Legislature(2017 - 2018)CAPITOL 17

01/30/2018 10:15 AM ENERGY

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Audio Topic
10:16:33 AM Start
10:17:15 AM Presentation: Interior Energy Project
11:53:51 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview: Interior Energy Project (IEP) TELECONFERENCED
-Gene Therriault, IEP Project Lead, AK Industrial
Development Export Authority (AIDEA)
-Jomo Stewart, General Manager, Interior Gas
Utility (IGU)
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE SPECIAL COMMITTEE ON ENERGY                                                                              
                        January 30, 2018                                                                                        
                           10:16 a.m.                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Adam Wool, Chair                                                                                                 
Representative Ivy Spohnholz, Vice Chair                                                                                        
Representative Matt Claman                                                                                                      
Representative DeLena Johnson                                                                                                   
Representative Jennifer Johnston                                                                                                
Representative George Rauscher                                                                                                  
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION: INTERIOR ENERGY PROJECT                                                                                           
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
JOMO STEWART, General Manager                                                                                                   
Interior Gas Utility                                                                                                            
Fairbanks, Alaska                                                                                                               
POSITION STATEMENT:  Presented a PowerPoint titled "Interior                                                                  
Energy Project."                                                                                                                
                                                                                                                                
GENE THERRIAULT                                                                                                                 
Alaska Industrial Development and Export Authority (AIDEA)                                                                      
Fairbanks, Alaska                                                                                                               
POSITION STATEMENT:  Presented a PowerPoint titled "Interior                                                                  
Energy Project."                                                                                                                
                                                                                                                                
DAN BRITTON                                                                                                                     
Pentex Alaska                                                                                                                   
Fairbanks, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions during the presentation.                                                              
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
10:16:33 AM                                                                                                                   
                                                                                                                                
CHAIR  ADAM WOOL  called  the House  Special  Committee on  Energy                                                            
meeting to  order at 10:16  a.m.  Representatives  Wool, Rauscher,                                                              
Spohnholz,  Claman,  Johnston, and  Johnson  were  present at  the                                                              
call to order.                                                                                                                  
                                                                                                                                
^Presentation: Interior Energy Project                                                                                        
             Presentation: Interior Energy Project                                                                          
                                                                                                                                
10:17:15 AM                                                                                                                   
                                                                                                                                
CHAIR WOOL  announced that the only  order of business  would be a                                                              
PowerPoint presentation on the Interior Energy Project.                                                                         
                                                                                                                                
10:17:55 AM                                                                                                                   
                                                                                                                                
JOMO STEWART,  General Manager,  Interior Gas Utility,  introduced                                                              
a  PowerPoint  titled,  "Interior Energy  Project."  [Included  in                                                              
members' packets]   He  walked through  slide 4, "Interior  Energy                                                              
Project  PURPOSE  AND  GOALS,"  and  explained  that  this  was  a                                                              
community-initiated  project  with   a  goal  "to  bring  low-cost                                                              
energy to as  many residents and businesses of  Interior Alaska as                                                              
possible,  as  quickly  as  possible ..."  He  relayed  that  this                                                              
project  had been  conceived during  a  time when  oil prices  had                                                              
escalated, which  brought the need to stabilize  the economy, help                                                              
improve air quality,  and offer an alternative  energy source that                                                              
was cleaner burning than wood stoves.                                                                                           
                                                                                                                                
10:20:50 AM                                                                                                                   
                                                                                                                                
CHAIR WOOL  asked if there had  been any air quality  studies done                                                              
prior to this.                                                                                                                  
                                                                                                                                
GENE  THERRIAULT,   Alaska  Industrial   Development   and  Export                                                              
Authority,  offered his belief  that because  of the seasonal  air                                                              
inversion,  the Fairbanks  North Star  Borough had  always had  "a                                                              
bit of an air  quality issue.  However, over time  the limits that                                                              
were allowed  under the Clean Air  Act became more  restrictive as                                                              
scientific  information  about   the  impacts  or  the  harm  from                                                              
particulate  matter."   He  added  that  a  shift to  wood  stoves                                                              
exacerbated that problem.                                                                                                       
                                                                                                                                
MR.  STEWART  said  that  this  was  the  local  impetus  for  the                                                              
Interior  Energy  Project, although  there  was also  a  statewide                                                              
component.   He  moved on  to slide  5,  "Interior Energy  Project                                                              
PURPOSE  AND GOALS,  Statewide,"  and  explained  that the  fiscal                                                              
position  of the state  was changing  and that  the allocation  of                                                              
large grants to  fund major development projects was  coming to an                                                              
end.   Consequently, there  was work for  a funding  strategy that                                                              
was more sustainable  moving into the future.  He  stated that the                                                              
committee had requested  a blended finance package,  modeled after                                                              
the "Bradley  Lake" model, which  blended a small  grant component                                                              
with bonds and loans  with favorable terms.  He  allowed that this                                                              
could  conceivably be  more sustainable  and within  the means  of                                                              
the state.                                                                                                                      
                                                                                                                                
MR.  STEWART  directed  attention  to slide  6,  "IEP  -  Original                                                              
Project  Definition."     He  explained  that  this   entailed  an                                                              
increase  of the  LNG [liquid  natural  gas] production,  storage,                                                              
and delivery  capacity.  He  added that  it was also  necessary to                                                              
increase delivery and support conversion for natural gas.                                                                       
                                                                                                                                
