03/11/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Finish Overview of Agia Regulatins | |
| SB242 | |
| SB243 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 242 | TELECONFERENCED | |
| += | SB 243 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 11, 2010
3:40 p.m.
MEMBERS PRESENT
Senator Lesil McGuire, Co-Chair
Senator Bill Wielechowski, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Hollis French
Senator Bert Stedman
Senator Gary Stevens
Senator Thomas Wagoner
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
FINISH OVERVIEW OF AGIA REGULATIONS
SENATE BILL NO. 242
"An Act providing income tax credits for geothermal resource
exploration and development."
- HEARD AND HELD
SENATE BILL NO. 243
"An Act removing the royalty obligation for geothermal
resources."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 242
SHORT TITLE: GEOTHERMAL RESOURCE TAX CREDITS
SPONSOR(s): SENATOR(s) MCGUIRE
01/27/10 (S) READ THE FIRST TIME - REFERRALS
01/27/10 (S) RES, FIN
02/10/10 (S) RES AT 3:30 PM BUTROVICH 205
02/10/10 (S) Heard & Held
02/10/10 (S) MINUTE(RES)
03/11/10 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 243
SHORT TITLE: NO ROYALTY ON GEOTHERMAL RESOURCE
SPONSOR(s): SENATOR(s) MCGUIRE
01/27/10 (S) READ THE FIRST TIME - REFERRALS
01/27/10 (S) RES, FIN
02/10/10 (S) RES AT 3:30 PM BUTROVICH 205
02/10/10 (S) Heard & Held
02/10/10 (S) MINUTE(RES)
03/11/10 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
COMMISSIONER PATRICK GALVIN
Department of Revenue (DOR)
Juneau, AK
POSITION STATEMENT: Finished Overview of AGIA Regulations from
3/10.
MIKE PAWLOWSKI
Staff to Senator Wielechowski
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Explained CSSB 242(RES) and CSSB 243(RES).
JONNE SLEMONS
Division of Oil and Gas
Department of Natural Resources (DNR)
Juneau, AK
POSITION STATEMENT: Answered questions about SB 242 and SB 243.
ALAN DENNIS, Division of Oil and Gas
Department of Natural Resources (DNR)
Juneau, AK
POSITION STATEMENT: Answered questions about SB 242 and SB 243.
PAUL THOMSEN, Director
Policy and Business Development
Ormat Technologies, Inc.
POSITION STATEMENT: Supported SB 242 and SB 243.
RAYMOND MANN, Renewable Energy Program Manager
City of Akutan
Akutan, AK
POSITION STATEMENT: Supported SB 242 and SB 243.
BRAD EVANS, CEO
Chugach Electric Association
POSITION STATEMENT: Supported SB 242 and SB 243.
ACTION NARRATIVE
3:40:13 PM
CO-CHAIR LESIL MCGUIRE called the Senate Resources Standing
Committee meeting to order at 3:40 p.m. Present at the call to
order were Senators French, Wagoner, Huggins, Stevens,
Wielechowski, and McGuire.
^FINISH OVERVIEW OF AGIA REGULATINS
FINISH OVERVIEW OF AGIA REGULATIONS
CO-CHAIR MCGUIRE said the committee would first finish the
overview of the AGIA regulations by Commissioner Galvin,
Department of Revenue (DOR).
COMMISSIONER PATRICK GALVIN, Alaska Department of Revenue (DOR),
went to slide 28 and said he would first talk about how to the
qualify for the AGIA tax inducement in the regulations and next
he would go through what the AGIA upstream inducement means.
3:41:38 PM
He said the AGIA inducement represents an exemption from any tax
increase on the gas (slides 30-33). So, in order to determine
whether there was an increase and how much it is, you need two
different numbers - gas production tax as calculated under the
law at time of production and the gas production tax under the
law that was in place at time of the open season. You subtract
the 2010 gas production tax from your current one and that is
your exemption that you get to apply to your current tax bill;
ostensibly you are brought back to whatever it was in 2010.
So, for the purposes of the current tax law, the regulations
provide a methodology for establishing the gas production tax in
a system that taxes oil and gas together. The gas portion
becomes what you would compare in the future to whatever the
future gas production tax is.
COMMISSIONER GALVIN explained that the exemption applies to the
capacity that a taxpayer has acquired and uses the point of
production (POP) value of the gas that is being transported on
that capacity in determining its value relative to the entire
POP oil/gas that particular taxpayer has. That percentage gets
multiplied by the entire tax liability and that figure becomes
the percent of the taxpayer's tax liability that is represented
by the AGIA gas.
SENATOR WAGONER asked if all three companies commit gas to the
pipe initially would there be multiple rates of tax.
COMMISSIONER GALVIN answered yes, and he emphasized that it
would only apply to the gas that flows through the capacity in
the initial open season.
