HB 280-NATURAL GAS: STORAGE/ TAX CREDITS  5:06:02 PM CO-CHAIR WIELECHOWSKI announced HB 280 to be up for consideration. [CSHB 280(FIN)am was before the committee.] 5:06:06 PM REPRESENTATIVE MIKE HAWKER, sponsor of HB 280, said it specifically addresses three issues regarding the needs of the Cook Inlet: the need for gas storage for utilities and proprietary storage for managing inventories, the need for additional exploration, and long-term supply contracts. He explained that the bigger components of the bill encourage the development of gas storage facilities. It creates the first regulatory framework for those facilities that don't exist now. At the end of the day they will provide a volumetric-based development credit based on certain criteria that a storage facility has to meet. Any investment in storage in the Cook Inlet is going to increase the gas to consumers and is a supply chain cost. The development credit is intended specifically to be consumer cost relief in that the credit is to be passed through ultimately to consumers. As far as encouraging development and further gas storage Representative Hawker said he asked DNR to expedite permitting of the storage facilities. It is important also to recognize that while this bill offers the "pass through credit" for development of gas storage facilities, for any entity to avail themselves of those credits they must also accept RCA regulation. This is an absolute linkage in the bill. The bill protects the ability of individual producers to develop storage for their own purposes for those companies who want to build proprietary storage, but very specifically no credits are available for it. Likewise, the RCA does not have regulatory authority over those privately owned proprietary interest gas storage facilities; unlike today. 5:11:17 PM SENATOR FRENCH asked him to identify the sections that pertain to gas storage credits and those that pertain to the RCA matters. 5:12:11 PM REPRESENTATIVE HAWKER responded that he wanted to present the bill's themes first without reference to specific sections and then he would go through a sectional. He said a couple of significant applications for long-term contracts were not approved by the RCA in the past several years. He asked the RCA what it would need to approve them, because in hindsight they would have been very good contracts to have approved. The bill directs the RCA now when making a decision on a contract application that they not only have to look at the specifics of the contract, but at the consequences of saying no to that contract. A number of sections increase access to existing tax credits for explorers and developers working in the Cook Inlet. REPRESENTATIVE HAWKER said this bill was developed with a great deal of help from Larry Persily (Federal Gasline Czar), Roger Marks (former Senior DOR Petroleum Economist), Jan Levy (former DOL oil and gas attorney), and Julie Lucky, legislative staff. 5:15:12 PM HB 280 Cook Inlet Recovery Act - Sectional Analysis Prepared by Representative Mike Hawker's Office Section 1: Sets out a short title for the legislation: Cook Inlet Recovery Act (CIRA). Section 2: Establishes an application process, criteria and timeline for the Alaska Oil and Gas Conservation Commission (AOGCC) to certify that a gas storage facility (GSF) meets the minimum working gas storage capacity and daily delivery rate requirements to be eligible for the financial incentives provided in this bill. 5:17:01 PM CO-CHAIR WIELECHOWSKI asked on page 2, line 10, if there was "any magic" in selecting 500 mmcf and on line 13 being able to withdraw a minimum of 10 mmcf. REPRESENTATIVE HAWKER answered they were the product of consensus in discussions with the DNR and DOR. Initially they considered a bill that would pay the credit up to double the capacity, but recognized this credit does not flow to the developer; 100 percent of it flows through to consumers. They were trying to second-guess the volume of large capacity storage that will be developed in Cook Inlet, and the DOR expressed concern that they wanted the bill as close as possible to the perspective development as possible. It was an effort to try to mitigate the potential gaming of the system. The idea of the flow-through volumetrics indicates they don't want to give credits to someone building a storage facility that cannot deliver sufficient gas to meek their peak demands. They might consider expanding the size of the credits once they see an actual project. CO-CHAIR WIELECHOWSKI asked if it's projected that Cook Inlet would need 10 million mmcf on any cold day. REPRESENTATIVE HAWKER answered that's the minimum amount and a fairly low number. They get 400 mmcf/day demand on really cold days. The idea of the storage facilities is to meet the peaking demands, not the sustained delivery. Section 2 also says if you cease using a storage facility within the first 10 years the state has a recovery provision on any credits provided that would have be refunded by the developer. The AOGCC would have to be notified on those cessations. REPRESENTATIVE HAWKER continued the analysis: 5:19:46 PM Section 3: Requires a GSF owner to notify the AOGCC if the facility ceases operation. -Provides definitions for terms used in CIRA. -Requires the Director of the Division of Mining, Land and Water to give priority to and expedite "when reasonably possible" any applications, permits and lease assignments needed for development and operation of a GSF. 5:20:30 PM Section 4: Directs the Department of Natural Resources (DNR) to waive any state land lease fees or rents for the first 10 years of a GSF's operation. The waiver would stop if the storage facility ceases commercial operations. -States that any waivers of lease fees or rents would be public record. -Requires that the GSF pass on the financial benefits of any lease exemption to utilities that use its service. -Clarifies that any gas withdrawn from a GSF is considered to be non-native gas and not subject to royalty until all non-native gas is withdrawn. SENATOR FRENCH asked if the director has already denied permits to producers for their storage wells. REPRESENTATIVE HAWKER answered that he heard that DNR's policy is that they would not permit storage facilities unless they were an open access facility. As presented to him in his conversations with Mr. Banks, the concern is that more storage capacity is needed right now and smaller producers may not have the financial wherewithal to build their own. Until they have a very vibrant third-party storage facility, the agency had concluded that it was best to make all future storage facilities open access. To him, this crossed his line of a little too much government interference and didn't recognize the reality that he sees in the Cook Inlet where the producers have the need to manage their own inventory (warehousing). For example, Chevron had substantial warehousing capability in the Drift River Terminal Facility that sat at the foot of a volcano. That storage facility has been taken off line after volcanic activity. While it was oil storage, it is now interfering with their ability to maximize and sustain ongoing production because they don't have a warehouse to put their own product in. The same thing with gas, he said. If producers don't have a place to store their case, the state would be encouraging them to shut in gas and not maximize production. This bill anticipates seeing proposals for a very large open access third- party owned project in the Cook Inlet in the near-term, but that would deny benefits to someone who simply wants to manage their own inventory. 