Legislature(2003 - 2004)

03/27/2003 03:20 PM O&G

Audio Topic
* first hearing in first committee of referral
+ 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 -                                                                        
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 -                                                                        
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                                                                   
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                                    
     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                                                                    
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                                                               
     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                                                                    
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                                                               
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                                                                    
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                                                               
     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                                                                    
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                                                                    
     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                                                               
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                                                               
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                                                               
     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                                                               
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                                                               
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.                                                                   
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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