3:46:19 PM
He illustrated this with the chart on slide 34, which for this
example showed a POP value of $120 for oil and $8 for gas. He
said this broad disparity in gas to oil ratio represents the
situation where you have a significant dilution of the tax
revenue. His example subtracted the transportation costs only,
not lease expenditures. In other words, the numbers that they
put into the formula assumed that all of the gas that is flowing
through the capacity qualifies for the AGIA tax exemption. This
is the "A" portion of the formula. Then using the formula he
talked about earlier, gas is figured out as a percent of the
total value of the oil and gas, and that number is multiplied by
the total combined tax obligation to get the value of the gas
production tax in 2010. Twenty-seven percent of the total POP
value was represented by the gas coming through the AGIA line -
an almost $1.2 billion in gas production tax that is being
allocated for the purposes of comparing it to the future gas
production tax obligation.
3:49:15 PM
CO-CHAIR WIELECHOWSKI asked if AGIA says that the benefit the
producer gets from committing their gas early on is that their
gas production tax is locked in at the tax rate in effect on May
1, 2010.
COMMISSIONER GALVIN answered yes and it stays that way for 10
years of production.
CO-CHAIR WIELECHOWSKI asked if he defined that in the
regulations as a number.
COMMISSIONER GALVIN replied the regulations have provided for a
formula for determining which amount of production gas
obligation is considered to be the gas production tax and what
is going to then be used to compare to future gas price
allocations.
3:51:28 PM
CO-CHAIR WIELECHOWSKI said he was trying to understand the
importance of May 1 lock-in date. Could they decouple oil and
gas in five years and not be subject to the gas production tax
under AGIA?
COMMISSIONER GALVIN said the next slide walks exactly through
that type of scenario.
SENATOR FRENCH interrupted for a moment and went back to slide
35 and asked him to explain the difference in the two taxes
using the regulations he promulgated under AGIA or ACES statutes
in reference to the spreadsheet figures.
COMMISSIONER GALVIN responded that the formula is not intended
to match up in the one column, because that column has a whole
bunch of assumptions with regard to primarily allocated costs
associated with oil production and gas production. This
particular representation is just an illustration where the
costs are allocated almost 90/10-oil/gas.
SENATOR FRENCH said he wanted to know that there was no
indemnification or payment because the tax figures were
different.
COMMISSIONER GALVIN said the end result is if you separated oil
from gas and had two different systems with the same
progressivity and everything else and the costs were allocated
in this way, and that separation took place sometime after the
open season, you would end up in your future world calculating
your gas production tax at $1.1 billion. You would then compare
it to this methodology for your 2010 calculation and end up with
$1.2 billion; and then there would be no exemption to claim.
SENATOR HUGGINS said his slide had an arrow going from tango
down to the combined tax in the lower right-hand circle. Why
wouldn't you be nervous about the difference between the
combined tax and the oil tax?
3:56:00 PM
COMMISSIONER GALVIN replied that the regulations are about how
much of the combined $5.5 billion tax liability is going to be
considered to be from the gas and how much from the oil, so that
if the legislature changes the tax system after the open season
(because lawmakers decide that they don't like going from $6.4
billion oil down to $5.5 billion oil), would that cause the end
result to be different than the combined $7.5 billion. However,
that is a separate discussion. What they tried to do with the
regulation is to provide an established number for what would be
considered the gas production tax in the current ACES system so
that when it is compared to whatever it changes to in the future
you have "the bogie" and "whatever the new thing is." They can
then determine if that would cause an exemption.
One can imagine a number of different scenarios someone might
use to claim what the gas production tax is, the Commissioner
said. Some might say you need to allocate the costs and
retroactively imagine what they should have been and recalculate
the column. That would be an accounting nightmare. The
department tried to make it clear in the regulations that the
point of production value of the gas is a percentage based upon
the combined tax. This way they have a very clear 2010 gas
production tax number that can be compared to a future tax
change to see if the tax exemption is implicated.
SENATOR HUGGINS asked if you put that into the context of the
open season, going into 2014 you could make the case this is all
irrelevant because the Commissioner and the Governor have the
authority to come back with a recommendation after negotiation
with the producers on fiscal terms.
COMMISSIONER GALVIN responded that the Legislature or the
Administration could, after the open season, change all the
terms, and with the consent of those who would otherwise qualify
for these, just change it entirely. He said the regulations deal
with the statute as it exists now along with the potential that
there might be no package deal that comes in later and that the
Legislature may act unilaterally to change the tax system at
some point, so that the AGIA tax inducement could be relied upon
by an initial shipper who would actually want to utilize it.
SENATOR HUGGINS said he asked multiple producers if they had
concerns with separating gas and oil and they said no because
they were going to negotiate fiscal terms anyhow. This led him
to believe that they are going to negotiate with the Legislature
and the Administration to move the gas pipeline forward. "Am I
on track or off track?"
COMMISSIONER GALVIN replied that is a very realistic
possibility. To a large extent they are setting up a post open
season world, which includes the strong possibility of the
producers and the state deciding on something everyone can agree
to and putting that in place. However, that may not happen and
they have the obligation to continue the course that the current
statute puts in place and to ensure that the rules are clear for
how that would be applied if there is no larger agreement that
is put in place by the Legislature in the future.
4:02:53 PM
SENATOR FRENCH asked if SB 305 passes, how much of this work has
to be redone.