MR.  STEWART addressed  slides  7  - 11,  "Project  History."   He                                                              
reported  that this  project had  been under  discussion for  more                                                              
than 10  years and  had started  in Fairbanks  with the  Fairbanks                                                              
Economic Development  Corporation Cost-of-Energy  task force.   He                                                              
relayed  that this  was a broad  cross section  of the  community,                                                              
more   than  100   people,  and   included  representatives   from                                                              
government,  the  university,  the  utility  sector,  and  private                                                              
citizens  trying to  find ways to  address the  challenge  for the                                                              
cost of energy.   He added  that most of the  recommendations were                                                              
adopted and included  energy efficiency programs such  as the home                                                              
energy  retro fit  program, the  renewable  energy grant  program,                                                              
and  a  bio mass  to  liquids  project.   He  explained  that  the                                                              
community then  approached the legislature  and requested  a grant                                                              
to advance a natural  gas project.  He pointed  out that, although                                                              
the  community  did run  primarily  on  oil,  Fairbanks was  in  a                                                              
position  to utilize  gas from  the  North Slope.   This  project,                                                              
funded by a state  grant in 2011, was called the  Gas Distribution                                                              
System  Analysis  and included  engineering,  financial  modeling,                                                              
and environmental  study.  He  explained that they  worked through                                                              
this process in  2012 and attempted to create  a municipal utility                                                              
to serve  the entirety of  the Fairbanks  North Star Borough.   He                                                              
relayed  that the  cities  could  cede the  utility  power to  the                                                              
borough to  help create an area  wide utility.  He noted  that, as                                                              
the cost for  the distribution infrastructure was  estimated to be                                                              
more  than  $500 million,  it  was  necessary  to find  a  funding                                                              
package,  and  this  was  when the  blended  finance  package  was                                                              
proposed to the  administration.  It was necessary  to keep moving                                                              
forward  by  establishing  the  municipal  utility,  creating  the                                                              
service area with  the RCA [Regulatory Commission  of Alaska], and                                                              
setting up  the administration.   In 2013, the project  was titled                                                              
the Interior Energy  Project and the funding package  was proposed                                                              
and  approved for  a  $57.5 million  grant,  a  $125 million  SETS                                                              
[Sustainable  Energy  Transmission  and  Supply]  loan  with  very                                                              
flexible  lending terms,  and $150 million  of bonding  authority.                                                              
This project  had a  mandate for  a North Slope  focus.   In 2014,                                                              
the private  sector took a SETS  loan to build  infrastructure and                                                              
an  RFP  process  was  initiated,  a  partner  was  selected,  and                                                              
development work  commenced on the North Slope  configuration.  He                                                              
reported  that  customer  conversion  studies  were  conducted  to                                                              
determine the receptiveness for natural gas.                                                                                    
                                                                                                                                
10:30:58 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  JOHNSTON  asked   if  natural  gas  expansion  was                                                              
supported by these funds or by private funds.                                                                                   
                                                                                                                                
MR. STEWART  replied that  it had been  done with Interior  Energy                                                              
Project funding.                                                                                                                
                                                                                                                                
CHAIR WOOL asked about the price for delivered gas.                                                                             
                                                                                                                                
MR.  STEWART said  that the  cost of  the raw  commodity from  the                                                              
North Slope  was about $3.00 per  mcf [million cubic  feet], which                                                              
was about  half the price  of gas from the  Cook Inlet.   He noted                                                              
that the  cost for  the infrastructure  was about  double  that of                                                              
the Cook Inlet.   He reported that initial cost  estimates for the                                                              
LNG  facility infrastructure  of  about $170  -  $190 million  had                                                              
risen  to  almost  $250 million,  while  the  estimated  cost  for                                                              
delivered  LNG  had  climbed  to  more  than  $18  and  was  still                                                              
increasing.  He  said that, in 2015, the infrastructure  price had                                                              
remained  very  high, which  left  little  money to  add  delivery                                                              
infrastructure within  Fairbanks.  The project then  requested the                                                              
latitude to  review other areas  to develop and site  the project,                                                              
which included  Cook Inlet.  He  reported that House Bill  105 had                                                              
approved  this in 2015,  and that  core Fairbanks  was now  almost                                                              
entirely plumbed  and ready for LNG.   He added that  the Interior                                                              
Gas Utility had  its first build-out phase in the  core North Pole                                                              
area, laying 70 miles of pipe in 100 days.                                                                                      
                                                                                                                                
REPRESENTATIVE  JOHNSTON  asked   if  the  construction  was  loan                                                              
based.                                                                                                                          
                                                                                                                                
MR.  STEWART  said  that  the  taxes  would  come  later  for  the                                                              
repayment of the SETS loan.                                                                                                     
                                                                                                                                
MR. STEWART  returned attention to  slide 9 and reported  that the                                                              
legislature had allowed  for the project to do a  review of energy                                                              
proposals in  2015.  Instead  of building  an LNG facility  on the                                                              
North Slope, it  was decided to base the project  in Cook Inlet in                                                              
the Matanuska-Susitna  Valley on the  way to Point Mackenzie.   He                                                              
reminded the  committee that,  in 2015, as  the oil  price dropped                                                              
precipitously,  a new conversion  analysis and market  sensitivity                                                              
analysis was  conducted because  a project goal  was to  halve the                                                              
cost of  energy.   This new  analysis found  that there  was still                                                              
support  for a  50 percent  conversion rate,  noting that  support                                                              
for  the investment  to  convert  was  dependent on  the  economic                                                              
driver.    He   pointed  out  that  analysis  reported   that  the                                                              
conversion rate for commercial businesses was 100 percent.                                                                      
                                                                                                                                
