HB 280-NATURAL GAS  3:39:35 PM CHAIR OLSON announced that the next order of business would be HOUSE BILL NO. 280, "An Act relating to natural gas; relating to a gas storage facility; relating to the Regulatory Commission of Alaska; relating to the participation by the attorney general in a matter involving the approval of a rate or a gas supply contract; relating to an income tax credit for a gas storage facility; relating to oil and gas production tax credits; relating to the powers and duties of the Alaska Oil and Gas Conservation Commission; relating to production tax credits for certain losses and expenditures, including exploration expenditures; relating to the powers and duties of the director of the division of lands and to lease fees for the storage of gas on state land; and providing for an effective date." 3:40:01 PM REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, explained that this is the second hearing in this committee. He related that HB 280 was introduced at the request of the RCA to provide clarity and determine whether the legislature intends the RCA to have regulatory authority over gas storage facilities. Some technical changes are necessary to "clean up" the bill, incorporated in an amendment labeled 26-LS1185\S.2, Bullock, 2/13/10. 3:41:06 PM REPRESENTATIVE NEUMAN made a motion to adopt Amendment 1, labeled 26-LS1185\S.2, Bullock, 2/13/10, which read: Page 2, line 10: Delete "operations" Insert "operation" Page 2, line 13: Delete "feet of gas each" Insert "cubic feet of gas a" Page 2, line 17: Delete "operations" Insert "operation" Page 2, line 18: Delete "operations" Insert "operation" Page 2, line 20: Delete "operations ceased" Insert "the gas storage facility ceases commercial operation" Page 2, line 25: Delete "operations" Insert "operation" Page 2, line 26: Delete "operations" Insert "operation" Page 2, line 30, through page 3, line 6: Delete all material and insert: "(4) "gas storage facility" means a tank, depleted or nearly depleted reservoir or pool, or other structure in the state that is available for the storage of gas;" Page 3, following line 10: Insert a new paragraph to read: "(7) "pool" has the meaning given in AS 31.05.170;" Renumber the following paragraph accordingly. Page 6, line 6: Delete "with certificates issued under  AS 31.05.032" Insert "that qualifies for a tax credit under  AS 43.20.046" Page 6, line 9: Delete "operations" Insert "operation" Page 6, line 10: Delete "operations" Insert "operation" Page 6, line 12: Delete "operations" Insert "operation" Page 6, line 18: Delete "AS 38.05" Insert "this chapter" Page 6, line 25: Delete "operations" Insert "operation" Page 6, line 26: Delete "operations" Insert "operation" Page 6, line 29, following "a": Insert "rate or a" Page 7, line 1: Delete "from" Insert "of" Page 7, following line 19: Insert a new bill section to read:  "* Sec. 7. AS 42.05.990(4) is amended to read: (4) "public utility" or "utility" includes every corporation whether public, cooperative, or otherwise, company, individual, or association of individuals, their lessees, trustees, or receivers appointed by a court, that owns, operates, manages, or controls any plant, pipeline, or system for (A) furnishing, by generation, transmission, or distribution, electrical service to the public for compensation; (B) furnishing telecommunications service to the public for compensation; (C) furnishing water, steam, or sewer service to the public for compensation; (D) furnishing by transmission or distribution of natural or manufactured gas to the public for compensation; (E) furnishing for distribution or by distribution petroleum or petroleum products to the public for compensation when the consumer has no alternative in the choice of supplier of a comparable product and service at an equal or lesser price; (F) furnishing collection and disposal service of garbage, refuse, trash, or other waste material to the public for compensation; (G) furnishing injection, storage, and  withdrawal services for natural gas that is owned by a  utility regulated under this chapter;" Page 8, line 3: Following "facility": Insert "described in (b) of this section" Delete "operations" Insert "operation" Page 8, lines 5 - 6: Delete "beginning after the date the gas storage facility commences commercial operations" Insert "in which the gas storage facility commences commercial operation or the tax year immediately following" Page 8, following line 12: Insert a new subsection to read: "(b) A gas storage facility qualifying for the credit in this section must (1) have a working gas storage capacity of more than 500,000,000 cubic feet of gas other than cushion gas; (2) have a minimum withdrawal capability of 10,000,000 cubic feet a day as certified by the Alaska Oil and Gas Conservation Commission under AS 31.05.032; (3) be available for the storage of gas that is owned by a utility regulated under AS 42.05; and (4) if located on state land and leased or subject to a lease under AS 38.05.180, be in compliance with the terms of the lease." Reletter the following subsections accordingly. Page 8, line 16, following "capacity": Insert "and withdrawal capability" Page 8, line 17: Delete "operations" Insert "operation" Page 8, line 19: Delete "form" Insert "application" Page 8, line 21: Delete "shall submit the