HOUSE TRANSPORTATION STANDING COMMITTEE May 8, 1997 10:10 a.m. MEMBERS PRESENT Representative Bill Williams, Chairman Representative John Cowdery Representative Bill Hudson Representative Jerry Sanders MEMBERS ABSENT Representative Beverly Masek, Vice Chairman Representative Kim Elton Representative Al Kookesh OTHER HOUSE MEMBERS PRESENT Representative Gene Therriault COMMITTEE CALENDAR * HOUSE CONCURRENT RESOLUTION NO. 17 Relating to improvements to highways and highway facilities. - MOVED HCR 17 OUT OF COMMITTEE * HOUSE BILL NO. 263 "An Act repealing the exemption from the motor fuel tax for fuel that is at least 10 percent alcohol by volume, and establishing a motor fuel tax exemption for motor fuel that is produced from the processing of lignocellulose, that is at least 10 percent alcohol by volume, and that is produced during the first five years of a facility's processing of lignocellulose from wood; and providing for an effective date." - MOVED CSHB 263(TRA) OUT OF COMMITTEE (* First public hearing) PREVIOUS ACTION BILL: HCR 17 SHORT TITLE: IMPROVE HIGHWAYS AND HWY FACILITIES SPONSOR(S): REPRESENTATIVE(S) MULDER JRN-DATE JRN-PG ACTION 04/16/97 1121 (H) READ THE FIRST TIME - REFERRAL(S) 04/16/97 1121 (H) TRANSPORTATION 05/08/97 (H) TRA AT 8:30 AM CAPITOL 17 BILL: HB 263 SHORT TITLE: MOTOR FUEL TAX:LIGNOCELLULOSE/10% ALCOHOL SPONSOR(S): REPRESENTATIVE(S) WILLIAMS JRN-DATE JRN-PG ACTION 04/25/97 1342 (H) READ THE FIRST TIME - REFERRAL(S) 04/25/97 1342 (H) TRANSPORTATION, FINANCE 05/08/97 (H) TRA AT 8:30 AM CAPITOL 17 WITNESS REGISTER MATTHEW GILL, Legislative Secretary to Representative Eldon Mulder Alaska State Legislature Capitol Building, Room 501 Juneau, Alaska 99802 Telephone: (907) 465-2647 POSITION STATEMENT: Sponsor testimony on HCR 17. PETER ECKLUND, Legislative Assistant to Representative Bill Williams Alaska State Legislature Capitol Building, Room 424 Juneau, Alaska 99802 Telephone: (907) 465-3423 POSITION STATEMENT: Sponsor testimony on HB 263. STEVE GATTO, Representative BCI 101 Derby Street Hingham, Massachusetts 02043 Telephone: (781) 461-5700 POSITION STATEMENT: Testified in support of HB 263. ROBERT LOESCHER, Executive Vice President Natural Resources Division Sealaska Corporation 1 Sealaska Plaza Juneau, Alaska 99802 Telephone: (907) 586-9233 POSITION STATEMENT: Testified in support of HB 263. ALLYN HAYES, Representative Ketchikan Pulp Company P.O. Box 6600 Hayes, Ketchikan 99901 Telephone: (907) 228-2233 POSITION STATEMENT: Testified in support of HB 263. JACK PHELPS, Executive Director Alaska Forest Association P.O. Box 23267 Ketchikan, Alaska 99901 Telephone: (907) 225-6114 POSITION STATEMENT: Testified in support of HB 263. ACTION NARRATIVE TAPE 97-26, SIDE A Number 0001 CHAIRMAN BILL WILLIAMS called the House Transportation Standing Committee to order at 10:10 a.m. Members present at the call to order were Representatives Williams, Sanders, Hudson and Cowdery. Members absent were Representatives Masek, Elton and Kookesh. HCR 17 - IMPROVE HIGHWAYS AND HWY FACILITIES Number 0031 CHAIRMAN WILLIAMS announced the first order of business would be HCR 17, "Relating to improvements to highways and highway facilities." Number 0060 MATTHEW GILL, Legislative Secretary to Representative Eldon Mulder, introduced HCR 17. He stated that Representative Mulder is asking that the state recognize the importance of having a strong transportation system, as both tourists and local residents use it. Number 0124 REPRESENTATIVE JOHN COWDERY asked if the primary intent of HCR 17 relates to the Alaska-Canada Highway and its connecting highways. Number 0148 MR. GILL replied that is correct. He stated that he has talked to various travel clubs that are supporting the legislation and their main concern is the area between Fort Nelson and Watson Lake, but otherwise they are pleased with it. Number 0221 REPRESENTATIVE COWDERY asked if HCR 17 is for the state of Alaska. MR. GILL replied that is correct. Number 0236 REPRESENTATIVE COWDERY stated that he thought it was a good resolution and made a motion to move HCR 17, with individual recommendations and a zero fiscal note, out of the House Transportation Standing Committee. CHAIRMAN WILLIAMS asked if there were any objections. Hearing none, HCR 17 was moved out of the House Transportation Standing Committee. HB 263 - MOTOR FUEL TAX:LIGNOCELLULOSE/10% ALCOHOL Number 0401 CHAIRMAN Williams announced the next order of business to be HB 263, "An Act repealing the exemption from the motor fuel tax for fuel that is at least 10 percent alcohol by volume, and establishing a motor fuel tax exemption for motor fuel that is produced from the processing of lignocellulose, that is at least 10 percent alcohol by volume, and that is produced during the first five years of a facility's processing