10:37:53 AM                                                                                                                   
                                                                                                                                
MR.  STEWART returned  attention  to slide  10  and reported  that                                                              
Salix  had been  chosen as  the partner  for the  Cook Inlet  area                                                              
project.   He explained that, as  the cost structure and  the cost                                                              
components  were driving  up  the cost  of  the gas,  it was  then                                                              
decided  to move  forward  with  the project  without  Salix.   He                                                              
reported  that,  in 2016,  negotiations  began  for the  state  to                                                              
purchase Pentex  through Alaska Industrial Development  and Export                                                              
Authority (AIDEA),  with a hope  to assist the community  with its                                                              
possible   purchase  of   the  operation.     In  December,   this                                                              
culminated  with   a  Memorandum  of  Understanding   for  further                                                              
negotiations toward the purchase.                                                                                               
                                                                                                                                
MR.  STEWART turned  attention to  slide  11 and  reported on  the                                                              
activity in 2017,  which began with negotiations  to transform the                                                              
Memorandum of  Understanding into  contractual agreements  to move                                                              
forward.    He  noted  that  the  legislative  agreement  for  the                                                              
project to  look for other sources  of gas had also  included some                                                              
restrictions on AIDEA  regarding funding.  He reported  that grant                                                              
funds  had   been  expended   in  pursuit   of  the  North   Slope                                                              
configuration,  although these  funds would  not be  used for  the                                                              
Cook  Inlet  project.    He  added   that  in  2017  there  was  a                                                              
continuance of  conversion analyses,  and pursuit of  alternatives                                                              
for sources  of gas,  project components  and configurations,  and                                                              
resources.                                                                                                                      
                                                                                                                                
10:41:43 AM                                                                                                                   
                                                                                                                                
CHAIR  WOOL asked  about the  investments  of money  on the  North                                                              
Slope.                                                                                                                          
                                                                                                                                
MR.  THERRIAULT  explained that,  although  $12 million  had  been                                                              
spent, part  of this  was an asset,  the building  of a pad  for a                                                              
plant  to be  sited,  and  this asset  remained  an  asset of  the                                                              
enterprise.    He reported  that  additional  money was  spent  on                                                              
engineering  and that  even  if the  plant  was not  built on  the                                                              
North Slope,  there was the knowledge  of the plans,  designs, and                                                              
technology which could  be used elsewhere.  He  explained that the                                                              
legislature  had  determined  in   House  Bill  105  that  it  was                                                              
necessary for specific  components to be included in  a plan prior                                                              
to spending large  amounts of money, and that AIDEA  was in charge                                                              
of this plan.                                                                                                                   
                                                                                                                                
CHAIR  WOOL asked  about the  current  status of  the North  Slope                                                              
assets.                                                                                                                         
                                                                                                                                
MR. STEWART  responded that  these assets  were AIDEA  controlled,                                                              
although  they were part  of the  package in  the transfer  of the                                                              
ownership of  Pentex.  He  pointed out  that the building  pad was                                                              
well sited  for the  proximity of  the infrastructure  for natural                                                              
gas on the North  Slope.  He said that the project  had filed with                                                              
the RCA  and with the Department  of Natural Resources  for change                                                              
of control for that  pad, and that AIDEA was in  negotiations with                                                              
a  development partner  for use  of  the pad,  which would  defray                                                              
some of its costs for the lease.                                                                                                
                                                                                                                                
CHAIR WOOL asked why they were trying to keep the pad.                                                                          
                                                                                                                                
MR. STEWART  replied that they were  keeping the lease  active for                                                              
the pad, and that  AIDEA was in negotiations for  a sublease which                                                              
would generate revenues.                                                                                                        
                                                                                                                                
REPRESENTATIVE  JOHNSON asked  about the  current price for  North                                                              
Slope gas.                                                                                                                      
                                                                                                                                
MR. STEWART  stated that  currently the gas  was coming  from Cook                                                              
Inlet.                                                                                                                          
                                                                                                                                
REPRESENTATIVE   JOHNSON  asked   about  the  earlier   negotiated                                                              
prices.                                                                                                                         
                                                                                                                                
MR.  STEWART said  that contracts  had been  negotiated by  others                                                              
with North Slope sellers, which were in the $2.50 - $3.50 range.                                                                
                                                                                                                                
REPRESENTATIVE JOHNSON  asked how this would tie in  with the AGDC                                                              
[Alaska  Gasline Development  Corporation]  and  the outtakes  for                                                              
the line.                                                                                                                       
                                                                                                                                
MR. STEWART explained  that the AGDC project was  a large diameter                                                              
gas line  from the  North Slope  to an  LNG facility  in the  Cook                                                              
Inlet region  for export.  He  acknowledged that the  AGDC project                                                              
could have  a lateral  line into  Fairbanks.   He stated  that the                                                              
Interior   Energy   Project   would  spur   the   development   of                                                              
infrastructure   which   would  allow   the   community  to   more                                                              
immediately tie  into and utilize  the larger AGDC  infrastructure                                                              
once it was in place.                                                                                                           
                                                                                                                                
REPRESENTATIVE  JOHNSON  mused that  the  outtakes  of the  larger                                                              
line could connect to the Interior Energy Project.                                                                              
                                                                                                                                
10:46:30 AM                                                                                                                   
                                                                                                                                
MR.  STEWART  turned  attention  to  slide  13,  "HB  105  Plan  &                                                              
Resolution"  and reported  that  the legislature  had "posed  some                                                              
more  robust reporting  requirements,"  listing  these to  include                                                              
quarterly reports to  the legislature.  He added  that the project                                                              
plan  should include  the  source of  natural  gas, the  estimated                                                              
total project cost,  and the estimated "pre-distribution"  cost of                                                              
the supplied gas.                                                                                                               
                                                                                                                                