COMMISSIONER GALVIN said he didn't want to speculate on that. It
depends on what SB 305 says at the end of the day.
4:04:05 PM
COMMISSIONER GALVIN said they have now shown how the 2010 gas
production tax number could be established out of this
particular set of assumptions (slide 36). So the next slide
shows how it would be used in an imaginary world 10 or 12 years
from now. For this example they assumed that nothing happens
between the open season and 2021, and instead in 2021 the
legislature decides to separate oil taxes from gas taxes and
raises the 25 percent production tax on gas to 30 percent. So,
using the previous example's assumptions - $120/$8 oil/gas,
these production levels and cost allocation numbers - then you
would end up with the same $6.4 billion for the oil side and the
gas tax would be increased by 20 percent; so it goes up to $1.35
billion.
4:05:56 PM
He explained how to determine the amount of the AGIA tax
exemption as follows:
1. Calculate Gas Production Tax under the system in place in the
Year of Production - based on the above assumption = $1.35B.
2. Calculate Gas Production Tax under the system in effect at
the Open Season (including the regulations) - previous slide
shows gas tax attribution of $1.2B.
3. Claim by the taxpayer of an exemption for the difference =
$150M. So the total production tax obligation in 2021 would be
the separate gas and oil taxes minus the exemption = $7.6B.
CO-CHAIR WIELECHOWSKI went back to slide 35 and asked him to
explain how the current progressivity works for gas. At what
level does it kick in?
4:07:39 PM
COMMISSIONER GALVIN answered in this example (production tax
value of $14B) if oil were taxed alone you would have a
progressivity rate of 23 percent. That is because oil is at
$88/barrel, a $58-profit at .4 percent (just about to the 25
percent cap). When you combine it with the gas, which is at $19,
it's not contributing on a per barrel basis much to the
progressivity. So, it's actually diluting the stream to a
$47/barrel value. That's only $17 profit which results in a 6.8
percent progressivity. That 6.8 percent is applied against the
combined numbers.
CO-CHAIR WIELECHOWSKI said he was trying to figure out at what
gas price progressivity kicks in - assume a tariff of $4.50.
COMMISSIONER GALVIN answered you would have to consider not just
the tariff but lease expenditures, too. So, if you assume a
situation like this where the lease expenditures are relatively
modest ($400M), then this all-end cost of production and
transportation is going to be a tariff of around $4.60. You need
a $5/Mmbtu with a 6:1 ratio = $30 as the kick off point. Divide
that by $6. So, there is a $5/Mmbtu profit to start
progressivity and with a $4.60 all-end cost anything over $9.60
would start progressivity. Progressivity would climb a lot
faster per dollar under gas than oil. So, for every $1/Mmbtu,
you get 2.4 percent increase in your tax rate (as opposed to .4
percent per $1).
He said that is why there are certain scenarios where the life
of the gas line runs out and at a certain point oil on a per
barrel basis could be less profitable than gas. This dilution
effect would operate in reverse where the value of the gas
production tax becomes diluted by the oil.
4:11:57 PM
COMMISSIONER GALVIN said he wanted to show that although on this
slide the gas column appears to be representational of the
attribution formula that is not always the case. It depends upon
the price relationship. So, he showed the range and the change
that would take place at different price relationships on slide
37. As the prices converge (the price of oil drops to 12.5/1
ratio) the value of the attributed 2010 gas tax goes down. So,
if in 2021 you have the same tax obligation, your exemption is
going to be greater because you are going to be considered to
charge the 2010 rate. The same if the price of oil goes down
even further; your attributed gas tax is lower because your oil
tax keeps going down; so your exemption will grow.
CO-CHAIR WIELECHOWSKI said he wanted to see some runs on where
the oil and gas ratio gets reversed and how those ratios would
impact the state - if oil hit $120/barrel and gas hit $16/mcf,
for instance.
COMMISSIONER GALVIN said he had a similar request from Senator
French and he would get that prepared.
SENATOR HUGGINS said the Commissioner was talking about price
forecasting.
COMMISSIONER GALVIN answered that he understood the request to
be not a forecast of what they think the prices are going to be,
but if the prices turned out to be X/Y for oil/gas what revenue
would be generated under the current system and under a
particular proposed bill. He elaborated that while the
introduction of gas into an existing oil system has the effect
of bringing down the oil tax, the AGIA gas production tax
inducement does not capture that portion of the effect. It just
says that the gas production tax obligation that you have in
2010 is going to be the same as what you are going to have in
2020-whatever. So, the answer to the question of locking in the
effect on the oil tax brought by the gas is no. The Legislature
may after the open season change either the effect that gas
production has on oil taxes or even separate oil from gas
entirely. The AGIA tax exemption only applies to gas production
tax; it does not apply to oil taxes or the effect that gas
production has on oil tax.
4:17:25
SENATOR HUGGINS said his concern is if they are going to
negotiate with producers, the commissioners and the
administration that "Everything is on the table."
COMMISSIONER GALVIN agreed.