form" Insert "under (d) of this section shall submit the application" Page 8, line 23: Delete "operations" Insert "operation" Page 9, line 12: Delete "determined" Insert "the capacity certified" Page 9, line 18: Delete "operations" Insert "operation" Page 9, line 22: Delete "operations" Insert "operation" Page 9, line 23: Delete "operations" Insert "operation" Page 10, line 5: Delete "(g) and (h)" Insert "(h) and (i)" Page 10, line 13: Delete "operations within 10 calendar years after the" Insert "operation within nine calendar years immediately following the calendar" Page 10, line 14: Delete "operations" Insert "operation" Page 10, line 16: Delete "operations" Insert "operation" Page 10, line 18: Delete "operations" Insert "operation" Delete "April" Insert "May" Page 10, line 19: Delete "operations" Insert "operation. The notice required in this subsection is considered a return for purposes of AS 43.05.260" Page 10, line 20: Delete "operations,"" Insert "operation," "commences commercial operation,"" Page 10, line 26: Delete "an expenditure or action taken" Insert "a lease expenditure incurred" Page 11, line 19: Delete "AS 38.05.032" Insert "AS 31.05.032" Page 11, lines 29 - 30: Delete "for activity" Insert "incurred" Page 12, line 1: Delete "for activity" Insert "incurred" Page 13, line 18: Delete "expenditure" Insert "lease expenditure incurred after December 31, 2010" Page 13, line 19, following "well": Insert "lease" Page 13, line 23, following "well": Insert "lease" Page 13, line 27, following "well": Insert "lease" Page 14, line 3: Delete "an expenditure" Insert "a lease expenditure incurred" Page 14, line 5, following "well": Insert "lease" Page 14, line 15, following "of": Delete "the" Insert "a [THE]" Page 14, line 16: Delete "AS 43.20.046 or" REPRESENTATIVE HOLMES objected for purpose of discussion. 3:41:31 PM LARRY PERSILY, Staff, Representative Mike Hawker, Alaska State Legislature, referred to Amendment 2, which he characterized as an 8-page amendment that contains "clean up" language and one substantive issue. He referred to Section 7, to page 3, lines 23 - 31, and page 4, lines 1 - 12, of Amendment 1. In response to a request by the RCA, who could not determine whether gas regulation falls under its jurisdiction, this language would amend the definition of utilities that are subject to RCA regulation. Thus, if an entity is furnishing storage services for natural gas that is owned by a utility regulated by the RCA, the storage service would fall under RCA jurisdiction. 3:42:48 PM REPRESENTATIVE NEUMAN asked for clarification of whether Amendment 1 would allow rates to utilities to fall under the RCA. MR. PERSILY answered yes. He related that the RCA would treat the natural gas storage like any other utility. The storage operator would have to present the cost and information, and obtain approval for the cost of service from the RCA. 3:43:15 PM REPRESENTATIVE BUCH asked for further clarification. He asked whether all gas coming into the gas storage facility would be from a utility. He asked whether the source of natural gas would be private sector gas and if the RCA would cover other gas. MR. PERSILY answered that if the storage operator is providing storage service for gas owned by a utility, the storage operation would be regulated. The fact that the utility may also have other gas owned by someone else, such as a speculator, someone marketing gas, or a producer, will not matter. Any natural gas in a facility owned by a utility is subject to RCA jurisdiction. In further response to Representative Buch, Mr. Persily explained that the storage is subject to regulation by the RCA, not necessarily the natural gas. The RCA is not involved in setting the rates for natural gas, but would consider the natural gas being stored. The natural gas being stored could be owned by a utility or someone attempting to gain access to the gas marketing business. 3:45:08 PM REPRESENTATIVE HOLMES related that Amendment 1 amends the definition section. She said basically any entity furnishing injection, storage, and withdrawal services for natural gas that is owned by a utility would be regulated under this chapter. She said it seems somewhat circular since it defines "utility" as anyone doing something owned by a utility. MR. PERSILY answered that the natural gas is owned by a utility, but the utility would not own the storage operation. For example, some producers have their own storage but they do not make it available to third parties, but operate the storage for their own needs, which is not subject to regulation. The natural gas being placed into storage is not owned by a utility, although it may later be sold to a utility. This bill would apply to storage operations that provide services to regulated utilities. REPRESENTATIVE HOLMES described a scenario in which a non- utility built a storage facility, whether it could store gas without being regulated so long as the natural gas is owned by them. MR. PERSILY answered that she is correct. He stated that if a non-regulated producer builds a storage operation and stores its own natural gas, and does not store gas owned by a utility, that gas would not be considered as a regulated storage operation. 