5:24:37 PM Section 5: Directs the Regulatory Commission of Alaska (RCA), when considering the approval of a utility's gas supply contract, to consider the impact on consumers if the commission rejects a utility's gas supply contract and to recognize the value of a utility holding a diversified portfolio of gas supply contracts with different pricing mechanisms in order to protect consumers from inadequate gas supplies and the risk of a single pricing mechanism. REPRESENTATIVE HAWKER explained if an open access third-party owned facility is constructed on state land, the lease fees or rents would be waived for the first 10 years of that facility's operations. He added that this bill also provides a regulatory framework for "last in, first out" inventory accounting in these new storage facilities. This means the last gas pumped into it is the first gas that comes out. This is relevant because the last gas (residual gas to maintain some pressure in the bottom of the well) in the bottom of the well has not ever been produced and when it is produced there will be a liability and obligation to pay production taxes on it. 5:27:10 PM Section 6: Requires that a utility's cost of gas storage that is passed on to consumers reflect the financial benefits of any tax credits and state lease exemptions provided in this legislation. It also stipulates that a portfolio representing diversified- terms of gas supply contracts is a good thing. 5:28:19 PM Section 7: Specifies that the Regulatory Commission of Alaska (RCA) has jurisdiction over natural gas storage services provided for gas that is owned by a regulated utility and that any benefits provided in this legislation flows through to the consumer. Section 8: Further defines "natural gas storage facility" and clarifies what is considered part of the storage facility. -Further defines that RCA regulation of gas storage facilities is limited to facilities operated primarily or exclusively for third-party customers; regulation does not extend to a proprietary storage facility operated exclusively or primarily to hold gas owned by the storage facility owner or operator. REPRESENTATIVE HAWKER explained that a potential loophole was discovered by DNR and DOR that it potentially could be argued that a large natural gas pipeline (if it were to be built), since it is a vessel capable of storing gas, someone might argue that it would fall under the parameters of this legislation, which was not at all the intent. So language clarifies that a natural gas storage facility that is part of a regulated natural gas pipeline is not also regulated by the utility. 5:29:51 PM Section 9: Clarifies that the names of taxpayers and the amount of credits claimed for gas storage facilities under this legislation shall be public information. -Requires the Department of Revenue (DOR) to furnish the information to the RCA. REPRESENTATIVE HAWKER explained that this section specifies that the RCA does have jurisdiction over gas storage services for gas that is owned by a regulated utility. They are looking at a couple levels of storage and in this case this gas would be purchased on the market by a utility that has developed the gas storage facility itself. Other provisions talk about how a third-party facility that provides services to a public utility is also regulated. 5:30:32 PM SENATOR FRENCH asked if he was referring to the definition on page 8, lines 18 and 19. REPRESENTATIVE HAWKER answered yes. Section 10: Establishes a credit against corporate income taxes of $1.50 per thousand cubic feet of new gas storage capacity opened in Alaska during 2011-2015. The credit is limited to $15 million per GSF. This section sets out minimum capacity and deliverability requirements to qualify for the credit, including that the GSF must be available for use by regulated utilities and, if utilizing state land, must be in compliance with its DNR storage lease. The credit can be refunded by the state at full value if the owner does not have enough taxable income to fully utilize it. REPRESENTATIVE HAWKER explained this section picks up the third- party customer coverage. CO-CHAIR WIELECHOWSKI asked if the definition of "natural gas storage facility" included the LNG plant in Nikiski. REPRESENTATIVE HAWKER answered as they have defined the ability for someone to get a credit under this bill, it had to be delivering gas to consumers. An export plant and facility was not contemplated for the benefits. CO-CHAIR WIELECHOWSKI asked if they released some of their gas on the really cold winter days. REPRESENTATIVE HAWKER replied anecdotally he was aware that when the peak demand of coldest days had occurred in Southcentral Alaska in a past couple of winters, ConocoPhillips, who owns and operates that facility, actually voluntarily diverted gas that they had committed to export to customers overseas into the supply chain for consumers. Their good-friends relationship with their consumers in Asia allowed them to do that. 5:34:26 PM Section 11: Sunsets the rule that limits how certain tax credits arising from activity in Cook Inlet or from producing gas for in-state use are used on January 1, 2011. This would allow a Cook Inlet explorer or producer to explore or produce elsewhere in the state and have full access to the credits it earned from its Cook Inlet activities. This section also makes sure that the names of producers and amounts of credit are public. It is necessary that the information is available to the RCA. 5:35:26 PM CO-CHAIR WIELECHOWSKI asked if this would be a good place to stop and pick up at a future hearing. REPRESENTATIVE HAWKER answered yes. [HB 280 was held in committee.]