Legislature(2003 - 2004)
03/27/2003 03:20 PM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 27, 2003
3:20 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Hugh Fate
Representative Jim Holm
Representative Lesil McGuire
Representative Norman Rokeberg
Representative Harry Crawford
Representative Beth Kerttula
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 17
Strongly encouraging the Secretary of the Interior to conduct
additional competitive oil and gas lease sales within the
National Petroleum Reserve in Alaska.
- MOVED HJR 17 OUT OF COMMITTEE
HOUSE BILL NO. 204
"An Act relating to the regulation of natural gas pipelines
under the Pipeline Act."
- MOVED CSHB 204(O&G) OUT OF COMMITTEE
PREVIOUS ACTION
BILL: HJR 17
SHORT TITLE:LEASES IN NATL PETROLEUM RESERVE
SPONSOR(S): REPRESENTATIVE(S)KOHRING
Jrn-Date Jrn-Page Action
03/14/03 0540 (H) READ THE FIRST TIME -
REFERRALS
03/14/03 0540 (H) O&G, RES
03/27/03 (H) O&G AT 3:15 PM CAPITOL 124
BILL: HB 204
SHORT TITLE:REGULATION OF NATURAL GAS PIPELINES
SPONSOR(S): REPRESENTATIVE(S)CHENAULT
Jrn-Date Jrn-Page Action
03/19/03 0586 (H) READ THE FIRST TIME -
REFERRALS
03/19/03 0586 (H) O&G, RES
03/27/03 (H) O&G AT 3:15 PM CAPITOL 124
WITNESS REGISTER
RANDAL G. BUCKENDORF, Counsel
Anchorage Legal Department
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: During hearing on HJR 17, testified in
support of Alternative A of the Bureau of Land Management's
draft environmental impact statement; said BLM should proceed
with the lease sale as soon as possible.
JAMES COWAN, Geologist
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HJR 17; answered
questions.
REPRESENTATIVE MIKE CHENAULT
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of HB 204.
KEVIN TABLER, Manager of Land and Government Affairs
Union Oil Company of California (Unocal)
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 204, which he
called necessary legislation; answered questions.
A. BEN SCHOFFMANN, Project Manager
Alaska Business Unit
Domestic Production
Marathon Oil Company;
Vice-President, Kenai Kachemak Pipeline, LLC
Anchorage, Alaska
POSITION STATEMENT: Offered presentation in support of HB 204
and SB 151, the companion bill; answered questions.
DAVE HARBOUR, Commissioner, Chair
Regulatory Commission of Alaska (RCA)
Anchorage, Alaska
POSITION STATEMENT: Offered perceptions with regard to HB 204
and how the situation differs in the Lower 48.
JIM STRANDBERG, Commissioner
Regulatory Commission of Alaska
Anchorage, Alaska
POSITION STATEMENT: During hearing on HB 204, answered
questions about RCA's role in consumer protection, the existing
Pipeline Act, and other issues; suggested the need for RCA to
maintain jurisdiction.
ANTONY SCOTT, Commercial Analyst
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During hearing on HB 204, answered
questions pertaining to DNR's fiscal note analysis.
ACTION NARRATIVE
TAPE 03-16, SIDE A
Number 0001
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:20 p.m. Representatives Kohring,
Holm, Fate, Crawford, and Kerttula were present at the call to
order. Representatives Rokeberg and McGuire arrived as the
meeting was in progress.
CHAIR KOHRING introduced Representative Holm as the new
committee member who was replacing Representative Chenault
because of revised committee assignments.
HJR 17-LEASES IN NATL PETROLEUM RESERVE
Number 0104
CHAIR KOHRING announced that the first order of business would
be HOUSE JOINT RESOLUTION NO. 17, Strongly encouraging the
Secretary of the Interior to conduct additional competitive oil
and gas lease sales within the National Petroleum Reserve in
Alaska.
CHAIR KOHRING, sponsor, informed members that the National
Petroleum Reserve in Alaska [known on its Bureau of Land
Management (BLM) web site as National Petroleum Reserve-Alaska
(NPR-A)] was established in 1923 by President Harding as a 23-
million-acre area from which to acquire oil in the event of a
national emergency. Then called Naval Petroleum Reserve [No.
4], NPR-A is the largest block of federal land in Alaska. In
1976, Congress transferred management to the Department of the
Interior, with a provision that oil development would be
prohibited except by Act of Congress; in 1980, the reserve was
opened with a further provision that 50 percent of the royalties
from any oil extracted would go to the State of Alaska, despite
the fact that the reserve is federal land.
CHAIR KOHRING said Alaska stands to benefit from additional oil
exploration there. He suggested this is timely: because of
Congress's recent vote against opening the Arctic National
Wildlife Refuge (ANWR) [to exploration and development], it is
prudent to aggressively look at other areas in Alaska. He noted
that Drue Pearce, former state Senate president and now a
special assistant for the U.S. Department of the Interior,
recently recommended submitting a resolution of this nature.
Number 0375
REPRESENTATIVE HOLM offered his understanding that the state's
50 percent doesn't necessarily go into the general fund. He
asked about that.
CHAIR KOHRING observed that nobody from the Department of
Revenue was at the meeting or on teleconference. He asked
Mr. Buckendorf to respond.
Number 0528
RANDAL G. BUCKENDORF, Counsel, Anchorage Legal Department,
ConocoPhillips Alaska, Inc. ("ConocoPhillips"), presented his
own testimony first. Mr. Buckendorf informed members that he
does both environmental and pipeline-related legal work; he has
been participating in the NPR-A environmental impact statement
(EIS) analysis, beginning in 1998 with the northeast planning
area, and continuing now with the northwest planning area. He
told members:
ConocoPhillips believes it is possible for
environmentally sound and culturally responsible oil
and gas exploration and development to occur in the
National Petroleum Reserve-Alaska. As I mentioned, in
1998 the Bureau of Land Management, the BLM, conducted
a similar environmental impact statement process and,
as a result of that, held two lease sales, in 1999 and
again in 2002; this is for the northeast planning
area. As a result of that, ConocoPhillips and our
partner, Anadarko Petroleum Corporation, participated
in those lease sales and are the number-one acreage
holders in the northeast planning area.
