that energy issues should be addressed through other processes.                                                                 
                                                                                                                                
CO-CHAIR PASKVAN thanked him for  the comments and indicated that                                                               
SB 153 would be held in committee.                                                                                              

Document Name Date/Time Subjects
SB 153 - Application to Fairbanks of HB 280.pdf SRES 2/9/2012 3:30:00 PM
HB 280
SB 153
SB 153 - Sectional - Version I.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB 153 - Project Overview.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB 153 - Sponsor Statement.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB 153 - Legislation - Version I.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB 153_Backup_Deadhorse rendering with description.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB 153_Backup_NorthPole rendering with description.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB153-Fiscal Note-DCCED-RCA-02-03-12.pdf SRES 2/9/2012 3:30:00 PM
SB 153
Bradford Keithley Bio.pdf SRES 2/9/2012 3:30:00 PM
Gleason Decision Alternate Perspective
NEW_SB153-Fiscal Note-DOA-AOGCC-01-14-12.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB153-Fiscal Note-DOR-TAX-02-07-12.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB153-Fiscal Note-DNR-DOG-02-06-2012.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB153-Fiscal Note-DNR-MLW-02-07-2012.pdf SRES 2/9/2012 3:30:00 PM
SB 153
B Keithley Alternate Perspective.pdf SRES 2/9/2012 3:30:00 PM
Gleason Decision Alternate Perspective