HB 280-NATURAL GAS  1:05:47 PM CO-CHAIR JOHNSON announced that the first order of business is 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." [Before the committee was CSHB 280(L&C).] 1:06:13 PM CO-CHAIR NEUMAN moved to adopt the proposed committee substitute (CS) for HB 280, Version 26-LS1185\C, Bullock, 3/9/10, as a work draft. There being no objection, Version C was before the committee. REPRESENTATIVE SEATON objected for purposes of learning what the changes are. 1:07:20 PM REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, joint prime sponsor of HB 280, directed attention to the one-page written explanation of the differences between Version C and CSHB 280(L&C). In response to Co-Chair Johnson, he said HB 280 is intended to help bring back the vitality of the Cook Inlet basin and increase gas production to meet the needs of Southcentral Alaska, Anchorage, and the Railbelt. He introduced his staff members that worked on this bill - Larry Persily, Janice Levy, and Juli Lucky - and noted that consultants Dan Dickinson and Roger Marks also assisted with the bill. 1:11:15 PM REPRESENTATIVE HAWKER explained that HB 280 is a response to the challenge of keeping the lights and heat on in his community during the winter. Gas supply in the Cook Inlet basin is depleting and there is a real probability of being unable to meet peak winter demands in a very short period of time. He said the first issue is recognizing there is a problem and solving it. In solving the problem, HB 280 would also provide consumer cost relief. The bill has statewide application in that it would provide the same advantages to the Fairbanks area as it would the Cook Inlet because gas storage will also be a necessity for Fairbanks, regardless of the city's source of gas. Storage was unnecessary when Cook Inlet gas was abundant, but that is no longer the case and storage is now needed to keep enough gas on hand to meet the peak winter demand. 1:13:37 PM REPRESENTATIVE HAWKER related that on February 15, 2010, the United Kingdom government approved construction of a $1 billion, 50 billion cubic foot natural gas storage facility. That facility is aimed at correcting years of government and market failure to build enough backup capacity to keep pace with demand and to fill unexpected supply disruptions. He said HB 280 would do the same for Alaska, but rather than a government-invested solution, it would be a free-market approach to developing the storage that is needed to provide energy security. 1:14:52 PM REPRESENTATIVE HAWKER noted that every stakeholder in Cook Inlet, from the municipalities to the utilities, has publicly stated that storage is essential to the future energy infrastructure. Storage will add an additional cost to the supply chain of gas, resulting in an upward pressure on consumer prices. An important part of HB 280 is that it would lessen those costs to consumers. REPRESENTATIVE HAWKER said HB 280 would also address the need for regulatory certainty because, at this moment, regulatory uncertainty is impeding the development and progress on any storage projects. The Regulatory Commission of Alaska (RCA) recently sent a message to the legislature asking for clarification of its regulatory responsibility with regard to gas storage activities in Alaska, and HB 280 would answer that. 1:16:25 PM REPRESENTATIVE HAWKER, in response to Co-Chair Johnson, began a review of the changes that would be made by Version C. He said changes to Section 2 are changes around the parameters of what type of facility would qualify for the incentive tax credit for the development. Version C would tighten this up and "right size" the bill to mitigate any potential gaming. He noted that gas can be stored in pipelines, called packing; Version C changes Section 2 so that pipeline packing is eliminated from being considered storage. Changes to Section 8 clarify the boundaries and facilities of a gas storage facility that would be subject to regulation by the RCA. It specifies that RCA regulation extends only to gas storage facilities operated exclusively or primarily for delivery of gas to consumers and not to the world market. 1:18:35 PM REPRESENTATIVE SEATON understood that Version C would not extend RCA regulation. He asked whether the credit would be extended. REPRESENTATIVE HAWKER responded no, the credit was not extended in the first version and is not extended in Version C. REPRESENTATIVE SEATON presumed it would be underground storage that is covered by Version C. He inquired whether tank storage would also qualify. REPRESENTATIVE HAWKER replied that Version C provides requirements for both physical size and deliverability. Realistically, it would be underground storage because to qualify an aboveground tank would have to accommodate 100 million cubic feet annual injection or withdrawal and be large enough to hold 500 million cubic feet of gas. 1:20:02 PM REPRESENTATIVE TUCK asked whether the RCA would have authority over new proprietary gas storage that is not necessarily third party. REPRESENTATIVE HAWKER answered Version C goes strictly to providing third-party storage of gas for delivery to consumers. At the moment, it is unclear as to the extent the RCA may wish to apply that regulatory authority beyond the clearly stated responsibility in the bill. REPRESENTATIVE HAWKER continued his discussion of the changes. In Sections 10, 17, and 19, Version C changes the transferable tax credit to a refundable tax credit. This change was at the request of the Department of Revenue to ease the accounting and management activities that would be involved in monitoring the credits. He said Section 10 relates to "right-sizing" the bill by cutting in half the maximum tax credit available for a gas storage facility. 