We have also been fortunate to be successful in our
exploration process, and just this January have
proposed the first development in [NPR-A]. We're
currently conducting the environmental impact
statement process for three satellite development
projects that will be produced back to our Alpine
project. That process is currently underway.
Number 0672
MR. BUCKENDORF addressed the northwest planning area.
Explaining why ConocoPhillips supports "Alternative A" in the
draft EIS, he said it is the only option that makes the entire
"high-prospectivity area" available for lease in a manner that
provides meaningful access to the northernmost part of the
reserve, the "Barrow arch," without imposing unnecessary
restrictions upon surface occupancy. Contending that
Alternative A will fully protect sensitive wildlife and
traditional lifestyles, he said it doesn't "prematurely and
categorically exclude leasing from certain lands without first
understanding the potential negative impacts of the proposed
development, if any, and whether such potential impacts can be
mitigated or eliminated." Saying Alternative A appropriately
identifies sensitive areas while reserving the application of
specific protective measures until the future, when site-
specific evaluations and determinations can be made,
Mr. Buckendorf suggested BLM should proceed with this lease sale
as quickly as possible.
Number 0850
MR. BUCKENDORF returned attention to Representative Holm's
question and said:
The 50-50 split, ... as part of the revenue-impact
process, is split between the federal and state and
local governments. As part of the 1998 analysis, the
1999 lease sale and 2002 lease sale resulted in - I
don't have the specific numbers here in front of me -
well over a hundred million dollars in lease sales,
bonuses. 50 percent does go to the state; the state
then shares that with local impacted governments, the
North Slope Borough ... particularly.
That money goes into what is termed an "impact
assistance fund." I believe in the '99 lease sale
about ... 60 to 70 percent ultimately went to the
North Slope Borough. ... The latest data was not
available ... as of last week for the 2002 lease sale.
The way I understand the process is that if there are
any funds left that do not go into the impact
assistance fund, then that can be utilized and goes
into the general fund.
Number 0970
REPRESENTATIVE HOLM asked whether possibly there could be
nothing left for the state, then.
MR. BUCKENDORF suggested the Department of Revenue could answer
better, but said monies always go to the state and that what
ends up going to the local boroughs - the North Slope Borough,
in this instance - is for the impact assistance fund.
CHAIR KOHRING offered to explore with the Department of Revenue
different hypothetical scenarios and what kinds of monies could
be expected. He mentioned potential gain in terms of general
economic growth and jobs, as well as money to local communities
such as Barrow.
MR. BUCKENDORF offered to provide data that he'd prepared to
submit in testimony in two weeks.
Number 1073
REPRESENTATIVE FATE remarked that how much of the state's 50
percent will be used for impact funds and so forth won't be
known ahead of time. It depends on "what is turned in" to a
committee that determines the impact to villages and whether to
grant the money. Furthermore, this money could be put into the
permanent fund or PCE [power cost equalization], for example,
and thus there might not be any money put into the state's
general fund.
Number 1240
JAMES COWAN, Geologist, Division of Oil & Gas, Department of
Natural Resources, in response to Chair Kohring, said he
supports the resolution. He said the revenue sharing is a big
aspect and that Representative Fate had painted a pretty
accurate picture of how it works. He noted that a specific
statute establishes how those funds will be distributed, and
agreed that the general fund might not receive a lot. He added
that the funds are unpredictable and depend on the sale results,
development results, and production.
CHAIR KOHRING asked whether Mr. Cowan thinks the timing is
appropriate because of the recent [congressional vote against
opening] ANWR.
MR. COWAN answered in the affirmative.
Number 1308
REPRESENTATIVE FATE asked whether Mr. Cowan believes this will
redirect the federal efforts away from continuing efforts to
open ANWR.
MR. COWAN said this has been a concern for several years within
the state administration and DNR. He added that he believes it
is important for the state to have a benchmark for revenue-
planning purposes.
Number 1393
CHAIR KOHRING offered his assessment that the industry is quite
supportive of this resolution. He said the state should pursue
all significant opportunities for oil development in the state.
CHAIR KOHRING noted that everyone who'd signed up had testified
already. He turned attention to members' comments.
Number 1423
REPRESENTATIVE FATE expressed concern about the timing, saying
the focus on NPR-A has been used repeatedly in the past to
refocus away from ANWR. He emphasized his desire to keep the
focus on ANWR instead.
CHAIR KOHRING respectfully disagreed. He said he'd prefer
drilling in ANWR, but doesn't see this resolution as refocusing.
Rather, it is an addition for expanding oil and gas development.
Even if few dollars go into the general fund, it will help the
economy in a substantial way.
Number 1621
REPRESENTATIVE McGUIRE suggested adding a section that
encourages a shift in the percentage Alaska will receive.
CHAIR KOHRING said he'd be receptive to such a conceptual
amendment.
Number 1720
REPRESENTATIVE FATE pointed out that the 50-50 split has been
adjudicated through litigation brought by the recipients of the
impact funds; the State of Alaska lost. He questioned the
propriety of requesting in a resolution a different set of
figures.
REPRESENTATIVE HOLM asked Representative Fate whether there is
some vehicle by which the state could change how the state's 50
percent is applied with regard to the general fund.
REPRESENTATIVE FATE answered that the 50 percent is already
affected by the "impact money." He surmised that changing it
such that the federal government receives 40 percent would
require an Act of Congress. If the state then got 60 percent,
he asked, would the state get 10 percent more or would that 60
percent be split up through "the impact funds"? He said he
wasn't sure.
Number 1945
REPRESENTATIVE McGUIRE said she envisioned a "WHEREAS" clause
that would encourage the congressional delegation to explore an
Act of Congress to change the percentage to 60-40. She added
that she wasn't sure whether it was worth pursuing.
REPRESENTATIVE FATE said he'd be amenable after looking into
whether it would be proper and could be done. He pointed out
that it is federal property that goes back to the Teapot Dome
scandal, and suggested the chance of success would be remote.
Number 2070
CHAIR KOHRING reiterated that he is amenable to Representative
McGuire's suggestion, and said he'd like to lobby for the
highest percentage possible for Alaska. He proposed that he and
his staff research the issue, however, with an eye toward
bringing it to the House Resources Standing Committee.