SENATOR HUGGINS said he didn't accept his bullet factors as
being descriptive of what he anticipates what will really
happen. If the producers think that oil taxes are too high now
and the state wants a gas pipeline, they'll say they think
everything is on the table.
COMMISSIONER GALVIN summarized that these regulations represent
the current AGIA tax inducement not what the producers may ask
for or ultimately show they need and what the administration and
the legislature may decide to offer through a change in the law.
4:19:50 PM
CO-CHAIR MCGUIRE announced an at ease.
SB 242-GEOTHERMAL RESOURCE TAX CREDITS
4:21:54 PM
CO-CHAIR MCGUIRE called the meeting back to order at 4:21 and
announced SB 242 to be up for consideration.
SENATOR FRENCH moved to adopt CSSB 242(RES) 26-LS1347\E. There
were no objections and it was so ordered.
MIKE PAWLOWSKI, staff to Senator Wielechowski, explained that
the committee substitute (CS) version E for SB 242 makes a
substantial departure from the original version by changing the
development and exploration tax credits in the following ways:
· Page 1, lines 9-14, subsection (b) is an exploration
credit. Since geothermal is a resource you have to drill
for, they felt it was appropriate to develop an exploration
credit. The original bill had an exploration tax credit
that differentiated between exploration on state land and
land that was not state land. It was originally 50/25
percent, but is changed to a flat 30 percent. In the
original version the applicability of the expenditures was
retroactive; in the current version it is not. These are
prospective expenditures made within the state. The carry-
forward language in the original bill was limited to 5-7
years and that has been changed to 20 years on page 1, line
13.
· Page 2, lines 2-6, subsection (c) introduces a development
tax credit - you have explored for a geothermal resource,
discovered that there is a commercial project there and
then step into the development phase. The development tax
credit is also a 30 percent tax credit. The unused carry-
forward tax credit on page 2, line 5, has been extended to
20 years. In the original version of the bill this was a 10
percent credit. The substantial departure that was made in
the bill is rather than a credit against income taxes, they
moved to a refundable credit (page 2, lines 12-15) for the
exploration expenditures (lines 12-13) that are refundable
on an annual basis. Once you move to the development of a
phase of a project (lines 14-15) the development credit is
only refundable after the project actually goes into
service. So you actually have to finish the project and
start producing gross income from the project and then you
can get your development credits. The reason carry-forward
language was included in a refundable credit is that
refundable credits are ultimately subject to legislative
appropriation. That is a risk project sponsors take when
they are looking at refundable credit. So, in the event the
Legislature didn't appropriate the money for a refundable
credit that unused credit could be rolled forward and
applied against income taxes or when the Legislature had
the money to appropriate for the credit.
· Page 2, lines 20-21, working with the Department of Natural
Resources (DNR) they developed a definition of when
exploration turns into development.
4:26:42 PM
CO-CHAIR WIELECHOWSKI said he supported the bill in concept but
the state could be put into a position of investing tens of
millions of dollars without getting any geothermal plant from
it, and he wanted to make sure that this credit is actually
needed. He had the same concern about any project.
MR. PAWLOWSKI responded that the original bill capped
exploration credits at $20M; a refundable credit for the actual
facility doesn't exist until you go into the development phase -
the facility has to be actually built and producing energy. In
terms of the overall risk of not ever getting a project, he was
correct there could be a lot of exploration that eventually
yields no project.
CO-CHAIR WIELECHOWSKI said he understands that the exploration
aspect of the Mt. Spurr project is about $137M, and so a 30
percent tax credit would be $40M-plus.
MR. PAWLOWSKI said he felt uncomfortable answering that. The
language that they used from the Division of Oil and Gas is
different than what the Ormat project sponsors thought in
determining exploration versus development. He would let them or
the representatives from Akutan speak about what would be
expenses in the exploration phase.
CO-CHAIR MCGUIRE said these are great questions to get on the
record. She had asked Ormat to model their internal rate of
return (ROR) and to show what every one of the government
incentives would look like and how that would benefit consumers,
in particular.
CO-CHAIR WIELECHOWSKI said he could wait and see that
presentation and then ask Mr. Pawlowski questions afterwards.
CO-CHAIR MCGUIRE set CSSB 242(RES) aside.
SB 243-NO ROYALTY ON GEOTHERMAL RESOURCE
4:29:56 PM
CO-CHAIR MCGUIRE announced SB 243 to be up for consideration.
SENATOR WAGONER moved to adopt CSSB 243(RES), 26-LS1346\R. There
were no objections and it was so ordered.
MIKE PAWLOWSKI, staff to Senator Wielechowski, said the
committee substitute (CS) version R represents a departure from
the change made in SB 242 where they increased the overall level
of state subsidy. The original version of SB 243 repealed
royalties on geothermal and made them a flat zero. Looking
around the country at royalties in other states and the federal
model, they decided to reinstitute the federal royalty rate of
1.75 percent of gross revenues for 10 years and then 3.5 percent
of gross revenues thereafter for geothermal projects.