1:21:43 PM REPRESENTATIVE SEATON inquired whether the refundable tax credits would be limited to gas storage credits or would apply to both oil and gas credits. REPRESENTATIVE HAWKER responded that Version C makes no changes to the transferable or refundable nature of any existing credits in statute. It would apply only to the development credit for gas storage facilities that originate in HB 280. REPRESENTATIVE SEATON removed his objection to Version C. There being no further objection, Version C was before the committee. REPRESENTATIVE HAWKER reiterated that Version C addresses the RCA request for clarification of its responsibility to regulate storage facilities, and it clarifies what would be allowable from the standpoint of inventory management within a contemplated storage facility. 1:23:08 PM CO-CHAIR NEUMAN asked whether HB 280 relates just to Cook Inlet and whether the sponsor statement still applies to Version C given the changes that have been made. REPRESENTATIVE HAWKER replied the provisions related to investment tax credits for the development of storage would be applicable statewide. The bill was brought forward because of the immediate, impending problem within the Cook Inlet basin that is the result of the production decline inside that area. Motivation for the bill came while he was flying over the Kenai Peninsula and saw shuttered buildings where once stood a vibrant economic zone. The underlying business conducted there - oil and gas development in Cook Inlet - is the foundation for the entire energy security of Southcentral Alaska. This decline in productivity in Cook Inlet is putting the Southcentral region at risk of an impending winter disaster when there is not enough gas to keep the lights, heat, and electricity on. REPRESENTATIVE EDGMON observed that this is a statewide issue in that rural Alaska is also very much dependent upon inexpensive, or at least stable, fuel costs in the Southcentral region; it is a symbiotic relationship. Work is continuing to get stable fuel to Bush Alaska as well. 1:26:54 PM CO-CHAIR NEUMAN noted that in Prudhoe Bay the natural gas liquids (NGLs) are re-injected into the well to make it easier to pump the oil. He inquired whether the intent is to consider that as gas storage and include that process in HB 280. REPRESENTATIVE HAWKER answered no. CO-CHAIR JOHNSON understood Cook Inlet gas is a much drier gas. REPRESENTATIVE SEATON noted that gas is sold to North Slope entities in addition to re-injection in the Prudhoe Bay fields. He asked whether this could be considered a gas storage field, given that he believes over 100 million cubic feet of gas per year is being sold. REPRESENTATIVE HAWKER responded the practical answer is no because those are active wells, not storage wells or storage leases. The bill would require certification of gas storage facility capacity by the Alaska Oil and Gas Conservation Commission (AOGCC), and it is very clearly not the intent to take an operating well and somehow be able to call it a storage facility. 1:29:27 PM REPRESENTATIVE HAWKER resumed highlighting the provisions of HB 280, Version C. He said the bill would provide clarification to potential owners and developers of storage facilities about the difference between storing gas and producing gas. When gas is produced, royalty and production taxes must be paid. Storing gas is an inventorying activity and the bill would offer an investment tax credit for qualified storage facilities. The Department of Revenue, the Department of Natural Resources, and others participated in developing the bill to ensure tight definitions that prevent gaming. The bill would provide the regulatory certainty that is being asked for by saying that RCA regulates gas storage. REPRESENTATIVE HAWKER said HB 280 would specifically require Last In, First Out (LIFO) accounting of the gas inventory - the last gas pumped into the facility is the first gas pumped out by volumetric measurement. These underground pressure vessels are former gas production facilities and leases that may already have recoverable gas in them, but that gas would be used as the cushion gas or the spring to push the injected gas back out. It would be considered production if more gas is taken out than is put in, and taxes would then have to be paid. 1:31:51 PM REPRESENTATIVE HAWKER pointed out that just the ability to store gas is not enough to solve the impending problem. More gas is needed as well. Therefore, HB 280 would encourage additional exploration through provisions that make Cook Inlet investment more attractive to both new producers and existing stakeholders in the inlet. Current production is out of five major gas domes, but now it is at the point of where the geology amounts to chasing small bubbles of gas in a three-dimensional space. The bill would encourage new exploration by expanding some access to existing tax credits through the crossing of limitation borders and minimally enhancing some of those credits. He emphasized that in HB 280 these issues are addressed only for the Cook Inlet; other bills are currently in the legislature that would apply the same provisions to the entire state. He said he did not want to touch the North Slope in this regard because it is too sensitive of an issue; he is looking to build legislative alignment and support for the immediate issues within the Cook Inlet. 