Number 2114
REPRESENTATIVE CRAWFORD spoke in favor of the resolution. He
remarked that Representative Fate's comments gave him pause, and
that he didn't want anything to take away from the chances of
success with ANWR. He said he believes there is a better chance
of getting the jobs sooner through NPR-A, however, and that he
doesn't believe this resolution would be detrimental to the
efforts towards ANWR.
Number 2215
REPRESENTATIVE ROKEBERG stated support for the resolution, but
highlighted a national move to focus on NPR-A [instead of ANWR].
He questioned the economic benefit to the state because of
current constraints.
Number 2324
REPRESENTATIVE HOLM moved to report HJR 17 out of committee
[with individual recommendations and the accompanying fiscal
notes].
REPRESENTATIVE FATE objected.
A roll call vote was taken. Representatives Holm, Rokeberg,
McGuire, Crawford, Kerttula, and Kohring voted in favor of
reporting HJR 17 from committee. Representative Fate voted
against it. Therefore, HJR 17 was reported from the House
Special Committee on Oil and Gas by a vote of 6-1.
HB 204-REGULATION OF NATURAL GAS PIPELINES
[Contains discussion of SB 151, the companion bill]
CHAIR KOHRING announced that the final order of business would
be HOUSE BILL NO. 204, "An Act relating to the regulation of
natural gas pipelines under the Pipeline Act."
Number 2396
REPRESENTATIVE MIKE CHENAULT, Alaska State Legislature, sponsor
of HB 204, informed members that in 2000 the legislature amended
Alaska's Pipeline Act to make provisions for the operation of a
North Slope gas pipeline. One provision allowed two classes of
transportation services: firm and interruptible. At the time,
the North Slope gas pipeline was the only gas pipeline in Alaska
proposing to provide such a service. Currently, however, a
pipeline under construction on the Kenai Peninsula [by Kenai
Kachemak Pipeline, LLC (KKPL)], proposes to provide
transportation to the Cook Inlet service area. He offered his
belief that this the first pipeline to be built in Alaska since
the oil pipeline [the Trans-Alaska Pipeline System (TAPS)].
REPRESENTATIVE CHENAULT reported that recently KKPL requested
authorization from the Regulatory Commission of Alaska (RCA) to
provide firm and interruptible service. Although RCA hasn't
issued a final ruling on this portion of the case, it has raised
questions of whether contract carriage for gas pipelines
elsewhere in Alaska was permissible, given the 2000 amendment to
the Pipeline Act that apparently was exclusive to transportation
of gas on the North Slope. He said HB 204 is intended to
resolve that question raised by RCA. It makes firm and
interruptible service available to any natural gas pipeline
carrier operating in Alaska. It also adds the definitions of
"natural gas pipeline" and "natural gas pipeline carrier".
Number 2659
KEVIN TABLER, Manager of Land and Government Affairs, Union Oil
Company of California (Unocal), voiced support for HB 204,
calling it necessary legislation. Noting that Unocal has
extensive operations throughout Cook Inlet, he indicated this
bill provides for transportation throughout Alaska for other
areas [besides the North Slope] where transportation systems
will be used and needed. Mr. Tabler opined that it wasn't
intended in 2000, when the Pipeline Act was amended, to preclude
other areas, and that there just weren't other projects then.
He said this sort of activity will come up repeatedly, and
commended Representative Chenault for introducing the bill.
Number 2719
REPRESENTATIVE ROKEBERG asked whether Unocal has any gas
pipelines affected by this bill.
MR. TABLER answered that [Unocal] has an 40-percent working-
interest ownership in the KKPL.
REPRESENTATIVE ROKEBERG asked whether other pipelines would be
affected.
MR. TABLER said not to his knowledge at this time.
Number 2768
A. BEN SCHOFFMANN, Project Manager, Alaska Business Unit,
Domestic Production, Marathon Oil Company; Vice-President, Kenai
Kachemak Pipeline, LLC, gave a presentation and provided a 12-
page handout. He referred to page 2 of the handout and
mentioned the Senate companion bill, SB 151, indicating he'd
addressed many of the same issues in the Senate Labor and
Commerce Standing Committee. Suggesting this "cleanup" bill
just gives RCA another tool, he said it allows RCA to approve
the offering of firm and interruptible service - sometimes known
as contract carriage - for any gas pipeline in Alaska, that it
doesn't remove RCA's authority in any way, and that it clarifies
that RCA has authority to rule on tariffs for such pipelines.
MR. SCHOFFMANN suggested this is considered sound policy in most
realms; it aligns with what has been happening in the Lower 48
since deregulation of natural gas over the past two decades, and
is something the Federal Energy Regulatory Commission (FERC) is
accustomed to seeing there. However, there haven't been many
pipelines in Alaska, and thus there hasn't been a need to deal
with the evolution elsewhere in the natural gas business.
Number 2885
MR. SCHOFFMANN referred to page 3 of the handout and explained
that firm service is common to many things like public
utilities; electrical service often is offered on a firm or
interruptible basis, for example. [Firm service] is a way of
reserving capacity or promising delivery in exchange for a
reservation fee paid in advance, regardless of whether the
service is used. By contrast, interruptible service is paid for
on an as-used basis, but is subject to interruption - or, more
likely, curtailment - if there is a capacity restriction or
conflict at any point in time.
MR. SCHOFFMANN addressed page 4 of the handout, indicating the
bill is important to both pipeline investors and shippers. For
pipelines, he mentioned setting a benchmark for the minimum
capacity that people are willing to promise and pay for, whether
or not they utilize it. Without such a tool, there is a risk of
putting in an unnecessary pipeline or one that is too large or
small. The pipeline investor wants minimal risk, as well as and
assurance of some return on the investment, he added. Turning
to page 5, he noted that a pipeline's customers - shippers who
generally are producers of the gas - would like [to be able to
choose between] firm and interruptible service for two reasons.