4:31:57 PM
CO-CHAIR MCGUIRE said the Senate has a diverse range of
opinions. Many agree that hot water is not a nonrenewable
resource that is being removed from the subsurface of Alaska and
therefore not subject to the typical considerations they would
have about resources being developed and shared for the maximum
benefit. Some felt a level of royalty was appropriate. But what
she didn't want Alaska to do is become uncompetitive if they
were going to put royalty in. Using the federal level, at least,
guaranteed that people won't be developing federal land over
state land. States that have a 10-percent royalty on the gross
income for geothermal development haven't had success with it.
The goal is to incentivize people to develop geothermal energy
so either no royalty or low royalty gets us there, she reasoned.
4:32:29 PM
SENATOR HUGGINS asked if Nevada has the most success with
geothermal and what their tax rate is.
MR. PAWLOWSKI said Ormat has a large geothermal development in
Nevada and they could speak to that.
CO-CHAIR MCGUIRE said one of the things she likes about Ormat is
that they have been doing it the longest. It was interesting to
see what other jurisdictions are doing relative to developing
geothermal.
MR. PAWLOWSKI said one of the Division of Oil & Gas
conversations around geothermal leases is that while it is hot
water it is also a property right and that maintaining some sort
of royalty is an appropriate rationale for leasing that
property.
4:34:10 PM
CO-CHAIR WIELECHOWSKI asked if the administration has a position
on royalty change.
JONNE SLEMONS, Division of Oil and Gas, Department of Natural
Resources (DNR), said she didn't oppose the bill. She could see
the rationale behind using the federal royalty rate. However,
the DNR commissioner does currently have the ability to waive,
extend or modify royalty rates for any mineral including
geothermal in AS 38.05.140(d). That statute appears to provide
ultimate flexibility to the commissioner in determining under
what conditions and at what rate royalty should be applied. This
bill could be considered redundant of those powers.
4:36:02 PM
CO-CHAIR WIELECHOWSKI asked what the purpose of the royalty is
from the state's perspective.
ALAN DENNIS, Division of Oil and Gas, Department of Natural
Resources (DNR), answered that the laws, the Constitution and
the department's regulations all speak to using the state's
resources to the maximum benefit of its citizens. These are
property rights and they belong to the citizens, and if private
companies are using that for their benefit it wouldn't pass
those principles.
4:37:28 PM
CO-CHAIR MCGUIRE thanked them both for being on line for the
committee. She said they are aware of the commissioner's
flexibility within the statute, but like other areas of mineral
management, they are choosing to make that policy statement so
people can make business decisions accordingly.
4:38:38 PM
PAUL THOMSEN, Director of Policy and Business Development for
Ormat Technologies, said a barrel of hot water is worth about 15
cents. When they are looking at developing a geothermal project
in the Railbelt, they are working in a confined and regulated
market. When they look at the project costs today they would
need a price of 14 cents for those barrels of hot water from the
utility to make their project pencil. Unlike other developers
they don't have the luxury of exporting the product. They have
to find a local off-taker and deal with the local market. That
is how they look at the incentives in SB 242 and SB 243
impacting their project as well as the ratepayers in the
Railbelt area and other areas that may have geothermal
development coming on line.
4:39:43 PM
SENATOR STEDMAN joined the committee.
MR. THOMSEN said without any incentives and a 10 percent royalty
on gross electricity sales today they would need a price of 14
cents. If SB 243 were implemented (taking the federal rate of
1.75 percent for the first 10 years and 3.5 percent thereafter),
they would be able to lower the price of the needed power
purchase agreement by 1 cent. Staff had requested a walk-through
of that calculation, so his slide 2 showed a 50 MW project; if
you multiply that by their availability or capacity factor
(0.95), multiply that by the hours in a year (8760), times the
$130 MWh (13 cent rate), times the average royalty rate (2.8
percent), times a 25-year power purchase agreement (PPA), they
would pay the State of Alaska $38 million in royalties.
What does it mean to lower the price by 1 cent? They took the
same calculation and showed that would result in a saving of
$104 million to the Railbelt ratepayers. He clarified that Ormat
is talking about selling the power to a wholesaler; they are not
in the business of distributing it to constituents at large. The
total economic benefit of this bill for Ormat would be around
$140 million.
SENATOR STEVENS asked him to explain how the ratepayer is
protected in this system.
MR. THOMSEN answered simply put any tax or royalty is going to
be a "pass through" for Ormat. They cannot recover those costs
through the RCA or through increased taxes. So, lowering the
amount of royalty they have to pass through to the constituents
is where they will see that savings. Not having to deal with a
10 percent royalty on gross proceeds brings the cost of the
project down drastically.
SENATOR HUGGINS said it is important to Ormat as a business to
have a structure to count on and asked if they might come back
and ask for royalty relief if for some reason what is
represented in this bill is too onerous for their business
model.
MR. THOMSEN said he had hit the nail on the head. This bill
would limit their total liability from a very potentially high
royalty payment. He explained when they calculate the total cost
of the project in SB 242, they plug in how much the power plant
will cost, what the leases cost, and the potential royalty rate
- and for something that is variable they have to put in the
highest potential exposure to the project. This bill would
dramatically bring that down from a potential of 10 percent on
gross proceeds to a maximum of 2.8 percent on the average to
still potentially be waived if a project is struggling. He
reminded them that this is on top of the $3 million they paid
for leasing 36,000 acres from the state.