MR.  STEWART moved  on  to  slide 14,  "HB  105 Resolution  -  Gas                                                              
Supply."     He  pointed  out   that  during  the   Memorandum  of                                                              
Understanding  process, a  lot of  effort went  into defining  the                                                              
scope  of  the  project  for what  was  being  developed  and  the                                                              
estimated  costing for that  development,  so that requirement  of                                                              
House Bill  105 had already  been put in  place.  He  acknowledged                                                              
that it was still  not clear from where the gas  would come or how                                                              
much it  would cost, in  order to determine  a delivered  price of                                                              
gas at meter.   He said that  negotiations in 2017  between Pentex                                                              
and  a  Cook  Inlet  seller were  on-going  and  finally  came  to                                                              
fruition  with a three-year  contract with  Hilcorp [Alaska,  LLC]                                                              
for natural  gas.  He reported that  the price was $7.72  per mcf,                                                              
that there was not  a price escalator, and the  price would remain                                                              
the same  on a seasonal  basis.  He  said that it  included enough                                                              
gas  for the  existing  1100 customers  and  allowed capacity  for                                                              
expansion.                                                                                                                      
                                                                                                                                
MR. STEWART  directed attention to  slide 15, "HB  105 Resolution"                                                              
and  reiterated  that the  questions  had  been answered  for  the                                                              
source  of gas in  Cook Inlet,  the estimated  total project  cost                                                              
was $346  million, and  the estimated  "pre-distribution"  cost of                                                              
supplied gas  of $14.19 after completion  of the LNG  facility and                                                              
the storage.                                                                                                                    
                                                                                                                                
10:49:51 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  SPOHNHOLZ  asked   about  the  funding  difference                                                              
between  the  principal  financing   supplied  by  AIDEA  of  $275                                                              
million and the estimated total cost of $346 million.                                                                           
                                                                                                                                
MR. THERRIAULT  explained that a  portion of the  original package                                                              
had  included  grant  funds  of   general  fund  dollars  for  the                                                              
project, as  well as the SETS loans,  and the ability  to bond for                                                              
additional funds.   He stated that  once the utility  was combined                                                              
and  operating,  it would  have  the  ability  to borrow  its  own                                                              
money.                                                                                                                          
                                                                                                                                
REPRESENTATIVE  SPOHNHOLZ  mused  that  some of  the  funding  was                                                              
carry over from earlier allocated funding.                                                                                      
                                                                                                                                
MR.  THERRIAULT  said that  the  entire  package  was a  blend  of                                                              
capital  dollars, loan  dollars,  and the  ability  to access  the                                                              
bond market.                                                                                                                    
                                                                                                                                
REPRESENTATIVE CLAMAN  asked how  this estimated average  price to                                                              
the  customer of  $17.31  compared  to the  average  price to  the                                                              
customer in Anchorage.                                                                                                          
                                                                                                                                
MR. THERRIAULT said that he was unsure of the current price.                                                                    
                                                                                                                                
REPRESENTATIVE CLAMAN  asked for prices in both  Anchorage and the                                                              
Matanuska-Susitna.                                                                                                              
                                                                                                                                
MR. STEWART directed  attention to the memo in the  House Bill 105                                                              
support package [Included in members' packets].                                                                                 
                                                                                                                                
CHAIR  WOOL said that  the underlying  conflict  was that,  as the                                                              
price  of  oil  comes  down  and  the  cost  to  the  consumer  in                                                              
Fairbanks  of  natural  gas  was  going  up,  there  was  not  any                                                              
savings, and possibly a loss.                                                                                                   
                                                                                                                                
MR.  STEWART, in  response, explained  that  his presentation  was                                                              
based  on the 2018  - 2019  time frame,  which was  just prior  to                                                              
full development  and full utilization.  He directed  attention to                                                              
the  memo about  House  Bill  105,  which detailed  the  estimated                                                              
reductions when the infrastructure was in place.                                                                                
                                                                                                                                
MR. THERRIAULT  directed  attention to  page 5  of the memo  about                                                              
House Bill 105.   He explained that, as the initial  price for gas                                                              
in  2018  and  2019  was the  existing  price,  it  was  currently                                                              
necessary  to  spread the  fixed  costs  over a  smaller  customer                                                              
base.  He reported  that an increase to the size  of storage would                                                              
allow the  existing plant to run  "full tilt and produce  more LNG                                                              
because we've  got a storage  container to put  it in."   He added                                                              
that  they   would  then  be   able  to  serve   more  residential                                                              
customers,  and then,  in 2020,  as the fixed  costs were  spread,                                                              
the delivered  price was  predicted to  come down  to $17.31.   He                                                              
pointed  out that  the price  was  projected to  continue to  come                                                              
down  over the  following years,  as  customers were  incentivized                                                              
and the increased efficiency of gas was touted.                                                                                 
                                                                                                                                
CHAIR WOOL  asked if the 50  percent conversion  included everyone                                                              
in the community.                                                                                                               
                                                                                                                                
MR. THERRIAULT explained  that this percentage was  for the people                                                              
who had access to conversion.                                                                                                   
                                                                                                                                