of lignocellulose from wood; and providing for an effective date." He stated that Peter Ecklund, Legislative Assistant, would present the bill. Number 0412 PETER ECKLUND, Legislative Assistant to Representative Bill Williams, read the sponsor statement into the record: "House Bill 263 was introduced to encourage a renewable energy industry in Alaska. Technology is now under development, which would allow ethanol to be reduced from wood and wood wastes. Alaska could be at the forefront of a new high value added, environmentally friendly wood ethanol industry. Southeast Alaska's timber industry has suffered a terrible job loss over the last six years. Absent any pulp mills, there are no current manufacturing techniques which use a low end, former pulp quality wood. We may soon be `chipping and shipping' low quality logs and jobs from Southeast. "If we are able to entice investors to start wood ethanol plants in Alaska, we could employ many of the now unemployed timber workers of the region. Wood ethanol plants could convert milling wastes, low quality wood chips and even paper into ethanol. "Current Alaska law taxes motor fuel at 8 cents a gallon. Gasohol, or gasoline blended with 10 percent ethanol, is exempt from this tax." Number 0508 MR. ECKLUND stated there was legislation that just passed the House a couple days ago, HB 63, that proposed to take away the ethanol tax credit. MR. ECKLUND continued to read the sponsor statement: "House bill 263 proposes to end the 8 cent a gallon tax credit for all gasohol except for that gasohol that uses ethanol derived from wood. Corn, barley and other grain based ethanol would not qualify for the gasohol tax credit." Number 0538 MR. ECKLUND stated that there is a work draft committee substitute in the committee members file. He then continued with the sponsor statement: "Under that gasohol using wood ethanol would be taxed at 8 cents lower than the prevailing motor fuel rate. So, if the motor fuel was raised in the future, the wood/ethanol gasohol tax rate would raise at the same rate and remain 8 cents below whatever the new motor fuel was. "Also, the wood ethanol gasohol tax incentive would only be in effect for the first five years of the wood ethanol plant's existence, and once that ethanol is sold on the market the 8 cent a gallon tax credit would only be in effect for five years. "According to the National Renewable Energy Lab, there are no plants which currently produce ethanol from wood. This legislation would send the message to investors that the state of Alaska wants to encourage a new renewable energy industry in our state, and create an environmentally friendly high value-added wood product." Number 0654 MR. ECKLUND passed out a revised fiscal note from the Department of Revenue. He stated that currently there is no gasohol that is produced from wood that can qualify for the tax incentive proposed in this bill. He stated that the fiscal note reflects the fact that there would not be that tax incentive for corn, barely or any other ethanol. The net benefit to the state would be $8 million in revenues the first few years and if and when a wood ethanol plant came on-line in Alaska, there would some reduction in that net gain. Number 0736 REPRESENTATIVE JERRY SANDERS stated that he thought they just passed a bill that would eliminate that; therefore, we would get this money back without HB 263. Number 0747 MR. ECKLUND replied that HB 63 is not law yet, and the current law gives an 8 cent a gallon tax credit for all ethanol. Number 0810 REPRESENTATIVE BILL HUDSON asked what happens if HB 63 does become law. Number 0818 MR. ECKLUND replied if HB 63 were to become to law and if HB 263 were to pass and become law, it would still recapture those current ethanol tax credits that go to the out-of-state producers of ethanol. He stated that there would be no reduction to the general fund for ethanol or gasohol using wood ethanol unless and until a wood ethanol plant came on-line and sold into the market. He stated that currently the purpose is to encourage the development of this new technology and have Alaska be at the forefront of this new industry. He stated that it is hard to tell what the fiscal impact could be in the future because it depends on whether or not we are able to entice someone to come to Alaska and create a new plant. Number 0909 REPRESENTATIVE HUDSON stated that HB 263 would have no bearing on HB 63, which eliminated the 8 cent tax exemption on gasohol, largely made from grains, that are shipped to Alaska. He stated the HB 263 states that the tax rate on motor fuel blended with alcohol is the same tax rate as a gallon of other motor fuel. However, he stated that HB 263, AS 43.40.010(4), Section 1, lines 3 through 7 states, "The tax is not due on the motor fuel sold or