TAPE 03-16, SIDE B
Number 2995
MR. SCHOFFMANN explained that, first, this allows the shipper to
align its gas-transportation services to its gas sales. The
interruptible [sales contracts] may have a lesser priority
sometimes, but may be subject to curtailment if there is some
problem. If a producer has interruptible contracts, the
customer may not be willing or consider it worthwhile to pay to
reserve capacity. And people with firm gas-sales contracts
ideally would like firm transportation service. It does no good
to promise to produce the gas but then not be able to ship it to
the customer. If the pipeline doesn't have the capability to
offer firm and interruptible service, he said, there can be a
conflict in the relationship of the producer and the customer
because the pipeline cannot adhere to the very thing required.
MR. SCHOFFMANN said, second, that some shippers/producers
haven't yet fully explored for their natural gas. It would be
inappropriate for them to commit to paying for capacity they may
never need or capacity of the wrong volume. This [bill] allows
them time to look at that. This offers the shipper a choice:
firm service if the shipper needs to deliver gas in a certain
amount to a certain place, which requires paying a reservation
fee for which the pipeline will promise to deliver the gas, or
interruptible service for those unwilling to pay that
reservation fee. He emphasized that the key element is
alignment.
MR. SCHOFFMANN, addressing page 6 of the handout, told members
the bill won't change the open-access provisions in AS 42.06;
the intent isn't to exclude potential shippers, but to give them
a choice as to the type of service. He opined that the bill
won't have an adverse fiscal impact on the state.
Number 2865
MR. SCHOFFMANN brought attention to the fiscal note [from DNR,
dated 3/26/03, the analysis for which says it is difficult to
predict what effects this bill might have on revenues because it
is difficult to predict the effects of contract-carriage
pipelines on gas exploration and development]. Agreeing with
the fact that the fiscal note [shows zero cost under the
categories "Operating Expenditures" and "Fund Source"], he
referred to the second page of the analysis, which read:
For pipelines that are owned by non-affiliated
pipeline companies, contract carriage could reduce
uncertainty of future throughput. This would reduce
capital costs, which in turn could encourage pipeline
construction and facilitate gas exploration and
development. However, for pipelines that are owned by
affiliated producers, contract carriage may not
provide greater assurance of throughput; the pipeline
company may know the volumes that its affiliated
producer wants to ship. Meanwhile, contract carriage
on a pipeline owned by an affiliated producer could
potentially be used to impede pipeline access for non-
affiliated producers. This could hinder natural gas
exploration and development and ultimately result in a
negative fiscal impact for the State.
Number 2840
MR. SCHOFFMANN disagreed with the foregoing analysis, asserting
that this gives the smaller producers or "nonfirm" producers an
opportunity to develop their resources "prior to that
happening." Emphasizing that RCA will be regulating any lines
under this statute and has the authority to approve or
disapprove the tariffs offered for these services, he said:
It is their job to ensure that these are fair and
equitable and are nondiscriminatory, ... regardless of
what the affiliation of the shippers and the pipeline
owners is. So, first of all, we believe that. Second
of all, the RCA has the opportunity to fully take a
look at those capacities ... that are being offered,
and to make sure that there are services available for
others who have yet to firm up their gas supplies.
And specifically in the case of KKPL, I'll be able to
demonstrate that there is quite a bit of extra
capacity available for the people who have yet to do
their exploring at this point in time. So, again, we
would disagree. We believe it's going to be an
incentive because it allows pipelines to be built to
areas that ... currently are isolated from the
infrastructure.
Getting a pipeline in is going to encourage
investment. That's the first and foremost thing. And
if we can't encourage the investment to be made, if we
can't assure shippers that they're going to be able to
move the gas that they have committed to sales, those
are impediments. Building pipelines [is an
incentive].
Number 2762
MR. SCHOFFMANN returned to the handout, page 8, explaining that
KKPL is a limited liability company (LLC) "arranged in Alaska"
and is a "Marathon-Unocal joint project" with Marathon Oil
Company at 60 percent and Unocal at 40 percent. He told
members:
KKPL will be a 33-mile pipeline 12 inches in diameter
and cost about $25 million. Its purpose is to ...
connect new gas discovered by Marathon and Unocal
around Ninilchik to the infrastructure of the pipeline
network in the Cook Inlet, thereby allowing that gas
to go wherever the Cook Inlet pipeline's
infrastructure goes.
Number 2731
MR. SCHOFFMANN continued, expanding on information on page 9 of
the handout, as follows:
In June 2002, we held an open season for prospective
shippers; that includes leaseholders throughout the
Kenai Peninsula - potential shippers and customers.
Two shippers, Marathon and Unocal, made firm
commitments - so, in other words, they'd like this
firm gas - for about 300 Bcf [billion cubic feet] in
total over 15 years.
The total peak committed rate is 90 million cubic feet
a day. That is not flat. ... It is basically a
profile that peaks at 90 and then drops off, so it
ramps up to that and drops off. That dictated a 12-
inch pipeline; the next smaller pipeline would have
not necessarily been adequate for that. But this
pipeline has a capacity of about 130 million, so it's
only about 75 percent full at its peak.
Before and after that, there is even more room
available, so there is room for other shippers in that
line. Expansion of that line is also possible if that
comes about, if there's a justified need. So that's
not the limit at that point in time; it could be
larger.
Number 2690
CHAIR KOHRING asked, if the gas pipeline began in Ninilchik,
where it would go.
MR. SCHOFFMANN answered that it would go to just south of Kenai,
running up the Sterling Highway and then along Kalifonsky Beach
("K-Beach") Road to the Kenai gas field. Returning to the
handout, pages 10 and 11, he offered the expectation of being in
service two months ahead of the scheduled date of November this
year. He indicated this legislation is important [to KKPL]
because it will soon submit a request back to RCA for its tariff
case; in order that RCA has clarity that it can rule on a two-
part service, firm and interruptible; and to be able to do that
as [KKPL] makes this filing, which it plans for probably
sometime in April. He added, "For us, we believe it's key.
It's pro-development without giving a handout. It gives people
the opportunity to select two different types of service. We
believe it's a positive thing for the State of Alaska."
The committee took an at-ease from 4:13 p.m. to 4:14 p.m.
Number 2636
MR. SCHOFFMANN turned attention to page 12 of the handout and
offered the following in conclusion:
We really view this as providing a tool to the RCA.