10:56:32 AM                                                                                                                   
                                                                                                                                
MR. STEWART  introduced slide 17,  "Purchase & Sale  and Financing                                                              
Agreements,"  which detailed  the  utility integration  agreements                                                              
for the purchase  of Pentex and the Interior  Energy Project (IEP)                                                              
Financing.   He then moved  on to slides  19 - 22,  "Definitions,"                                                              
which listed IGU,  Interior Gas Utility; AIDEA,  Alaska Industrial                                                              
Development  and Export Authority;  Pentex  Alaska, LLC;  and IEP,                                                              
Interior  Energy Project.    He explained  that  the reference  to                                                              
Titan was  for the  liquefaction facility,  near Point  MacKenzie.                                                              
He  noted  that the  current  plant  was  Titan  1, with  Titan  2                                                              
becoming  the  expansion,  and   Titan  3  being  another  further                                                              
expansion.   He went on  to explain that  the phases all  moved in                                                              
tandem, as  the demand increased, there  was a need for  more LNG,                                                              
hence the need  for more liquefaction capacity.   He explained the                                                              
phases  of  the   distribution  system  by  IGU:     Phase  1  was                                                              
accomplished in 2015  with installation in core  North Pole; Phase                                                              
2 and  Phase 3 would be  built out at a  later date.  He  moved on                                                              
to discuss  the storage  facilities at  Fairbanks Natural  Gas for                                                              
350,000 gallons  which allowed  service to  about 1,000  customers                                                              
and  reported  on  the  plan  to   install  a  5.25-million-gallon                                                              
storage  facility  which would  allow  for service  to  "thousands                                                              
upon  thousands   of  customers"  with  the  RCA   requirement  to                                                              
maintain a five-day supply of natural gas.                                                                                      
                                                                                                                                
REPRESENTATIVE  JOHNSTON asked for  the cost  to building  out the                                                              
network.  She  referenced the build out districts  in Southcentral                                                              
Alaska  which  were  financed  by the  residents  over  a  10-year                                                              
period and asked if the costs were comparable.                                                                                  
                                                                                                                                
11:01:20 AM                                                                                                                   
                                                                                                                                
DAN  BRITTON,   Pentex  Alaska,   in  response,   said  that   the                                                              
distribution system would cost [indisc].                                                                                        
                                                                                                                                
CHAIR WOOL recapped  that the costs were comparable  at $225,000 -                                                              
250,000 per mile.                                                                                                               
                                                                                                                                
MR.  STEWART  acknowledged   that  the  cost  for   build  out  of                                                              
distribution  for the  Interior Gas  Utility was  a bit more  than                                                              
for Fairbanks Natural  Gas, stating that the wages  were paid at a                                                              
higher  rate.   In response  to Representative  Johnston, he  said                                                              
that they  had a  similar build  out system  for the road  service                                                              
areas.                                                                                                                          
                                                                                                                                
REPRESENTATIVE RAUSCHER  asked for a better definition  to payment                                                              
of a little bit more.                                                                                                           
                                                                                                                                
MR.  STEWART explained  that the  IGU build  out was  more in  the                                                              
$275,000 -  $300,000 range  per mile.   He added that  the current                                                              
build out had been very rapid and robust for one summer.                                                                        
                                                                                                                                
REPRESENTATIVE  CLAMAN  asked  how  the  cost per  mile  would  be                                                              
financed.                                                                                                                       
                                                                                                                                
MR.  STEWART,  in  response,  directed   attention  to  slide  28,                                                              
"Project Financing  - Funds  & Sources."   He reported  that these                                                              
were  financed with  SETS  loans, although  the  exact terms  were                                                              
slightly different,  about 1  percent loans  with a maturity  date                                                              
in  December 2017.   He  stated that  the loans  had been  granted                                                              
with the  recognition that IGU was  moving forward with  a utility                                                              
integration  and  that the  loans  would  be subsumed  by  another                                                              
loan.    He  said  there  was  "a   bit  of  a  grace  period  for                                                              
repayment."   He returned  attention to slides  24 -  26, "Utility                                                              
Integration Agreements."   He outlined that the  agreement and the                                                              
SCOPE of work, as  currently defined by the purchase  and sale and                                                              
financing  agreements,  was  for  successive  LNG  development  to                                                              
increase natural  gas capacity and  storage capacity  in Fairbanks                                                              
and North  Pole, to increase  the build-out for  Phases 1 -  3, to                                                              
expand the  Fairbanks Natural  Gas service  area, and  to increase                                                              
the customer  conversion program.   He pointed  out that  slide 25                                                              
presented a  more detailed breakdown  of the capital  requirements                                                              
and  the   estimated  pricing.     He  shared  slide   26,  visual                                                              
depictions  of   an  LNG  facility,   a  heat  map,   and  greater                                                              
development within the community.                                                                                               
                                                                                                                                
REPRESENTATIVE  JOHNSTON  asked  about refinancing  for  the  SETS                                                              
funds.                                                                                                                          
                                                                                                                                
MR.  STEWART,  in  response,  stated  that  SETS  was  Sustainable                                                              
Energy Transmission.                                                                                                            
                                                                                                                                
MR.  THERRIAULT explained  that  this wording  was established  by                                                              
the legislature in  2012, and this was a funding  source for AIDEA                                                              
loans for energy transmission and distribution assistance.                                                                      
                                                                                                                                