otherwise transferred in the state that is at least 10 percent alcohol by volume and has been produced from the processing of lignocellulose derived from wood; and was produced in a facility that processes lignocellulose..." He asked if this bill only affords the 8 cent exemption from gas that has the additive of wood ethanol. Number 1021 MR. ECKLUND replied that is correct. The only ethanol that would qualify to blended with gasoline and qualify for the 8 cent a gallon tax incentive would be wood ethanol. He stated that currently there are no producers of wood ethanol, anywhere. He stated that the capability is there as we are trying to encourage a company to come to Alaska and produce wood ethanol. Number 1120 REPRESENTATIVE HUDSON stated that he supports the legislation, not only because of Southeast Alaska, but because of the vast forests of the Susitna, Tanana, Fairbanks and Kenai Peninsula. He stated that this would be a tax incentive, similar to the ethanol fuel incentive that parts of Alaska has had for a number of years. Number 1204 MR. ECKLUND added that paper would also work in this process. He stated that if HB 63 became law, this legislation would mesh and wood ethanol would be the only one that would qualify for the credit. Number 1223 REPRESENTATIVE COWDERY asked if Ketchikan, being a rain forest, would have the best quality of wood suited for the wood ethanol, rather than the hard wood of other areas of the state. Number 1248 MR. ECKLUND stated that someone will be here to answer that question, but it is his understanding that hard woods are better for wood ethanol production. Number 1312 REPRESENTATIVE COWDERY asked, "Is the alcohol or whatever we're importing from Kansas or wherever, is it the same product or is it a different product. Do we -- or do you know?" Number 1328 MR. ECKLUND replied that it is ethanol. Number 1436 STEVE GATTO, Representative, BCI, stated that the company is based in Boston and is involved in the technology that allows the conversion of organic materials into ethanol. The significance is they able to take grass, sawdust, wood waste, fish waste, corn cobs, and other various agricultural wastes and then converts them into ethanol. He stated that ethanol is utilized in a component of gasoline because the emissions are cleaner. He stated that BCI is involved because they have a desire to build a plant. He pointed out that their goal would be to take advantage of the abundant feed stocks that appear to be available, utilize those feed stocks, convert them into alcohol and have an indigenous source of ethanol that could be blended and used in the various markets available in Alaska. Number 1554 MR. GATTO informed the committee that he toured the Ketchikan pulp mill to understand what the potential opportunities are to revitalize that particular region and to utilize the existing infrastructure to make it a producible asset again. He stated that BCI needs to have a lot of information because the investment is staggering. He explained that to begin the process of evaluation, just from an engineering prospective, costs over a million dollars. He asserted that there are a lot of uncertainties in Alaska with respect to the availability of materials. He stated that the Tongass Land Management Plan is due out and is creating pressure on the community of Ketchikan to revitalize and get back the jobs that were lost as a result of the mill closure. He stated that BCI has the opportunity to get involved in the process but direction is needed as well as the understanding of exactly what the availability is of the feed stocks. Number 1706 MR. GATTO asserted that BCI's interest is real. He stated that Alaska has an outstanding market opportunity to utilize the products that BCI makes. He said BCI makes a product called gypsum, which has no radioactivity. Ketchikan has a plant that would have the potential to use that product as it is currently being imported. Mr. GATTO explained that an opportunity is created by taking waste materials that currently exist and then utilizing the existing pulp mill. The waste product could be wood, fish waste, card board, paper sludge, or mixed waste paper. He stated that the net effect is an indigenous source of ethanol, that allows the blending of the product on a statewide basis. Number 1817 MR. GATTO stated that job creation, economic development, rural development and environmental opportunities to clean up areas would be the effect. He stated that the areas effected by beetlekill need to be cleaned up, as it has a pent up supply of material that nobody can do anything with and as a result is causing damage. He continued that Ketchikan would be the starting point of this opportunity because there is the pre-existing infrastructure. He stated that BCI's interest and desire