3:47:03 PM REPRESENTATIVE HOLMES related a scenario in which gas is owned by producer, and then sells the gas to a utility, the gas in question being sold would not be covered by this definition. MR. PERSILY agreed. The intent of Amendment 1 is to regulate storage services which are purchased by regulated utilities. Just as gas supply contracts are currently subject to the RCA, these gas supply contracts will eventually come before the RCA. 3:47:45 PM REPRESENTATIVE NEUMAN understood at the point the non-native gas is removed from the storage facility for distribution the gas would fall under authority of the RCA. He further understood that the costs for storage would not be passed on as excessive costs to the customer as a regressive tax. MR. PERSILY agreed. 3:48:40 PM REPRESENTATIVE HOLMES asked whether the RCA has reviewed Amendment 1. CHAIR OLSON answered that the RCA would be testifying. REPRESENTATIVE HOLMES removed her objection. There being no objection, Amendment 1 was adopted. 3:49:30 PM REPRESENTATIVE NEUMAN made a motion to adopt the next amendment, which was referred to as Amendment 3, which read [original punctuation provided]: Page 2, line 22: Delete "operations" Insert "operation" REPRESENTATIVE HOLMES objected for the purpose of discussion. MR. PERSILY explained that Amendment 3 is a technical amendment to fix one instance which was previously missed. Thus, "operations" is changed to "operation". REPRESENTATIVE HOLMES removed her objection. There being no objection, Amendment 3 was adopted. 3:50:54 PM CHAIR OLSON asked whether the AOGCC will be able to comply with the provisions in HB 280. CATHY FOERSTER, Commissioner, Alaska Oil and Gas Conservation Commission (AOGCC), Department of Administration, answered yes. She added that the AOGCC will not have a fiscal note associated with the bill. CHAIR OLSON asked whether the process will work. MS. FOERSTER responded that with respect to the AOGCC, the process will work and is consistent with the commission's work. CHAIR OLSON asked whether she thought offshore reservoirs in Cook Inlet could be used for storage. MS. FOERSTER suggested that if an operator follows the AOGCC's regulations for gas storage, it does not matter whether the facility is offshore or onshore. The AOGCC insures that when an operator operates a storage reservoir, it is accomplished to maintain and protect the integrity of the reservoir. This means the operator must ensure the mechanical integrity of every well that penetrates the reservoir. She related an incident that happened in Hutchison, Kansas, in which a storage reservoir at the Yaggy field, located approximately 5 miles outside of town caused problems in the town of about 50,000 people. The gas storage approval process did not take into account the complex geology of the reservoir until several buildings in the town exploded. Since then an operator must prove the gas reservoir has integrity and acts as a closed system, every well has mechanical integrity, and the gas will not seep into unexpected places. If an operator met the AOGCC's requirements for gas storage, the facility would be safe on shore or offshore. She related that the cost or logistics of the reservoir falls outside of the AOGCC's jurisdiction. 3:54:24 PM REPRESENTATIVE CHENAULT asked whether the AOGCC is the controller when gas is reinjected into a reservoir. He related a scenario in which a storage facility is located in an area in which a private party owns the mineral rights. He offered that the party may have an expectation for compensation on gas when it is injected and again when it is removed from the reservoir. MS. FOERSTER explained that the AOGCC would play a role in protecting correlative rights. The operator would need to demonstrate ownership or approval of all owners in the acreage. 3:55:44 PM REPRESENTATIVE NEUMAN remarked that the AOGCC would ensure the gas fields do not leak. MS. FOERSTER agreed. 3:56:56 PM REPRESENTATIVE HOLMES recalled prior testimony that AOGCC foresees no problems in complying with the terms of the bill. She asked whether the AOGCC is "already signing off." MS. FOERSTER offered a scenario in which an operator indicates it wants to inject gas into a reservoir. The operator must inform the AOGCC of the anticipated maximum pressure it will subject the reservoir, provide geological information of the reservoir boundaries, and prove that every penetration of the reservoir has sufficient mechanical integrity to withstand the anticipated pressures. The AOGCC checks the data, and using the beginning and ending pressure, as well as a good production history or physical description of the reservoir, the AOGCC can obtain a good estimate of the amount of gas will be stored. She stated this is something the AOGCC already performs and their estimates are very close. 3:59:07 PM REPRESENTATIVE HOLMES asked whether the requirements in HB 280 are acceptable. MS. FOERSTER suggested that the AOGCC may need to tweak the regulations to require operators to provide more information, similar to the process the AOGCC uses as technology changes. 