11:07:28 AM                                                                                                                   
                                                                                                                                
MR. STEWART moved  back to slide 28, "Project Financing  - Funds &                                                              
Sources,"   which  listed   the   major  funding   components   as                                                              
appropriated  by   the  legislature.    He  addressed   slide  29,                                                              
"Utility  Integration   Agreements,"  and  spoke   about  the  key                                                              
business and  financial terms, which  included a commitment  of up                                                              
to  $330 million  of total  development  investment, structure  of                                                              
the SETS  loans for  $125 million, and  the standards  and process                                                              
for issuance  of $150 million  in AIDEA  bonds.  He  addressed the                                                              
purchase   of   Pentex,   and   the   process   and   timing   for                                                              
infrastructure development  and system integration.   Moving on to                                                              
slide  30, "IEP  SETS Financing,"  he  explained that  this was  a                                                              
loan for  $125 million  with a  50-year payback,  and an  interest                                                              
rate of zero  percent for the first  15 years, and then  a rate of                                                              
0.25  percent interest  for the  remaining  time.   He added  that                                                              
there was  a grace period  dependent on  demand growth, as  it was                                                              
still unclear for how the market would react.                                                                                   
                                                                                                                                
MR.   STEWART  directed   attention   to  slide   31,  "IEP   Bond                                                              
Financing," and  explained that the authorizing statute,  when the                                                              
legislature  originally appropriated  the funds,  said that  AIDEA                                                              
could  waive any  and  all regulations  that  normally applied  to                                                              
lending,  as  well as  accommodation  for  certain statutes.    He                                                              
spoke  about  various   other  revolving  loan  programs   he  had                                                              
witnessed,  noting that  the state  did not want  to compete  with                                                              
private sector  banks.  He stated  that with this loan,  there was                                                              
a maximum  interest of 3 percent,  as there was the  potential for                                                              
very  large commercial  investments.   He  allowed  that this  may                                                              
have required  "a high  degree of  flexibility  to make it  work."                                                              
The  desired  result  was  for   a  maximum  of  benefit  for  the                                                              
citizenry.                                                                                                                      
                                                                                                                                
REPRESENTATIVE SPOHNHOLZ  referenced slide 30 and  asked about the                                                              
a) and b) options.                                                                                                              
                                                                                                                                
MR.  STEWART  explained   that,  although  there   was  a  50-year                                                              
deferral and  a 35-year  payback, within  the loan document  there                                                              
was a  "demand-based deferral," which  would allow, if  the demand                                                              
was  not  as  estimated,  that  the  utility  make  interest  only                                                              
payments  for five  years  and re-amortize  the  remainder of  the                                                              
loan over  a shortened time period.   He declared that  this acted                                                              
as  a  five-year  cushion  to  allow  the  demand  to  accrue,  if                                                              
necessary.                                                                                                                      
                                                                                                                                
MR. STEWART  returned attention to  slide 31 and stated  that this                                                              
was  a  standard bond  package  for  a  30-year  payback and  a  4                                                              
percent  interest rate  with the  standard  debt service  coverage                                                              
ratios.   He moved  forward to  slide 33,  "IEP Financial  Model,"                                                              
and  stated  that  a  robust  financial  and  economic  model  was                                                              
produced for this  project.  He added that this  model was updated                                                              
regularly with  the latest information,  which included:   cost of                                                              
feed-gas,  cost  of construction  and  operations,  and  estimated                                                              
customer conversion  rates.   He addressed  the AIDEA  purchase of                                                              
Pentex,  pointing out  that the  project and  its funding  package                                                              
had  to  accommodate  the  purchase payback  with  interest.    He                                                              
described  the three  modelling  scenarios:   the  base case,  the                                                              
low-gas case, and the no growth case.                                                                                           
                                                                                                                                
11:16:12 AM                                                                                                                   
                                                                                                                                
MR. STEWART  introduced slide 34,  "Modeled SETS  Financing Terms"                                                              
and slide  35, "Modeled  Bond Financing  Terms," which  listed the                                                              
standard  bonding  assumptions  for  a  30-year  term:  4  percent                                                              
interest  rate,   a  3-year  deferral   on  the  front   end,  and                                                              
capitalized on  the back end  with standard debt  service coverage                                                              
ratios.     Pointing  to   slide  36,   "Modeled  Cost   and  Rate                                                              
Scenarios,"  he listed  the assumptions  to include  the price  of                                                              
the  feed  gas,  the  infrastructure,   the  build  out,  and  the                                                              
customer conversions under each of the modelling scenarios.                                                                     
                                                                                                                                
CHAIR WOOL mused about the no-growth scenario.                                                                                  
                                                                                                                                
MR. STEWART  replied that this was  not a realistic  scenario, and                                                              
was not  meant to  be a  realistic scenario,  but was,  instead, a                                                              
worst  case  scenario.    He  pointed   out  that  the  commercial                                                              
consumers  had   a  different  "calculus"  than   the  residential                                                              
consumers,  as there were  still commercial  consumers signing  up                                                              
during a time of  price parity for oil and gas.   He declared that                                                              
there  were  reasons  not  connected   directly  to  price,  which                                                              
included  conversion for  efficient appliances  or elimination  of                                                              
environmental hazards.                                                                                                          
                                                                                                                                
MR. STEWART presented  slide 37, "Modeled Capital  Program - Major                                                              
Items,"  and  slide  38,  "Cardno  Studies:"  which  depicted  the                                                              
utilization  of the  cardno  data and  the  estimated reaction  to                                                              
natural gas.   He  explained that  the delta  between oil  and gas                                                              
was compared and then used to plot market reactions.                                                                            
                                                                                                                                