CO-CHAIR WIELECHOWSKI asked if this project would be regulated
by the RCA so they can ensure that these benefits are passed on
to consumers.
MR. THOMSEN answered absolutely.
CO-CHAIR WIELECHOWSKI said if the state were to collect a 10-
percent royalty rate, it would get around $380 million, and by
reducing it to 1.75 percent it would collect around $38 million,
a lot less.
MR. THOMSEN reiterated that they would have to get 14 cents from
the ratepayer if they have to pay a royalty. But shifting that
burden from the ratepayers to DNR is a policy decision for the
legislature to make.
CO-CHAIR WIELECHOWSKI said the cost of their project is $275
million and if that meant their credit would be around $82
million.
MR. THOMSEN answered yes.
SENATOR STEDMAN asked him to clarify the difference between a
wholesale rate and what a customer would actually be paying.
MR. THOMSEN said his understanding is that the utility or off-
taker of this power would get the product at a wholesale price
and then mark it up for transmission and delivery to the
ratepayer, and he would let the utility comment on what their
mark up for that is.
CO-CHAIR MCGUIRE stated they asked that the RCA regulate the
contract with the utility to decide on rate of return and to
show how the state tax credits and royalty relief would end up
benefiting the wholesale rate they could offer the utility which
would in turn be passed on to the consumer.
4:48:18 PM
CO-CHAIR WIELECHOWSKI asked if Ormat's project would be
regulated by the RCA or the power sales agreement.
MR. THOMSEN replied that Ormat Technologies would be regulated
directly. There would be three layers of regulation - Ormat as
the entity selling the power, the state-owned utility that is
buying the power, and then the broader decisions the RCA makes
on top of that.
CO-CHAIR WIELECHOWSKI asked if Ormat had any intention of coming
back and asking to be deregulated at any point in time.
MR. THOMSEN said they don't have those plans; the current
regulation scheme in Alaska wouldn't stop them from developing
this project at this time.
CO-CHAIR WIELECHOWSKI said he wanted it clear if this bill
should pass that Ormat's huge tax breaks go through to the
consumer. He would not like to see for this to pass giving them
big tax breaks and then for them to come back in a year or two
asking for deregulation. That would be a worst case scenario
from his perspective.
MR. THOMSEN responded that once the contract is approved it is a
fixed price long-term contract. Because all of those entities in
Alaska are regulated, they don't have much flexibility. However
the utilities are going to have to get to a price that they are
feel comfortable with in signing a contract with Ormat. They
need to take that to the RCA to make sure they agree that it's
in the public's best interest. Once that contract is approved it
is binding for the life of the project.
The reason he sounds hesitant with the word "regulation" is not
because they don't intend on honoring their contract, but rather
if they refinance this project at a later date, being a
regulated entity doesn't really translate outside of the bounds
of the State of Alaska. Being regulated in Nevada or California
is very different, and he didn't want to see the standards for
which they enter into a contract in Alaska be changed even
though any change or amendment would take approval from both
sides.
CO-CHAIR WIELECHOWSKI moved to a slightly different topic of
royalty and asked what the rate is in Nevada.
MR. THOMSEN replied that Nevada has no royalty.
CO-CHAIR WIELECHOWSKI asked if they collect any higher income
taxes or do they make it up anywhere else.
MR. THOMSEN replied no. Nevada has a sales tax and an income
tax, but geothermal is granted a 50-percent abatement of both of
those taxes.
CO-CHAIR WIELECHOWSKI asked what the sales tax would be charged
on for Ormat.
MR. THOMSEN answered on the sale of equipment into the state,
buying trucks and things like that for the project. It's very
minimal.
4:54:17 PM
SENATOR HUGGINS asked how federal incentives would apply here.
MR. THOMSEN answered that Ormat is eligible for both a
production and an investment tax credit, but they have to choose
which one. Unfortunately both of those federal incentives get
renewed typically on two-year cycles. Building a geothermal
project takes about five or six years. So, they are always
entering into projects without knowing when the federal tax
credits will expire. Today as part of the federal stimulus bill,
geothermal, wind and solar are eligible for a 30-percent
investment refundable tax credit mirrored here in Alaska.
Unfortunately those incentives expire in 2012 and they don't
know if they will be extended or renewed.
The 30 percent was part of the federal ARRA bill which tried to
get new investment. If that should not be extended they could
fall back to the original tax credit which was a 10 percent
investment tax credit or a $.02/KWh production tax credit; those
expire around 2015. For those to apply to this project would
require an extension. So for this project's model they have
scheduled no federal incentives.
SENATOR HUGGINS asked how many jobs would be created by this
project.
MR. THOMSEN replied that during the construction phase they tend
to act as the general and will try to employ as many locals as
possible, in the triple digits. During the operation phase it's
in the low double-digits.