is to work with the people of Ketchikan and the state of Alaska. He continued the BCI would like to understand all the elements that are necessary to bring to bear the feed stock at this location and to analyze the reusability of the existing mill. Number 1935 MR. GATTO continued that the key element is to make sure the 8 cent a gallon credit stays. He said, "The reason is simple. You folks are reeling right now because the federal government stepped in and said, `we're going to reduce the cut,' and that effects your timber industry which effects all of Alaska. The effect of getting rid of this credit does the exact same thing." He stated that it would prevent taking advantage of a vibrant opportunity. Number 2008 MR. GATTO stated that it would be a $30 million to $40 million investment for a 10 million gallon a year plant. He stated that the it would be a benefit to the people who would be employed by the plant. The current configuration of an 8 cent a gallon credit, is vital to the industry and can create a tremendous infrastructure opportunity for development both in Southeast Alaska and other areas of the state. Number 2054 REPRESENTATIVE COWDERY asked, "The conversion cost versus gasoline cost, in other words, after your up and running costs what do you anticipate that -- I am trying to relate to that to the cost of gasoline." Number 2128 MR. GATTO replied that he could not speak with certainty about the cost of gasoline in Alaska. He stated that he would relate it to the cost of gasoline in Massachusetts, where the wholesale gasoline pretax is about 75 cents, per gallon for regular unleaded 84 octane gas. He stated that he heard testimony in the House Finance Standing Committee about blending the 84 octane gasoline and requiring ethanol in the 10 percent blend to have a cost of about $1.35 a gallon. He stated that the federal credit of 5.4 cents a gallon coupled with the 8 cent a gallon credit, that the state provides, would be sufficient enough to cover the transportation costs to get ethanol to Alaska. Mr. Gatto said, "In terms of the cost of landing a product outside the state of Alaska the manufactured cost leaving that area where it is made is about $1.20 a gallon." Number 2223 MR. GATTO stated that ethanol is a petroleum product, however, its raw material base has nothing to do with the petroleum markets. He stated that the volatility and the problems that can happen within a specific environment could effect the end product. For example, 18 months ago grain prices were at there highest, corn was up to $5 a bushel therefore, the ethanol price would have to go up as well. He stated that typically the consumer is the one who would pay. Number 2350 MR. GATTO stated that the significance of BCI's technology is that BCI is utilizing materials that are wastes. He continued that in most cases people pay BCI to get rid of the wastes. For example, when Ketchikan pulp mill was in operation they generated sludge, BCI would provide the environmental benefit to take that material out and turn it into ethanol at 78 cents per gallon. He stated that is compared to the import price of $1.20 per gallon plus transportation fees to get the product to Alaska. He reiterated that the 8 cent credit is imperative to maintain the current industry and infrastructure to allow BCI to come forward. He asserted that ethanol will be blended in Alaska, it is just a matter of what is the better way. Number 2515 REPRESENTATIVE COWDERY asked if automobiles could run on the product. Number 2525 MR. GATTO replied that a lot of people would say yes. He stated that in Brazil it is being done. He stated that the real question is, "Are there any issues in Alaska that may alter that?" There is a major push in car manufactures to create vehicles called E-85 cars. These cars run on 85 percent ethanol and 15 percent gasoline. He stated that these cars have proven to be acceptable and cost the same as all gasoline vehicles. Number 2625 MR. GATTO asserted that there is an opportunity to take advantage of an existing market presence that has been created by the federal government and, at the same time, have a better, cleaner burning fuel. He stated that the opportunity is to make the process indigenous which would create jobs. Number 2733 REPRESENTATIVE HUDSON asked where the market would be for the 10 million gallons that could be produced in Ketchikan. Number 2751 MR. GATTO replied that it is a based on the assumption that the Tongass Land Management Plan comes in at a level that is indicative of BCI's ability to be there. He stated that would be at 300 million board feet, not at 80 million board feet which would impact BCI's ability to garner waste from that region. He stated that BCI's process provides an opportunity to generate roughly 85 to 100 gallons per