It means that the request for a pipeline to offer firm
and interruptible service will be decided on the
merits of that service, as opposed to a limitation in
the statutes. It has a purpose in encouraging
investment, both for pipeline owners and for
prospective shippers, because it gives them more
choices. And then finally, again, ... this is going
to be before the RCA shortly. We would just like them
to have the clarification that this indeed [is]
something they can rule on, based on its merits.
Number 2604
REPRESENTATIVE HOLM observed that page 9 of the handout shows
that Marathon Oil Company and Unocal have committed to 300 Bcf
of gas in 15 years. He asked what the capacity is of that 12-
inch pipeline in that period of time.
MR. SCHOFFMANN noted that page 9 also shows that the 12-inch
pipeline would have a nominal operating capacity of 130 million
cubic feet per day. Calculating an answer, he said the peak
rate of the 300 Bcf required by Marathon Oil Company and Unocal
is 90 million cubic (Mmcf) feet a day. However, the expectation
is to start at about 40 and ramp up to 90 Mmcf a day in about 5
years, and then taper off at about a 10 percent decline over 15
years. He added that more than half of the volume of the
pipeline over that 15 years is still available on that basis.
Number 2518
REPRESENTATIVE CRAWFORD pointed out that other pipelines might
not have excess capacity for common-carrier [shippers]. He
asked whether that might be the reason the fiscal note says this
could hinder natural gas exploration and development and
ultimately have a negative fiscal impact for the state. He also
asked what the reason was for wanting to change the law for the
whole state and for any pipeline.
MR. SCHOFFMANN, expressing interest in keeping the bill as
simple as possible, said offering these two classes of service
isn't unusual policy and is very similar to what's being done by
FERC in the Lower 48. He also said it isn't in the interest of
pipeline owners to turn away business or in the interest of KKPL
to ship only its affiliates' gas. He continued:
We would love to ship other people's volumes through
that. Why? That's going to result in efficiency and
cost savings for everybody involved. It was not our
intent to find language that purely benefited
ourselves, but rather to basically look at ... an
incentive across the state. Again, this is in
alignment with the way business has been done over the
past decade and a half, ... as regulated by FERC in
the Lower 48.
It's also an important issue for just attracting
investment, both on the pipeline investors' side to
this state - how ... are we going to incentive people
to build pipelines if they cannot firmly line up the
business in advance - and, secondly, we're going to
incentivize the smaller producers and ones who haven't
done that, because they will have a pipeline coming
past them. So once the pipeline gets built, that's
one of the biggest incentives to investment ... that I
think you could see.
Number 2392
MR. SCHOFFMANN continued:
There are other regulations within the state. For
example, we could choose to build gas-gathering lines,
which are purely for the benefit of those investors.
... Those opportunities, if people wanted to do that,
I believe are potentially there. So this is really
just an alignment issue. And I ... understand your
concern, but I believe this is expressed in this
fiscal note as a hypothetical and is not necessarily
well defined. And at this in point in time I would
disagree with it because I just don't see that the
incentive is for people to build assets that are only
partly utilized or utilized for one specific purpose,
as opposed to serving all the available gas that may
be found.
Number 2350
REPRESENTATIVE CRAWFORD recalled that there has been some
experience in Alaska of some smaller, independent companies
being "frozen out" of pipeline capacity or overcharged for
transportation costs. He suggested it behooves legislators to
pay attention and not make that same mistake twice.
MR. SCHOFFMANN emphasized that it is RCA's mission to make sure
that fair, nondiscriminatory tariffs are charged. He added:
All we're asking ... is to give them the approval to
rule on this type of service. It's still under their
purview to approve or disapprove the tariffs that
would result and understand what access is available
for others. We don't have models in place of this
type. Most of the models the state has had have been
oil pipelines that have been even-divided-interest or
common carriers [where] that's been a concern ....
This is a different mechanism. I think it is tried
and true, to some extent, with the experience in the
Lower 48.
Number 2271
REPRESENTATIVE FATE told members he is for the bill, but
suggested it might need to be clarified that it is intrastate.
He said he'd requested FERC to get an opinion on future
conflicts because of concern about possible conflicts among
FERC, RCA, and the new pipeline authority [proposed by an
initiative approved by voters in the 2002 election]. Since this
deals with gas and not oil, he suggested making it clear that it
is for in-state [transportation] and that there is no question
RCA has that responsibility for in-state gas.
Number 2160
MR. SCHOFFMANN, in response to questions from Representative
Rokeberg about the KKPL line, said:
Initially, when the first project was conceived, it
was to run to Anchor Point, ... very near Homer. That
was based on drilling activity that was planned or in
progress at the time by ... our partner in this
project, Unocal. Unfortunately, they didn't see the
success they were hoping for. As a result, when we
finished the open-season process in June 2002, the
only firm capacity commitments we had were ... for
delivering gas from [the] Ninilchik field, which is
only about halfway that far.
There are certainly possibilities, again, that this
... line or some other line could be built to extend
service farther south. Again, this is a transmission
line, ... not a distribution line. But we are in
conversation with ENSTAR [Natural Gas Company], for
example, who's a partner in this project, who is very
interested ... in serving the community down that
direction. I believe our partner Unocal still has
leases that direction, ... and other producers do too.
If, at some point in time, more gas is discovered down
that direction and there are firm commitments, again,
to undergird any additional investment for an
extension, that would certainly be considered and
possible. Other pipelines, likewise, could be built
and tied in to KKPL.
Number 2063
REPRESENTATIVE McGUIRE mentioned discussions that day in her
office and said she shared some concerns raised by
Representative Crawford. She emphasized that smaller,
independent companies - perhaps not even formed yet - will want
to come into the marketplace; she suggested the need to
encourage that, saying she believes it is healthy for the market
and for Alaskans to have that kind of competition in the state.
She continued:
One of the discussions that we had involved RCA, and
... we're in the process of looking at RCA as a whole
right now. ... And I advocated ... and told you today
that I think we really do need to have a specialist in
this area. But ... you mentioned, too, that RCA, even
right now, has the power to order expansion of the
pipeline, even if there are more offers that are out
there. Is that correct?