1:34:27 PM REPRESENTATIVE HAWKER concluded by stating that HB 280 is a very simple bill that would provide gas to keep on the lights and heat during cold winter days in Anchorage. The bill would also protect consumers by mitigating the inevitable cost increases resulting from the development of storage facilities. The bill would answer a current unknown by imposing regulation on the emerging energy storage industry. Further, HB 280 would provide operating clarity for the developers of the emerging energy storage industry so they clearly know the difference between gas storage and gas production. 1:36:01 PM CO-CHAIR NEUMAN inquired whether any work is ongoing to renew the "Nikiski export facility". He surmised a storage facility would benefit this export facility. REPRESENTATIVE HAWKER replied that through this point in time, the ability to export Cook Inlet gas is exactly what has made the Cook Inlet gas economy and process work. He explained that gas wells operate best by keeping production at a fairly stable level. However, consumer demand is not stable and varies radically between the colder winter days and warmer summer days, and on those low demand days something must be done with the surplus gas. Since the mid-1960s, the export facility has taken that surplus on low demand days and exported it. Likewise, there was a time when production levels were so high that the surplus was also taken by the "Agrium plant". Closure of the Agrium plant was the first casualty of Cook Inlet's declining gas production. There is now risk that the export facility will be lost through not being re-licensed for export. If that occurred today, it would force underproduction of the existing wells and there would not be enough gas produced to meet consumer demand on winter days. He noted that time is drawing short to protect the people of Southcentral Alaska because the current export license expires on March 31, 2011. 1:40:20 PM REPRESENTATIVE SEATON observed that the reason for the tax credit is to keep consumer prices low. However, producers have stated over the past that the price is so low the value is not there to engage in exploration and development in the Cook Inlet. He asked whether trying to keep consumer prices low defeats the initiative for exploration and development. REPRESENTATIVE HAWKER answered there are two issues. The issue of storage is the mission-critical component of ensuring there is enough gas available for delivery on peak-demand days. The bill would require that every penny of the investment tax credit for storage capacity development be passed on to the consumer, and this provision is why HB 280 is a bill to minimize consumers' exposure to the necessarily increasing costs. In exchange for this benefit to consumers, the bill would provide regulatory certainty on how to operate storage that does not currently exist, as regulatory uncertainty is impeding development of storage. Encouraging exploration and production of the stratigraphic gas traps in Cook Inlet is an entirely separate matter than the consumer-oriented storage facilities. He reiterated that both storage and exploration need to be encouraged. The State of Alaska currently requires amortization of exploration incentive credits over a period of two years; HB 280 would drop that to one year, which would improve a company's cash flow and make Alaska more competitive with the rest of the world. 1:44:34 PM REPRESENTATIVE SEATON inquired whether HB 280 would allow a producer to use its Cook Inlet credits to offset its North Slope production instead of having to reinvest in Cook Inlet. He noted that when production taxes were designed they were specifically set apart because the Cook Inlet tax regime is so different at basically no tax. REPRESENTATIVE HAWKER, to provide an understanding of the question asked, explained that when production taxes were changed on a statewide basis in previous legislative sessions, the Cook Inlet was ring-fenced and allowed to operate under the rules of the previous economic limit factor (ELF) rather than going to the profit-sharing taxes. This kept the production taxes in Cook Inlet from going up. Beneficial credits were added for exploration and development in the profit-sharing tax bills. It was recognized that a company operating in both the Cook Inlet and other parts of the state could take an investment credit based in Cook Inlet, where its taxes were lower already, and file a single tax return on a statewide basis that used those credits to offset higher taxes in the other regions. For purposes of utilizing tax credits, the original bill said that a company generating a tax credit in the Cook Inlet must first figure out what its taxes would have been in the Cook Inlet without the ring-fencing under ELF and then discount its tax credit by the amount it would have had to use to offset the differential between the production tax under the profit-sharing method and the lower taxes in the Cook Inlet. 