SB 242-GEOTHERMAL RESOURCE TAX CREDITS
4:57:05 PM
CO-CHAIR MCGUIRE said they would go to back to SB 242.
MR. THOMSEN said they reset their model in SB 242 to again say
at today's costs they would need $.14. If SB 243 were to pass
they would be eligible for a 30-percent refundable investment
tax credit and that would allow them to lower the price they
would need to develop this project by 2.5 cents. In dollars this
would be worth $82.5 million to this $275-million project. A
very small portion of that is in the exploration phase; the
majority is in the development phase.
When they originally look at resource development they are
talking about all the wells required for the development of the
project. In CSSB 242(RES) exploration is defined to stop after
drilling the second production well. To put that into
perspective, he said a good geothermal well today at a good
temperature is enough to produce approximately 4-5 MW. So, after
the second well is drilled and they can confirm that there is a
resource, they move into the development phase where they will
still drill many production and reinjection wells for the fluid
and covering the body of the power plant. So for total exposure
during this exploration phase they are looking at a number in
the vicinity of $15 million. If both of the production wells
were $5 million and the leases they have already acquired in
Alaska are about $3 million, any additional money in between
those would amount to an exposure of about $4.5 million. Since
this would be in the exploration phase they could get that tax
credit annually. Once they get past that point then there is no
exposure until the project is placed in service.
MR. THOMSEN said that $82 million would be quite a commitment
from the State of Alaska to make this project happen. Lowering
the rate by 2.5 cents would result in a $260 million savings to
Railbelt ratepayers for the life of the project and an economic
benefit for Ormat of $175 million.
Eighty-two million is an undiscounted number. Knowing the time
value of money and that $82 million in one payment up front is
worth a lot more than them paying the state for the next 26
years, they used a discounted rate of 7 percent and said with
the time value of money the estimated discount savings to
ratepayers would about $132 million, which still nets an
economic benefit of $50 million for Ormat. He said they were
trying to show that dealing in a fixed market if the state is
willing to partner with Ormat and give them $82 million up front
allowing them to get this PPA in place and move the project
forward more rapidly they would be able to discount the
wholesale price to the utility by 2.5 cents.
He explained that because they are regulated by the RCA they
will know what their construction costs were because the credit
is based on them reviewing the eligible construction costs and
giving them 30 percent of that in a cash rebate. They disclose
their rate of return and the RCA will know the price because not
only will Ormat have disclosed it but the utility will have
brought the contract to them. So, there should be very good
transparency with this model.
5:01:12 PM
SENATOR STEDMAN asked why the tax credit is 30 percent instead
of 10, 15, 50 or zero.
MR. THOMSEN replied that they are trying to get to what they
think utility expectations are today for a PPA. The savings is
less with 10 percent. To enter into a PPA in an aggressive time
frame they need to be around 10 cents; this gets them to that
price.
CO-CHAIR MCGUIRE said the earlier version had a 25 percent on
state land and 50 percent on federal land. The decision was made
to go to a flat 30 percent. It's just a question of what level
of partnering. The idea is that the state offers exploration
credits in Cook Inlet and other places; so is this a place the
state wants to help mitigate costs and absorb risk. If they
think they do, then they can argue about what the rate should
be. She appreciated them at least putting in the numbers so they
could understand what the benefits are.
5:02:59 PM
SENATOR FRENCH followed up on some questions from Senator
Wielechowski and asked how an amendment saying something like a
taxpayer accepting credits under this bill accepts RCA
regulation would be viewed.
MR. THOMSEN said he didn't see a problem with that. Ormat's
understanding is that they are currently regulated by the RCA
and will always be regulated by them as long as they are selling
power to anyone in the State of Alaska.
CO-CHAIR WIELECHOWSKI said if that 10 cents was a wholesale
price or retail to the consumer.
MR. THOMSEN replied that all prices his prices are wholesale.
CO-CHAIR WIELECHOWSKI said he understood that the wholesale
price for consumers in the Cook Inlet area is roughly 6.5 cents.
MR. THOMSEN answered that he just came from the House hearing on
GRETC and the Black & Veatch report had changed their estimate
from 5 cents to 17.5 cents. So he didn't know enough to tell him
what the wholesale price is today.
CO-CHAIR WIELECHOWSKI said he is curious as to the
competitiveness of the project because the state would be making
a pretty large up front contribution.
MR. THOMSEN said Ormat can be competitive. They have been
developing projects for 40 years and they make money doing it;
they typically have a 13-14 percent rate of return. What is
unique about this price is if they move quickly to lock it in -
whether it's 10 or 11 cents - that is a fixed price for 25
years. So, 10 years from now when they are trying to find the
prevailing rate of electricity, this is their hedge; 10 cents
locked in for this period of time is very competitive. He said
they brought on projects in Nevada in 1985 and had to compete
with and draw down their rate of return to compete at 6.5 cents.
They are still sitting on those projects today saying boy that
was a good investment.