Number 1999
MR. SCHOFFMANN answered that under AS 42.06, if there are
compelling reasons to do that because of the open-access
concepts therein, he believes RCA has some authority in that
respect. He indicated the hope and need to ensure that any
investments KKPL makes are able to be recovered. He added that
if there is a compelling reason and it can be done economically,
there will be a significant incentive and other ways of ensuring
that expansion can happen. He continued:
For instance, this pipeline doesn't necessarily have a
hard line at 130 million cubic feet a day. ... There
are several things that dictate pipeline capacity.
One is the diameter; the other is the operating
pressures. There are numerous ways to expand
capacity; installing compression ... is a great one,
changing the inlet-outlet pressure conditions.
So we're not necessarily talking about huge
investments to lay a second piece of pipe down there.
And, again, I believe under compelling reasons,
undergirded by sound investment policies, that ...
expansion, at least of the capacity, ... is something
that RCA has the ability ... to approve.
Number 1919
REPRESENTATIVE McGUIRE again suggested the need to ensure good
staffing and well-trained people for RCA. Offering that RCA
also has the ability to make decisions regarding modification,
she asked whether it is correct that if a person isn't sure how
big a discovery is or whether it warrants a firm commitment,
that person could get an interruptible contract and then later
go through RCA to change it to a firm contract.
MR. SCHOFFMANN affirmed that. He said the selection of the type
of service one wants will be available for people throughout the
life of the pipeline, although there might be a question of how
much firm capacity remains 10 years from now; at that point,
there might be a capacity restriction, and until the pipeline
could be expanded, if that is justifiable, there might not be as
much firm service as desired at that point. He added, "However,
they still can select firm service contracts or interruptible
contracts; those ... will be designed to be fair to all
parties."
Number 1838
REPRESENTATIVE McGUIRE, referring back to concerns mentioned by
Representative Crawford, explained that the notion of producer-
owned pipelines creates discomfort sometimes for legislators
whose charge is to uphold the constitution and ensure maximum
yield from [the state's] resources. She cautioned against
setting up a network across Alaska of producer-owned pipelines
for which the firm offers are already in the bag for capacity by
the same producers, such that no independent companies have an
opportunity to get a fair shake and be part of the competitive
marketplace. She emphasized the need to remember that
principle, and mentioned jobs and so forth.
MR. SCHOFFMANN responded that a pipeline affiliate that found
more gas five years later, for example, would be in exactly the
same situation as others discovering gas then, and couldn't
displace people from the line who were there before. He
suggested it is nondiscriminatory in that sense, and that [the
bill] just gives RCA the tool to make its own rulings to ensure
that the two-tiered system - firm and interruptible, rather than
the current common carriage - is fair and equitable.
CHAIR KOHRING invited Mr. Harbour to comment.
Number 1637
DAVE HARBOUR, Commissioner, Chair, Regulatory Commission of
Alaska (RCA), told members Mr. Strandberg, RCA commissioner, was
more capable of addressing technical aspects. He offered the
following, however:
We appreciate the wisdom and the handicraft of the
people who are proposing ... this statute. I believe
that everything that has been stated so far has been
technically on point and very well done. The
legislature should realize, in making decisions like
this, where it may be going. Representative McGuire
made some good points about where the legislature may
be going, as did Representative Crawford.
This is neither right nor wrong. It's just a
decision. In the Lower 48, as distinguished from
Alaska, there is a great deal of contract carriage in
gas pipelines. Those gas pipelines are connected to
enormous grids, providing the opportunity for massive
competition. Those pipelines are typically owned by
gas pipeline companies, not by producers. The gas
pipeline company incentive is to maintain as complete
capacity for the best price that they can - that's the
business - and to expand, to loop, wherever possible
to increase business.
Number 1543
MR. HARBOUR continued:
In Alaska, we're not connected to that grid. ... I
appreciate the candor of the witnesses when they
address the affiliated-interest issue, because it is a
consideration. It is in the far realm of possibility
that a company could own reserves and could own a ...
gas pipeline and could have contract carriage and
could obtain reserve capacity on that pipeline, bought
and paid for by an affiliate of the company that owns
the pipeline, when in fact the gas was not ready to
move in the pipeline and other volumes from a
competing company perhaps were.
That having been said, I hear the legislature, through
its questions, appreciate the fact that he who makes
the investment has certain rights and is taking a
certain amount of ... initiative, and that that spurs
additional investment by those companies. That's
right too.
In short, ... I haven't heard anything today, myself,
that seems right nor wrong. I have heard things that
suggest that the legislature makes a decision that's
greater simply than supporting the construction of one
pipeline.
Number 1438
REPRESENTATIVE McGUIRE reported that in her discussions that day
with Marathon Oil Company, her questions with regard to RCA were
asked for one purpose: to understand how contract negotiations
occur and how so-called openers are dealt with - changes in
discoveries of fields or capacity, and how a company would get
in or out of a particular pipeline. But she said she also
wanted to understand RCA's role in the area of consumer
protection. She offered that there is a high degree of merit in
saying Marathon Oil Company and Unocal took the initiative and
risk, and that Alaskans should support that investment in the
state. However, she emphasized the importance, when looking at
infrastructure development, to provide an opportunity for
competition. She asked:
Do you believe that RCA, through its rule-making power
in [AS] 42.06, has the ability to effectively advocate
for consumer rights ... in that way, to be able to
force expansion of pipelines, when it's clear that a
case that you just mentioned is present, where you can
see that there are independents who are trying to get
in the line; they have ... proven gas; they want to
get in there. ... Do you feel that you have the tools
right now, through regulating interruptible and firm
contracts and being able to exchange between the two,
and - as the testimony indicated - potentially force
the expansion of a pipeline? Are those adequate
tools? Do they work?
MR. HARBOUR answered that these are important and perceptive
questions. The RCA has the capability, through contract or
common carriage, to assure the consumers of just and reasonable
treatment, he said, but deferred to Mr. Strandberg, who was on
teleconference, to answer more fully.