MR. STEWART  discussed slide 40,  "Financial Modeling  - Results,"                                                              
and  explained that  under the  "No Growth"  scenario the  utility                                                              
would  be "in  a very  challenged position"  even as  it would  be                                                              
able to continue  to operate and  provide service for at  least 20                                                              
years  because of  the structure  of  the financial  package.   He                                                              
discussed  the "Base  Case" scenario  of a  35 percent  conversion                                                              
rate, and  stated that the utility  would be healthy,  although it                                                              
would not  be able to meet  its rapidness of  development targets.                                                              
He moved  on to the "Lower-Cost-Gas"  scenario and stated  that he                                                              
utility  could  substantially  meet  its  price  targets  and  its                                                              
development goals.   He reported that, based on  these models, the                                                              
board  chose  to  enter  into an  agreement  with  AIDEA  for  the                                                              
purchase of Pentex.                                                                                                             
                                                                                                                                
11:23:13 AM                                                                                                                   
                                                                                                                                
MR.  STEWART stated  that there  had  been a  "robust" process  to                                                              
reach  the decision,  which included  quarterly reporting,  public                                                              
comment  periods, and  public  presentations,  slide 41,  "Utility                                                              
Integration  Agreements  -  Public  Process and  Decisions."    He                                                              
reported that  the IBU board meeting  approval was granted  at the                                                              
Fairbanks  North Star  Borough Assembly  Chambers  on December  5,                                                              
2017 and  the AIDEA  board approval was  granted at  the Anchorage                                                              
offices on December 7, 2017.                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAUSCHER asked  if  the Matanuska-Susitna  process                                                              
for a  local improvement  district was similar  to the  process in                                                              
Fairbanks.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  JOHNSTON  explained   that  the  Matanuska-Susitna                                                              
process was for a service district.                                                                                             
                                                                                                                                
MR.  THERRIAULT explained  that  although it  was available,  they                                                              
were not  counting on this;  however, limitations were  built into                                                              
the agreement  for  the combined  utilities ability  to go  to the                                                              
bond market.   He  suggested that  although this  was a  means for                                                              
the  development of  a  new area  with a  need  for service  which                                                              
would  have  to  contribute  by  voting  on  a  local  improvement                                                              
district, it was not currently required.                                                                                        
                                                                                                                                
11:27:04 AM                                                                                                                   
                                                                                                                                
MR. STEWART  continued with  slide 43,  "PSA/FA Advancement,"  and                                                              
said that the  applications for change of control  had been filed,                                                              
the due diligence  was being performed, and the  other work needed                                                              
to satisfy the conditions was also being carried out.                                                                           
                                                                                                                                
CHAIR  WOOL asked  about  the change  of  control  letter for  the                                                              
North Slope pad.                                                                                                                
                                                                                                                                
MR.  THERRIAULT  explained  that  AIDEA  was  the  holder  of  the                                                              
existing lease  for the North  Slope pad  and it was  necessary to                                                              
request that  the Department  of Natural  Resources work  with IGU                                                              
to determine  that IGU  was fit,  willing, and  able to  take over                                                              
the original  lease.   He added  that there  was work on  approval                                                              
for part  of the pad to  be used under  a sub-lease.   He declared                                                              
that  with approval  both  the original  lease  and the  sub-lease                                                              
would be transferred to IGU control.                                                                                            
                                                                                                                                
CHAIR WOOL  asked about  a future  sale of the  pad to  recoup the                                                              
investment.                                                                                                                     
                                                                                                                                
MR. THERRIAULT  said that  any positive cash  or proceeds  of sale                                                              
would have  to be used  to achieve the  original goal  for getting                                                              
gas to Fairbanks and North Pole.                                                                                                
                                                                                                                                
MR.  STEWART  explained  that  once   funds  were  released  after                                                              
certification of the  House Bill 105 plan, the  project would move                                                              
forward  on  the  infrastructure  development,  slides  44  -  45,                                                              
"Large LNG  Storage Tank Construction  - Commenced."   He reported                                                              
that AIDEA approved  deployment of grant funds to  Pentex to begin                                                              
FEED  work on  the storage  and  the competitive  bid process  had                                                              
begun  in August  2017.   He reported  that  the construction  had                                                              
already  commenced  with a  hope  to meet  the  2020 deadline  for                                                              
storage.                                                                                                                        
                                                                                                                                
CHAIR WOOL asked where the storage credit came from.                                                                            
                                                                                                                                
MR. STEWART  said that it came from  the state.  He  reported that                                                              
the  contractor was  Preload Cryogenics,  and he  shared that  the                                                              
subcontractors were both local and statewide.                                                                                   
                                                                                                                                
MR. STEWART  noted  that the project  was also  moving forward  on                                                              
bond   authority   extension,   slide   46,   "Bonding   Authority                                                              
Extension:  HB   216  &  SB   125,"  as  the  original   five-year                                                              
authorization would terminate on June 30, 2018.                                                                                 
                                                                                                                                
11:32:03 AM                                                                                                                   
                                                                                                                                
MR.  STEWART  concluded  with slide  48,  "Next  Steps:  Immediate                                                              
Term," and shared  that the contracts addressed a  closure date of                                                              
May 31, 2018.   He noted that  the natural gas  conversion program                                                              
had been  moving forward throughout  the entire process  and there                                                              
was  also focus  on a  potential  on-bill repayment  program.   He                                                              
added  that  the  utility  integration   plan  was  prepared,  the                                                              
procurement manual  was being  finalized, and additional  policies                                                              
were  being  prepared  to  ensure this  was  an  investment  grade                                                              
utility  that  operated  under prudent  utility  principles.    He                                                              
shared  an  update  on the  North  Pole  storage  and  engineering                                                              
design, as well as the LNG facility design.                                                                                     
                                                                                                                                
REPRESENTATIVE  JOHNSTON asked  if there  had been integration  of                                                              
Eielson  Air Force  Base and  defense spending  into the  ten-year                                                              
fiscal plan.                                                                                                                    
                                                                                                                                