3:59:51 PM REPRESENTATIVE HOLMES asked for the gas or reservoir capacity in the Cook Inlet that is in use, authorized, or pending. MS. FOERSTER explained that the AOGCC has three physical areas of approval. She recalled that five or six storage injection orders have been approved, but these orders encompass three basic geographical areas. Additionally, two more applications for storage injections have been received. She detailed that two of the three areas with approved storage include the Kenai and Sterling, with 6 billion cubic feet (Bcf). However, given that the start and end pressure entails only 100 pounds increment, which is a tiny increment, the reservoir could store up to 25 Bcf of gas. Thus, every 100 pounds per square inch (psi) of pressure would yield approximately 25 more Bcf of gas. She related that at some point the wells would not have mechanical integrity and the AOGCC would not allow the producer to go above that amount, noting the AOGCC has not been asked to do so. The Kenai and Sterling Area comprise 25 Bcf of gas storage. The Pretty Creek gas storage facility has two intervals using that same method of determining volume have a storage capacity composite of 2.5 Bcf. Swanson River has three reservoirs intervals have a composite of 5.3 Bcf of storage capacity. The Department of Natural Resources (DNR) may show a lower capacity based on the operator's intent, but for authorized pressures the operator has more ability. She noted that Aurora Gas, LLC, has applied for storage injection order at Nicolai Creek for another 0.8 Bcf, and another operator has applied for 3 Bcf at Ivan River, for a total of 36 to 37 Bcf of gas storage capacity that is approved or in the approval process. 4:02:48 PM REPRESENTATIVE HOLMES asked how much gas is being used for storage at the current time. MS. FOERSTER related her understanding that a small volume is being stored, but not near the full capacity. REPRESENTATIVE HOLMES expressed interest in the reason gas is not being stored if the producer has the capacity to do so. MS. FOERSTER suggested this question is better answered by the operator. 4:03:44 PM REPRESENTATIVE NEUMAN related his interest in knowing the mechanics of a scenario in which a development plan was proposed, but was disapproved by the department. He offered to pass on the question for now. 4:04:15 PM REPRESENTATIVE BUCH understood an agent or producer has been storing and shipping Liquefied Natural Gas (LNG). He inquired as to whether this is under the AOGCC's purview. MS. FOERSTER answered that the AOGCC's authority stops at the wellhead. REPRESENTATIVE CHENAULT, in response to Representative Buch, clarified that 32 Bcf of gas per year is being shipped out of state until 2011. 4:05:45 PM REPRESENTATIVE CHENAULT asked to put on the record that without having the ability to access the storage facility that recently, at times, not enough gas would have been available to run the consumer utilities. He related that the LNG facility has been an integral part to the overall gas storage and distribution system in the Cook Inlet. He suggested while some people may believe that if the LNG facility went out of business it would provide a solution to the Cook Inlet gas supply, their belief is not based on fact. CHAIR OLSON pointed out that Representative Chenault is referring to a process called "peak shaving" when some of loads destined for Japan have been shorted several times in the past few years to provide additional gas to Southcentral during the cold winters. REPRESENTATIVE CHENAULT, in response to Chair Olson, stated he did not recall the number of times that has occurred. 4:06:53 PM REPRESENTATIVE BUCH clarified he wanted to place on the record that the state has a mechanism, integral to consumers in a utility, and gas storage is a component which should also be considered. 4:07:36 PM DAN SULLIVAN, Mayor, Municipality of Anchorage, expressed condolences for the loss of Jim Bowles, President, Conoco Phillips, who was recently killed in a tragic accident. He emphasized that HB 280 is important to Anchorage and to Southcentral Alaska. He had the opportunity, as part of the Municipality of Anchorage's Energy Task Force, to meet with Representative Hawker on the bill. The three main areas this bill covers are essential to the long-term energy future of Cook Inlet gas, including the ability to create gas storage, provide incentives to maintain and increase gas production in Cook Inlet, and to clear any regulatory hurdles that may occur as these types of contracts are being considered. He stressed it is also important to keep the consumer in mind during this process. The Municipality of Anchorage is concerned about the declining production of natural gas, in particular, as it relates to pressure. He stated that pressure is the key to deliverability on cold winter days. He pointed out events in the last two or last three years that resulted in deliverability concerns. He characterized the Cook Inlet gas issue as not one of shortage, but of pressure in the fields. Gas storage facilities are important since they will help control pressure. The MOA has taken several steps, including instituting the Energy Watch Program, which requests consumers turn down their thermostats for heat and turn off lights to conserve energy. Initially, the results of this program have been outstanding, but the state cannot rely on energy conservation alone as a long-term solution. 