5:07:16 PM
He said their project would diversify the state's energy
resources and remove the fuel cost risk; and while he didn't
know how to value that, but he didn't know of any other fuel
supply they could go to to get a 25-year fixed rate. They have
zero emissions, a closed loop system and are not depleting the
reservoir of any hot water, and they think in the long term this
will be 100-percent competitive. They might get to the point
someday where renewable resources will enable policy to be
changed on directing fossil fuel generation.
CO-CHAIR WIELECHOWSKI asked if his numbers are a fixed price for
25 years if in 2035 the utility would still be paying a
wholesale price of 11.5 cents.
MR. THOMSEN replied that they have negotiated a very modest
price escalation in the price contract for operations and
maintenance and the RCA would have to approve it.
CO-CHAIR WIELECHOWSKI asked who would build the long
transmission line.
MR. THOMSEN answered they assume that building a 40-mile
transmission line is a job for the utility.
SENATOR STEDMAN said if they were going to incentivize
geothermal electrical generation, maybe they should do modeling
to see if the state would be better off subsidizing the
transmission lines, which are the negative side of this whole
scenario. He didn't know the answer.
CO-CHAIR MCGUIRE remarked if you don't have a project to begin
with to connect to a transmission line who cares.
SENATOR STEDMAN said he assumed they had selected a physical
location.
MR. THOMSEN answered yes, because they are on state leases. He
added that these bills are independent of transmission lines
because they can impact other geothermal developments that may
not have the same transmission "log jams" they have. The Mount
Spurr development is 40 miles from the Beluga power plant where
they would tie in and be able to access the Railbelt grid. This
infrastructure would benefit future hydro plans in this area
like Chakachamna and Tyonek/CIRI.
SENATOR STEDMAN asked if they had done economic models for the
40-mile power line to Beluga.
5:14:32 PM
CO-CHAIR MCGUIRE explained that the bill was designed to
incentivize geothermal exploration and development generally in
any geothermal area that might be explored in the state of
Alaska. It is not project-specific. Interestingly, the contract
that Ormat has already entered into renders the royalty portions
of the bills before them meaningless.
MR. THOMSEN said he would be happy to provide them with a
presentation on those hurdles that they are already preparing
for another committee.
5:16:49 PM
RAYMOND MANN, Renewable Energy Program Manager, City of Akutan,
said they are currently pursuing development of both hydro
electric and geothermal power with feasibility and exploration
currently being funded by the Renewable Energy Grant Fund. He
thanked the legislature for continuing support of renewable
energy development which is critical to the development of
sustainable rural communities. They are committed to eliminating
their dependence on diesel fuel, reducing or eliminating PCE
subsidies, eliminating the 50,000 tons of carbon emissions per
year and providing residential and commercial power well below
the current 32 cents KWh that their residential users pay.
They are also committed to public private funding for the
development of their geothermal resource. It's currently
estimated that 3/4 of the total development cost of their
project will be borne by private investors. However, the ability
to attract private capital and development expertise will depend
heavily on reasonable tax incentives, carbon offsets,
exploration credits and a positive investment environment. They
believe that both SB 242 and SB 243 are the right approach and
would go a long way in creating the investment environment that
will allow Akutan and many other communities to create the
public private partnerships needed for geothermal development.
MR. MANN said they support the legislation in general although
its applicability to Akutan is not quite clear. They are
developing on private land, for example, and the royalty issues
may not be applicable to them.
5:19:38 PM
BRAD EVANS, CEO, Chugach Electric Association, said Chugach
generates 90 percent of its electricity with natural gas from
Cook Inlet and they are now facing tremendous pressures in
security in the price of their natural gas fuel supply. In
reaction to this, Chugach is embarked on a mission to diversify
its generation portfolio and reduce their reliance on a single
source of fuel. They also support the development of a rational
statewide energy policy that addresses where, when, and how the
state incentives should be applied for development of
alternative energy supplies. He said priority should be made for
those projects that are sustainable and geothermal is
sustainable; it is also good for future prosperity.
He said the potential for geothermal development in Alaska
appears viable; however the cost of development for this
resource in remote areas is significant. Even a location that
you might be able to see from a tall building in Anchorage is
still a long ways away in terms of getting a project built. In
these situations it makes an appropriate state energy policy to
lower costs barriers to development where possible. Both bills
want to lower costs and in each of these cases their primary
concern is the assurance these benefits flow through to the
consumers and not merely result in additional enrichment to the
developer. To be clear, their concerns do not stop just at the
incentives contemplated here today; they also apply to those
situations where any public money is loaned to developers
whether they are state or federal. If public money touches any
project directly or indirectly transparency should be demanded
ensuring the flow of the benefits to the public.
In this specific situation, Mr. Evans said, Ormat has
demonstrated a refreshing willingness to work towards an open
and transparent process. He said the efforts of this committee
are noteworthy, measurable and a step in the right direction.
5:22:56 PM
CO-CHAIR MCGUIRE thanked everyone for their testimony, set both
bills aside, and adjourned the meeting at 5:22 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 242 Version E.pdf |
SRES 3/11/2010 3:30:00 PM |
SB 242 |
| SB 243 Version R.pdf |
SRES 3/11/2010 3:30:00 PM |
SB 243 |