ton of bone dry material. He said, "The Tongass Forest at 100 percent value of 300 million board feet, the amount of waste material that is generated in the corollary could be tremendous in terms of the alcohol production potential." He stated that the export potential is huge, there is a company in Seattle and Portland called TOSCO Corporation which blends ethanol, most of their product coming from the mid-west. He reiterated the export opportunity for Alaska. He stated that the market opportunity in the state for ethanol is quantified by the total gasoline pool. He said, "If the total gasoline pool is 116 million gallons and you can only blend 10 percent, well then you understand, the credit can only be so much in order to achieve the gain. So it is quantifiable." Mr. Gatto stated that if the Tongass Land Management Plan is favorable it would provide export opportunities. Japan imports almost all of their petroleum needs. Number 2944 REPRESENTATIVE COWDERY stated that in addition to Japan; Korea and Taiwan have major pollution problems and would therefore have a potential market for the product. Number 3015 MR. GATTO stated that he agreed. He explained that there was a World Bank study that discussed that Indonesia and China will consume as much petroleum as the United States does. He reiterated that utilizing an indigenous renewable source of energy provides an opportunity to limit imports to the United States, in addition to being implicit in terms of air quality. He stated that it will create significant air quality benefits as a result. He stated that he understands that it appears that it is taxing the roles today but the net effect will be the offset of costs that otherwise will have to be deployed somewhere to meet those air quality standards. Number 3145 REPRESENTATIVE COWDERY stated he supports this concept. Number 3235 ROBERT LOESCHER, Executive Vice President, Natural Resources Division, Sealaska Corporation, read the following statement into the record: "I'm pleased to appear today to lend Sealaska's enthusiastic support for HB 263. As the state's general motor fuel tax exemption for ethanol based fuel appears destined for repeal, HB 263 recognizes that there remain compelling public policy reasons for retaining a more targeted exemption for wood based ethanol. With this bill, the Alaska Legislature may help unlock one door to the revitalization of Alaska's timber industry. As Alaska's largest private timber owner, Sealaska supports that initiative. "With the loss of Southeast Alaska's two pulp mills, the market for the lower-end of Alaska's forest products has declined considerably. At the same time, timber owners in Southcentral and Interior Alaska face the challenge of marketing marginal timber infested by bark beetles. On a statewide basis, then, Alaskans are challenged by the need to find and encourage a reliable long term market for a considerable portion of the state's timber inventory. "The use of lower-end wood products to manufacture ethanol is a potential answer to that challenge and ethanol manufacturing would aid our forest industry in a different way as well. The already marginal economics of instate wood processing are driven even lower by the costly burden of disposing of sawdust and other wood wastes from saw mill operations. Indeed, Sealaska has estimated that opening a new sawmill in Southeast Alaska would carry with it the need to invest over $5 million in wood waste disposal facilities. Right now Mr. Chairman we have been at the benefit of Alaska Department of Environmental Conservation and local municipalities who have been taking our wood waste and creating golf courses but we are going to run out of areas to create golf courses. And with the two current options for wood waste disposal, that is either incineration or land filling being disfavored by regulators, the problem of solid waste disposal becomes a legal, as well as economic disincentive. "Legislation that offers a targeted tax incentive to: (1) create a market for lower end forest products; and (2) turn costly solid waste into profitable feed stock, would represent a concrete, creative and pro-active response to the ills that have befallen Alaska's forest products industry. "I cannot tell you, sitting here, that an exemption from an 8 cent per gallon tax will transform wood based ethanol production from a concept into reality. The truth of the matter is that less than one-fifth of 1 percent of America's total ethanol production is currently attributable to wood. We are dealing here with a concept, an exciting possibility and not a reality. But as Ms. Megan Smith of the National Biofuels Institute told the House Resources Committee on February 20th, some of our nation's most respected biofuels experts including those at the U.S. Department