4:10:10 PM MAYOR SULLIVAN recalled during a discussion of the proposed gas line and bullet line that someone once remarked "the solution to Cook Inlet is Cook Inlet." He agreed. He surmised that Cook Inlet holds 10 to 15 years of the necessary natural gas supply, not counting any new discoveries. This bill, HB 280, does several things the MOA supports, including the strong requirement that any financial benefit from incentives in the bill would flow through to the utilities to the benefit of their consumers. He offered his belief that the 40 percent credit for exploration expenses against production taxes provides a great incentive to garner increased production in Cook Inlet. Finally, directing the Department of Law to consider the impact on consumers is important in the event the RCA rejects a utility's gas supply contract. Thus, these three key elements in HB 280 are reasons the MOA supports the bill. He related that he would not go into the financial aspects of the bill. 4:12:14 PM REPRESENTATIVE HOLMES asked how much of the gas storage capacity in Cook Inlet is actually being used and any reasons it is not being used. KEVIN BANKS, Director, Division of Oil and Gas, Department of Natural Resources (DNR), offered his belief that Ms. Foerster's answer is correct, but to obtain a precise answer, it would be necessary to ask the operators. He suspected the increased capacity that results in gas storage costs money so an operator would consider whether to drill another well or add compression to the existing well. Gas storage may not be needed unless the operator has customers to purchase the gas. He surmised that if a producer has a market due to contract supply obligations, the producer would likely spend to increase the capacity. He suggested decisions for gas storage thus far may have been made because it was less expensive to construct gas storage than drill new wells since new wells might not be as productive as older wells used to be. 4:14:27 PM REPRESENTATIVE HOLMES stated that she does not have any specific objections to the bill. She related that she was considering many aspects of natural gas in Cook Inlet, including that new wells are not being drilled, that the current Liquefied Natural Gas (LNG) facility will be closing, any supply contracts, and many other factors. She acknowledged the effort made in the bill and expressed her interest is to be certain that everything is considered in order to obtain sustainable gas in Cook Inlet. CHAIR OLSON noted three people from the Department of Revenue are available to answer tax questions. 4:15:19 PM REPRESENTATIVE HOLMES asked whether Amendment 1 addresses the concerns that the RCA had about jurisdiction. RICHARD GAZAWAY, Advisory Section Manager, Regulatory Commission of Alaska (RCA), answered that the RCA did ask for guidance on jurisdiction over gas storage and the intent of the drafters is clear. He offered that the RCA did not participate in drafting so while the intent is clear, some improvements could be made in the drafting. 4:16:35 PM MR. GAZAWAY, in response to Representative Holmes, suggested that the DOL could review the language. He referred to page 4, line 12 of Amendment 1, which read: (G) furnishing injection, storage, and  withdrawal services for natural gas that is owned by a  utility regulated under this chapter;" MR. GAZAWAY suggested that the latter clause could use clarification. MR. GAZAWAY, in response to Representative Holmes, agreed to the specific cite in Amendment 1. MR. GAZAWAY, in response to Chair Olson, agreed that the RCA could work to improve the specified language at next committee. 4:18:00 PM REPRESENTATIVE NEUMAN asked whether this bill would complement an industrial user of gas who may need the flexibility to use different volumes of gas. MR. BANKS related his understanding that the expectation is that storage would be similar to when an industrial user would shut down during peak demand and inject gas to the local market. He surmised that physically this would happen. Currently, industrial users such as the LNG facility also do not have storage relationships with the local consumers of gas. Thus, unlike the proposed gas storage destined for consumers, with presumably transparent pricing for the service, a similar transparent pricing does not exist for the LNG plant. Additionally, there is not necessarily a market for gas that is redirected by the producer from the LNG facility. It is part of their normal supply contract obligation. He restated that the LNG plant does not participate in the local market in the same way as the proposed storage facility would participate. CHAIR OLSON characterized that the proposed storage facility as operating more like a bank, with the owner having the ability to pull out its gas when needed, but can also deposit any excess gas. MR. BANKS answered that is correct. He said to the extent gas is owned by the utility, the state has some indication and regulation over the price of the storage. However, price indicators are not present in other situations, including the LNG and producer-owned storage facilities. 4:21:32 PM CHAIR OLSON, after first determining no one else wished to testify, closed public testimony on HB 280. 4:21:50 PM REPRESENTATIVE NEUMAN related his understanding of the need to regulate gas facilities. REPRESENTATIVE NEUMAN moved to report HB 280, Version 26- LS1185\S, as amended, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 280 (L&C) was reported out of the House Labor and Commerce Standing Committee. 4:24:10 PM