Number 1238
JIM STRANDBERG, Commissioner, Regulatory Commission of Alaska,
told members he believes the proposal by Mr. Schoffmann is a
"mainline proposal." He concurred that this is commonly applied
in the Lower 48. He said Alaska's statute was well put together
to protect the rights of both ratepayers and shippers under the
common-carrier rules, and that he believes the current statute
does that very well for a common-carrier pipeline. He
continued:
What we will need to work together on, I believe, to
carry something like this forward, would be to make
sure that the statute is modified so that those same
protections continue. In short, ... under the current
statute, yes, we have adequate powers for consumer
protection. ... Consumer protection in pipelines is
considerably different, often, than under our
regulation of public utilities such as electric
utilities, where we have many, many ... residential
customers. Under the Pipeline Act, typically, we have
shippers and producers. ... Especially for a
circumstance such as the Kenai pipeline, we will have
shippers that ... we have to protect their rights on,
but in protecting those rights, that also must extend
to the individual ratepayers who might be using that
gas.
Number 1102
REPRESENTATIVE ROKEBERG expressed concern about why the 2000
legislature specifically added this for the North Slope. He
asked Mr. Strandberg to address the regulatory theory behind the
existing common-carrier law, whether interruptible service was
allowed previously under RCA's jurisdiction, and whether he sees
negative impacts from this bill to existing pipelines.
MR. STRANDBERG answered:
The Pipeline Act was passed in 1972. And during that
time ... the legislature, I believe, wished to
establish a policy of equal and unfettered access to
oil and gas pipelines. And the common-carrier
concepts at that time ... were widely employed, and
indeed they ... have worked quite well. The principal
concept, of course, under common carriers is that a
pipeline must take oil and gas from all shippers
equally. And we have the ability to allocate the
capacity of the pipeline to stop any discrimination.
We can also, of course, order the pipeline to be
larger.
I believe those basic concepts ... still apply. And
the stranded gas pipeline Act, ... I have not looked
at that for several months. ... But I will state that
a lot of that was built ... to really harmonize our
statute with ... federal statutes that would improve
the chances of actually getting the project through,
and also to ... protect the rights of in-state
ratepayers. There was a massive amount of
negotiations that went on ... under that stranded Act
- again, that was two and a half years ago. Is that
getting at your question, sir?
Number 0864
REPRESENTATIVE ROKEBERG said it did in part, but asked what the
economic impact to existing common carriers would be from this
legislation. He also asked whether [RCA] currently allows
interruptible service to the common carriers.
MR. STRANDBERG replied:
Currently, we have two gas pipelines, which are
regulated under [AS] 42.05; ... these pipelines are
really regarded as public utilities. We don't have
... any gas pipelines that we ... currently regulate
under this statute. And there are a couple of reasons
for that; I'd be happy to go into that. But under ...
[AS] 42.05, treating these pipelines as utilities
gives us a lot of flexibility to make sure that all
ratepayers are served. ...
And so when we look at this particular bill language,
... this would really be a fundamental change, and it
may well ... see a different brand of regulation that
we really haven't done in this state for a gas
pipeline yet. ...
The devil will be in the detail here. I believe that
... certainly we can create a statutory change that
would allow effective contract carriage. But there
are a number ... of interrelationships between ... the
common-carrier language that are currently in this
statute and contract-carriage language that is
included in the current changes, which we would have
to work out to make sure that the RCA maintains its
powers, its jurisdiction ... to really fully regulate
the pipeline.
Number 0653
REPRESENTATIVE ROKEBERG asked Mr. Strandberg to identify the two
carriers it regulates now and explain why the other lines aren't
regulated.
MR. STRANDBERG responded that they are Beluga Pipe Line Company
and Alaska Pipeline Company; the latter conveys gas from a
number of fields through two lines up either side of [Cook]
Inlet, basically in a loop, using a 20-inch line, to his belief,
that goes up the north side of the inlet. He said this is tied
in not only with the ENSTAR [Natural Gas Company] residential
customers on the Kenai Peninsula, in the Matanuska-Susitna area,
and in Anchorage, but also with the Beluga power plant.
Therefore, the pipelines that [RCA] regulates under [AS] 42.05
are basically in the Cook Inlet basin, stretching on both sides
of the inlet.
Number 0533
REPRESENTATIVE ROKEBERG alluded to Mr. Schoffmann's testimony
and a Kenai gas hub with a [KKPL] line running north. He asked
whether that is a regulated line.
MR. STRANDBERG answered that basically the KKPL project hub, to
his belief, is somewhere near Kalifonsky Beach or in the
Soldotna area and goes south from there. He said it is designed
to interconnect with the existing "Alaska Pipeline network."
REPRESENTATIVE ROKEBERG asked whether passage of this bill to
allow interruptible transportation services would have any
impact on the Alaska Pipeline Company with regard to RCA's
jurisdiction.
MR. STRANDBERG replied, "As currently written, I do not believe
so, because there is no retroactive conversion of regulation
included in the current language. Unless you put that in there,
it would not apply ... to these other pipelines."
Number 0428
REPRESENTATIVE ROKEBERG offered his understanding that if the
legislature enacted a change that affected RCA's ability to
regulate, there would need to be a retroactive clause in order
to affect previous contracts or dockets and decisions by RCA.
MR. STRANDBERG answered, "That's correct. It would be important
... in any statute change to really define the breakpoint and
whether this only applies to new pipelines."
REPRESENTATIVE ROKEBERG suggested that the bill's sponsor check
into it.
MR. STRANDBERG added:
These other pipeline companies hold their own
certificates, and indeed they are certificated as
public utilities. So unless you reached in through
your statute and threw them back here to say, "Well,
you have the option," ... they would stay put where
they're at.
REPRESENTATIVE ROKEBERG again requested that the sponsor look
into it to ensure that is the case legally. He added that if
so, this shouldn't affect existing lines, only future lines,
"and therefore they would know what they are getting into."
Suggesting that is consistent with practice in the Lower 48, he
acknowledged the deregulated gas market there.
Number 0233
REPRESENTATIVE CRAWFORD asked whether there would be an
advantage to being regulated as a utility, rather than a
transportation pipeline. He also inquired about the reason for
treating the two differently.