1:47:01 PM REPRESENTATIVE HAWKER said his own take is that production needs to be encouraged all across the state; however, in Cook Inlet it is critical that production be increased. While he appreciates the argument that companies are not paying as much tax in Cook Inlet and so should not be allowed to utilize the credits, that is telling people not to bother with the Cook Inlet and to instead invest where there are higher tax credits. He said he thinks that may have had unintended detrimental consequences in discouraging investment in the Cook Inlet. The single thing most needed from investment in the state is additional exploration and production. He said he therefore thinks it is appropriate to bring forward a change and a compromise of the limitation that was provided for in the earlier legislation. 1:49:05 PM REPRESENTATIVE HAWKER, in response to Representative Guttenberg, explained that HB 280 contains a tax recovery provision, meaning that if a credit is received for starting a gas storage facility and then that facility ceases operation, the state will receive the credit back from the operator. The notice provision in HB 280 means the operator has the affirmative responsibility to tell the state if it ceases to comply with that requirement and that it triggers recapture of the credit the operator has been given. So, the notice requirement means an operator cannot suddenly stop operations and hope the state does not catch it. 1:51:35 PM REPRESENTATIVE GUTTENBERG asked what would happen if an operator failed to meet the bill's requirement to cycle [100 million cubic feet of gas per year] for reasons beyond the operator's control. REPRESENTATIVE HAWKER deferred to Larry Persily. LARRY PERSILY, Staff, Representative Mike Hawker, Alaska State Legislature, responded that the sponsors tried to set a limit by requiring that a facility be in operation in return for receiving the incentives and certainty provided by HB 280. The sponsors did not want to take the chance that someone could take an old depleted reservoir with a well, claim storage, take a credit, and then not do much with it. The 100 million cubic feet is an arbitrary number and a pretty low threshold, given that a couple of existing storage operations proprietary right now in Cook Inlet have capacity for 1 billion or 5-6 billion cubic feet. He therefore cannot conceive that someone could say the reason for not operating is because of a warm winter. The sponsors tried to pick a number that is reasonable but not so high that ceased operations would be declared when they really have not. Should an operation cease, the state would pro-rate and take back the credit. 1:53:52 PM REPRESENTATIVE HAWKER allowed that Representative Guttenberg may have brought up a point that is not actually addressed by the bill, which is the possibility of something like a natural event that is beyond the control of the owner/operator of the storage facility. The bill, as written, may not provide a safety valve that would allow the commissioner to overlook a violation of the statute. He said that is something to take a look at. REPRESENTATIVE GUTTENBERG suggested this could be put into the regulations because HB 280 gives the director a lot of leeway. 1:54:47 PM REPRESENTATIVE GUTTENBERG requested Representative Hawker to expand on the provisions of Section 20, Version C. REPRESENTATIVE HAWKER replied many folks would argue that Cook Inlet is over-regulated and that the Regulatory Commission of Alaska has made decisions that were not of benefit to the community and may have exacerbated the problems. As a result of having no clear guidance, the RCA did not approve some contracts for long-term gas supply, and had those contracts been approved, industry would be scrambling hard today to bring gas up. The sponsors of HB 280 are trying to include some tooth that says the regulatory authorities should be encouraged to approve long- term supply contracts without trying to set any empirical measure by which to tell them to do it. For example, Mr. Pickett of the RCA has pointed out that there is nothing telling the RCA that it must consider what would happen if it does not approve a contract. Section 20 and Section 5, Version C, add this new philosophic guidance that the RCA must consider the consequences of saying no. 1:58:37 PM REPRESENTATIVE TUCK understood HB 280 has two parts: one that would pave the way for third party storage and the other to incentivize exploration in the Cook Inlet region. He inquired whether there is the potential that third party storage may not be necessary should HB 280 be passed and exploration is incentivized, but the LNG export license is not renewed. REPRESENTATIVE HAWKER answered there is unanimous concurrence among the stakeholders in the inlet that storage is an absolute necessity, even if LNG export stops. Gas will still be needed to meet those peak requirements and to do that there needs to be increased capacity to pull gas out of the ground, which takes storage. If the export facility continues to operate, a buffer of gas storage will still be needed for those days of excess gas production and days of insufficient gas production. 2:00:43 PM CO-CHAIR JOHNSON held over HB 280. He noted that this is a key issue for his community, so the committee will be returning to the bill as quickly as possible.