of Energy's National Renewable Energy Lab, are sufficiently encouraged by the prospect to have at least begun exploring this technology's feasibility. "Like any exciting new technology, the promise of this one depends on the willingness of good people to devote the time and money necessary to try, test and develop. And that, in turn depends on the existence of a favorable economic climate, which is what HB 263 would help create. "And it would do so, I would add, at little cost. If the legislation fails its purpose, it would cost nothing, for no wood based ethanol plant would exist to claim its exemption. And if it succeeds too well, spawning a healthy new industry that needs no further help, this legislature can take due credit for its birth, while future legislatures can amend the law to prevent excesses. "But succeed or fail, HB 263 would signal to all Alaskans that the Alaska Legislature has done what it could to aid a beleaguered industry. And that, I think, may ultimately prove both the finest virtue of this legislation." Number 3717 MR. LOESCHER stated that Sealaska Corporation supports HB 263. Sealaska Corporation has been committed to looking at reinvestment in the timber industry. He stated that the corporation owns 3 billion board feet of private timber and inventory and has been studying this technology for about a year. Number 3758 ALLYN HAYES, Representative, Ketchikan Pulp Company, testified via teleconference from Ketchikan in support of HB 263. He stated that Ketchikan Pulp Company is committed to a redevelopment plan and has been looking for smaller user tenants, an ethanol possibility would be a major user of some of the assets of Ketchikan Pulp Company. He stated that they have engaged redevelopment experts in the Pacific Northwest, to look at the buildings that would be useable for smaller tenants. He continued that one of the major buildings that would be the logical area for an ethanol plant, is scheduled for demolishing prior to the end of the year. Mr. Hayes explained that time is an important factor because the Tongass Land Management Plan will result in decisions as to what assets that should be kept. Number 4133 CHAIRMAN WILLIAMS asked if was at the end of the year that the demolition would occur. Number 4145 MR. HAYES stated that the goal is to have the central pulp preparations building down by the end of the year or at least by next spring because this facility needs to be heated in order to be maintained. Number 4231 CHAIRMAN WILLIAMS asked what the legislature could do to help Ketchikan Pulp Company. Number 4239 MR. HAYES replied that if an outside interest is interested in the Ketchikan Pulp Company it would lend itself to trigger the decision that would hold off the demolition of some areas. Number 4350 CHAIRMAN WILLIAMS indicated that Representative Gene Therriault was in attendance. Number 4353 JACK PHELPS, Executive Director, Alaska Forest Association, testified via teleconference from Ketchikan that it is a genuine possibility to not only recover some of the jobs lost, but also to address the problem of low-end wood and other waste materials, particularly sawdust. He stated that the state should not hinder any new investments in Southeast Alaska that would help alleviate the communities economic problems. He stated that the incentive for the use of ethanol in the state is a factor for BCI to come to Alaska and the loss of that incentive may not destroy the viability of the project but it would remove one of the main attractions for doing it. He stated that HB 263 would restore that incentive and it is important for this door to be kept open. He stated that he encourages the committee to move HB 263 forward. Number 4621 REPRESENTATIVE HUDSON stated that at this point the committee does not have the committee substitute before them. He stated he would like to move to adopt CSHB 263(TRA), Version B. Number 4640 CHAIRMAN WILLIAMS asked if there was an objection. Hearing none, CSHB 263(TRA), Version B, was adopted. TAPE 97-26, SIDE B Number 0017 REPRESENTATIVE HUDSON moved and asked unanimous consent to pass CSHB 263(TRA) out of committee with individual recommendations and the attached fiscal note. Number 0053 CHAIRMAN WILLIAMS asked if there was an objection. Hearing none, CSHB 263(TRA) was moved out of the House Transportation Standing Committee. Number 0120 REPRESENTATIVE HUDSON asked that the committee to consider an appointment of a Alaska Marine Highway subcommittee. Number 0134 CHAIRMAN WILLIAMS stated that he would like to appoint Representatives, Hudson, Kookesh and himself to that subcommittee and asked if there were any objections. Hearing none, it was so ordered. ADJOURNMENT Number 0142 CHAIRMAN WILLIAMS adjourned that House Transportation Standing Committee meeting at 11:00 a.m.