MR. STEWART  explained that  there had  been discussions  with the                                                              
military  bases, including  Fort  Wainwright,  about the  possible                                                              
conversion to gas,  although it had not been factored  into any of                                                              
the plans.   He said that  inclusion could improve  the economics.                                                              
He stated  that there  had been  a very  conservative approach  to                                                              
the fiscal  plan.  He pointed out  that, as the combined  heat and                                                              
power systems  for the  military base  was fed  by coal,  it would                                                              
have  been overly  optimistic to  factor this  in as  coal was  so                                                              
cheap.   He added that  any utilization  of gas would  improve the                                                              
economics for all the customers.                                                                                                
                                                                                                                                
11:36:04 AM                                                                                                                   
                                                                                                                                
CHAIR WOOL stated  that the predictions for when and  for how much                                                              
were  both off.   He  expressed his  concern that  the data  might                                                              
still be off and  noted that the conversion rate  was dependent on                                                              
the  prices of  gas  and  oil.   He  asked what  safeguards  would                                                              
ensure  expansion and  if there  was confidence  for the  timeline                                                              
and price.                                                                                                                      
                                                                                                                                
MR. THERRIAULT  expressed his agreement  for the  uncertainties to                                                              
price and date.   He stated that once the House  Bill 105 plan was                                                              
in place,  that allowed  the large  storage and construction  time                                                              
period that  had certainty for completion  by the middle  of 2019.                                                              
He expressed  uncertainty for  the number  of conversions  at that                                                              
time, although the  storage had to be in operation  to qualify for                                                              
a  potential  grant by  January  1,  2020.    He stated  that  the                                                              
certainty  for the  availability of  gas was  coming into  clearer                                                              
focus,  even though  the price  was  dependent on  the volume  and                                                              
number  of  customers  to drive  down  the  per  unit price.    He                                                              
pointed out that,  even at today's price, there was  some "pent up                                                              
demand."   He shared an anecdote  about a commercial account.   He                                                              
offered his  belief that, as the  majority of the pipe  was in the                                                              
business district,  there would be  an increase for  service which                                                              
would also bring  down the per unit price.  He  stated that it was                                                              
possible to get  more production out of the existing  LNG plant if                                                              
they had more storage.                                                                                                          
                                                                                                                                
CHAIR WOOL  opined that, as the  current problem was  storage, not                                                              
production,  once  this  was  resolved  more  customers  could  be                                                              
served with the  resulting drop in price.  He asked  if there were                                                              
any other incentive programs.                                                                                                   
                                                                                                                                
MR.  STEWART directed  attention  to slide  25  and reported  that                                                              
there were some  funding accommodations for a  customer conversion                                                              
program.   He  added that  the Fairbanks  North  Star Borough  had                                                              
been soliciting funding.                                                                                                        
                                                                                                                                
CHAIR WOOL asked about the conversion cost for an individual.                                                                   
                                                                                                                                
MR. STEWART explained  that a home within 100 feet  of the service                                                              
line had  an external conversion  cost of $50.   He said  that the                                                              
internal  conversion  could  be  "a bit  more  substantial."    He                                                              
shared  that  there were  conversion  kits  for most  major  brand                                                              
furnaces  younger   than  10  years   which  made  it   much  more                                                              
affordable,  about $2,000.   He  reported that,  although the  IGU                                                              
community conversion  steering committee  had been put on  hold in                                                              
2016, it  was now being restarted.   He suggested that  an on-bill                                                              
repayment program could be in place within two years.                                                                           
                                                                                                                                
CHAIR WOOL, reflecting  on the high prices for  conversion, opined                                                              
that  these  conversions would  be  more  likely with  an  on-bill                                                              
repayment program.   He asked if  the availability of  natural gas                                                              
near  Fairbanks   would  eliminate   the  need  for   storage  and                                                              
liquefaction.                                                                                                                   
                                                                                                                                
11:48:20 AM                                                                                                                   
                                                                                                                                
MR. STEWART  explained that  the program was  moving forward  in a                                                              
way  to avoid  any stranded  assets.   He  said that  it would  be                                                              
possible to relocate  the LNG facility to put more  gas in storage                                                              
as a hedge for  any supply disruption.  He pointed  out that there                                                              
would  be  many  communities  beyond   the  economic  reach  of  a                                                              
pipeline and that Fairbanks could become the hub.                                                                               
                                                                                                                                
CHAIR  WOOL  asked  about  inclusion  of  the  military  bases  as                                                              
customers and whether  the infrastructure build out  would need to                                                              
be adjusted to accommodate such a large customer.                                                                               
                                                                                                                                
MR.  THERRIAULT  acknowledged that  any  large  user would  be  an                                                              
attractive customer,  although he was  not sure that  trucking LNG                                                              
could support  such a  large combined  heat and  power plant.   He                                                              
offered a synopsis  for the needs of each base as  a customer.  He                                                              
stated that the  long-term vision for the interior  energy project                                                              
was  for the  infrastructure  to  be in  place  to  meet the  core                                                              
demand in  the Fairbanks North  Star Borough, although  ultimately                                                              
that  infrastructure  would  serve  the energy  needs  beyond  the                                                              
borough.                                                                                                                        
                                                                                                                                
11:53:51 AM                                                                                                                   
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being  no further business  before the committee,  the House                                                              
Special Committee on Energy meeting was adjourned at 11:53 a.m.                                                                 

Document Name Date/Time Subjects
IEP - House Energy Committee - January 30 2018 Final with changes.pdf HENE 1/30/2018 10:15:00 AM
Overview - Interior Energy Project Update