MR. STRANDBERG opined that it is generally beneficial to the
ratepayer when a gas pipeline company "comes in under [AS]
42.05." He said there are other ramifications, such as whether
or not a pipeline company would come under PUHCA - the Public
Utility Holding Company Act [of 1935] - conditions; that relates
to "the vertical integration of the company," he added. He
continued:
Under the current statute, I believe that ... a gas
pipeline company with specific delivery requirements
on a long term ... would look at our common-carrier
requirements. And ... if the pipeline were to get
completely filled, under that statute we would really
be obligated ... to require that pipeline company to
put that additional customer on, and then everybody's
pro-rata share of the capacity would be reduced. Now,
we don't have that situation here, with a full
pipeline. But I believe those sorts of considerations
certainly pipeline companies look at these days, and
especially if you have a gas pipeline where you have
specific demands that you have to fulfill over the
long term. Those are ... of concern.
Number 0016
CHAIR KOHRING asked whether anyone else wished to testify. [He
closed public testimony.]
TAPE 03-17, SIDE A
Number 0030
REPRESENTATIVE ROKEBERG asked Mr. Schoffmann to comment on the
questions just discussed. He offered his belief that the only
concern is whether there would be any negative impact from the
bill to existing lines or access to lines.
MR. SCHOFFMANN responded:
My understanding of what Mr. Strandberg said was
exactly true. ... These other lines have a certificate
that is under a different statute. Unless they ...
had the freedom to refile and again go through RCA for
a different statutes, I don't see how that would
affect existing lines ... in their status. ...
I believe, personally, that one of the reasons we're
seeing Alaska have a lot of producer-affiliate lines
being installed is exactly ... the inability ... of an
independent investor to come in and line up business
in advance. ... It's very difficult ... for people who
don't have ... a vested interest elsewhere in the
state to make these type of investments. So I think
this type of legislation is exactly why we're seeing
primarily producer affiliates step forward to make
pipeline proposals, as opposed to independent
investors. So, with that clarification, I think that
that kind of speaks to, potentially, another reason to
see some legislation of this type go through.
Number 0186
REPRESENTATIVE McGUIRE offered her understanding from
Mr. Strandberg's testimony that he believes there may need to be
statutory modifications to incorporate consumer rights similar
to those granted under common-carrier status today, now that
there will be contract-carrier status [if the bill passes]. She
asked what those changes are, requesting that Mr. Strandberg
provide them to the committee if he wasn't prepared to address
them at this meeting.
MR. STRANDBERG agreed to respond in writing.
CHAIR KOHRING stated his desire for an immediate effective date.
Number 0343
REPRESENTATIVE McGUIRE moved to adopt an amendment to provide
for an effective date. There being no objection, it was so
ordered.
Number 0404
REPRESENTATIVE CRAWFORD expressed concern about whether this
bill potentially could be used to impede pipeline access for
nonaffiliated producers. He asked why DNR put the analysis in
the fiscal note [text provided previously] if there wasn't a
concern.
Number 0503
ANTONY SCOTT, Commercial Analyst, Division of Oil & Gas,
Department of Natural Resources, answered that there are two
possible ways contract carriage could be used to impede access.
He offered his understanding that the open-season process -
wherein a pipeline company solicits binding commitments for
capacity on a pipeline - isn't actively regulated on the federal
side, for example, by FERC, in the Lower 48. He added, "That
goes to when open seasons occur; there are certain sort of
baseline requirements of conduct in terms of posting notice ...
and making sure that there's adequate notice and so on."
MR. SCOTT said he sees no provision in this bill that gives RCA
authority to regulate the open-season process either. Thus he
noted some concern about a North Slope gas pipeline: an open
season could be timed to facilitate the sizing of a pipeline to
meet producer-affiliate needs, and would not be particularly
responsive to the needs of independent explorers. He continued:
While it is certainly true that the RCA has authority
to order capacity expansion - and it would be awfully
nice if, on the federal side, that authority existed,
say, with regard to a North Slope pipeline - for
smaller pipelines and basins, which would potentially
involve much smaller quantities of gas for ... an
independent explorer, the prospect of needing to first
discover gas - you haven't discovered it yet - before
you can then go to the RCA and try to get an order for
capacity expansion, which would then subsequently
allow you to market your gas, that ... delay there
could, in some cases, be enough to prevent the
explorer from ever making the exploration investment.
And ... the RCA would never hear from an explorer who
failed to get into the exploration business because of
concerns that the payback on their project might not
be favorable.
Number 0720
MR. SCOTT emphasized that, as Mr. Schoffmann said, permitting
contract-carriage provisions could be useful for facilitating
development of independent pipeline companies in the state. For
nonaffiliated pipeline companies, he said, there's clearly no
conflict; in fact, an independent pipeline company makes all its
money by moving gas on a pipeline and attracting carriage to do
so. He highlighted the possibility, however, that a producer-
affiliated pipeline could have competing incentives to want to
create barriers to entry, or at least might profit from barriers
to entry that reserve potential exploration basins to itself.
Number 0831
REPRESENTATIVE McGUIRE requested confirmation that Mr. Scott's
position is that RCA currently has no authority to regulate
open-season requirements for a contract carrier.
MR. SCOTT said that is correct. Offering what he called a minor
point, he conveyed his view that beyond giving RCA the tool to
permit contract carriage, the language possibly gives a pipeline
company the right to offer contract-carriage service. He
suggested there would be much less concern about potential
problems with a producer-affiliated pipeline if it were within
RCA's discretion whether or not to provide that. Mr. Scott
emphasized that none of his comments go specifically to KKPL or
imply anything nefarious; rather, this is a question of future
policy and how this could affect the state's resources, since
the state is a property owner in these gas resources.
Number 0997
REPRESENTATIVE ROKEBERG suggested the Division of Oil & Gas was
looking for something that isn't there, since, to his belief,
the bill doesn't speak to that. He suggested that if there is a
defect regarding open seasons, additional legislation should be
introduced. He offered his belief that RCA "can move." He
asked, if neither FERC nor RCA regulates open seasons, how it
can be commented on in the fiscal note.
Number 1047
REPRESENTATIVE ROKEBERG moved to report HB 204, as amended, out
of committee with individual recommendations and the
indeterminate fiscal note; he related his belief that it should
be a zero fiscal note. There being no objection, CSHB 204(O&G)
was reported from the House Special Committee on Oil and Gas.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
5:08 p.m.
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