ALASKA STATE LEGISLATURE  SENATE RESOURCES STANDING COMMITTEE  February 10, 2020 3:30 p.m. MEMBERS PRESENT Senator Peter Micciche, Chair Senator John Coghill, Vice Chair Senator Click Bishop Senator Cathy Giessel Senator Joshua Revak Senator Scott Kawasaki Senator Jesse Kiehl MEMBERS ABSENT  All members present OTHER LEGISLATORS PRESENT Senator Lora Reinbold COMMITTEE CALENDAR  SENATE BILL NO. 171 "An Act relating to industrial hemp." - HEARD & HELD SENATE BILL NO. 161 "An Act relating to geothermal resources; relating to the definition of 'geothermal resources'; and providing for an effective date." - HEARD & HELD PREVIOUS COMMITTEE ACTION  BILL: SB 171 SHORT TITLE: INDUSTRIAL HEMP PROGRAM; MANUFACTURING SPONSOR(s): SENATOR(s) HUGHES 01/31/20 (S) READ THE FIRST TIME - REFERRALS 01/31/20 (S) RES 02/10/20 (S) RES AT 3:30 PM BUTROVICH 205 BILL: SB 161 SHORT TITLE: GEOTHERMAL RESOURCES SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR 01/22/20 (S) READ THE FIRST TIME - REFERRALS 01/22/20 (S) RES, FIN 02/10/20 (S) RES AT 3:30 PM BUTROVICH 205 WITNESS REGISTER BUDDY WHITT, Staff Senator Shelley Hughes Alaska State Legislature Juneau, Alaska POSITION STATEMENT: Introduced SB 171. JOAN WILSON, Assistant Attorney General Civil Division Commercial, Fair Business & Child Support Section Alaska Department of Law Anchorage, Alaska POSITION STATEMENT: Answered questions related to SB 171. DAVE SCHADE, Director Division of Agriculture Alaska Department of Natural Resources Palmer, Alaska POSITION STATEMENT: Testified in support of SB 171. ROB CARTER, Agronomist Division of Agriculture Alaska Department of Natural Resources Palmer, Alaska POSITION STATEMENT: Answered question regarding SB 171. LAURA OGAN, Legislative Liaison & Special Projects Commissioner's Office Alaska Department of Natural Resources Anchorage, Alaska POSITION STATEMENT: Participated in an overview of SB 161. STEVEN MASTERMAN, Director Division of Geological and Geophysical Surveys Alaska Department of Natural Resources Fairbanks, Alaska POSITION STATEMENT: Participated in an overview of SB 161. TOM STOKES, Director Division of Oil and Gas Alaska Department of Natural Resources Anchorage, Alaska POSITION STATEMENT: Answered questions regarding SB 161. ACTION NARRATIVE 3:30:41 PM CHAIR PETER MICCICHE called the Senate Resources Standing Committee meeting to order at 3:30 p.m. Present at the call to order were Senators Kiehl, Kawasaki, Coghill, Giessel, Revak, Bishop, and Chair Micciche. SB 171-INDUSTRIAL HEMP PROGRAM; MANUFACTURING  3:31:25 PM CHAIR MICCICHE announced that the first order of business would be SENATE BILL NO. 171, "An Act relating to industrial hemp." 3:31:49 PM BUDDY WHITT, Staff, Senator Shelley Hughes, Alaska State Legislature, Juneau, Alaska, explained that Representative Shelley Hughes worked with Senator Johnny Ellis in the 29th Alaska State Legislature to create an industrial hemp program in the state, but the legislation did not cross the finish line. In 2016, Senator Hughes took the lead on legislation to create an industrial hemp pilot program.. She was able to establish a feasible way for industrial hemp through Section 7606 of the 2014 Farm Bill, which allowed states to establish an industrial pilot hemp program. The U.S. Department of Agriculture (USDA) gave statements of principles on industrial hemp in August 2016 that outlined a path forward for the pilot hemp program and Senate Bill 6 was signed into law in April 2018. However, when taking direction from the federal government, things quickly changed. 3:33:47 PM MR. WHITT explained that with the passage of the 2018 Farm Bill, the new legislation removed industrial hemp from the Schedule I Controlled Substances [U.S. Department of Drug Enforcement Administration (DEA) classification]. The USDA released its final rule of regulations on the 2018 Farm Bill in October 2019 which provided additional information on the needed changes to the state's statutes to meet federal compliance. MR. WITT said the passage of the 2018 Farm Bill requires the state to make a few changes, which SB 171 does. The bill removes the industrial hemp pilot program statute and adds the authority to permit the manufacturing of hemp-related products and registration, and the renewal process for participation in the industrial hemp program. This authority resides within the Alaska Department of Natural Resources (DNR). He noted that the bill adds that a registrant could not have been convicted of a drug-related felony within the last 10 years. Further, the department must develop a program that is compliant with federal law and submit those regulations to the USDA for approval in order to have an industrial hemp program. The bill also fixes some incongruent language in the statutes. CHAIR MICCICHE asked Mr. Whitt to proceed with the sectional analysis for SB 171. 3:35:37 PM MR. WHITT paraphrased the following sectional analysis for SB 171: Section 1 AS 03.05.010(a) Page 1, Line 3 through Page 3, Line 8 Two subsections added to this section authorizing the commissioner of the Department of Natural Resources to include the manufacturing of products made from industrial hemp, as well as registration and renewal procedures, in the regulations for the industrial hemp program. He explained that the two subsections were added because the pilot program is being eliminated. Section 2 AS 03.05.076(a) Page 2, Lines through 24 Adds language that a registrant for the industrial hemp program is not eligible if they had been convicted of a felony involving a controlled substance within the last ten years in order to comply with the 2018 Farm Bill. MR. WITT noted that there is a grandfather provision, which was not in the 2018 Farm Bill, but is in the federal regulations, 7 CFR 990.6(e)(1). Section 3 AS 03.05.076(d) Page 2, Line 25 through Page 4, Line 11 Adds that the department shall develop an industrial hemp pilot program that complies with federal requirements and submit a plan for the program to USDA for approval. Section 4 Page 4, Line 12 Repeals AS 03.05.077, the establishment of the industrial hemp pilot program, and AS 03.05.079, which was the violation section for industrial hemp containing 0.3 and 1.0 percent THC. 3:37:33 PM MR. WHITT explained that AS 03.05.077 established the industrial hemp pilot program which is being replaced with a permanent program that resides within and is regulated by the Department of Natural Resources. The repeal of AS 03.05.079 eliminates the incongruency between that statute and AS 03.05.076(b)(4) and (d)(4). The department can use the latter provisions to regulate and manage hemp growers who are acting in good faith to keep THC levels in their product at or below the statutory limits. MR. WHITT said Senator Hughes requests the committee consider a friendly amendment to change the "shall" in AS 03.03.010(c) to "may" to align with other provisions in the bill that allow a bit of leniency for good actors. Subsection (c) currently reads: The Commissioner of Natural Resources shall issue a stop order to any person who is found to be producing a plant product with THC over 0.3 percent, regardless of whether the person is registered. SENATOR COGHILL noted that the proposed amendment would fall under section 1. He mentioned the stop order requirement and asked for help understanding the difference between the stop for the product transaction versus the producer transaction. MR. WHITT deferred to Rob Carter with the Division of Agriculture to explain what a stop order entails. 3:43:14 PM SENATOR KIEHL referenced the criminal conviction barrier to participating in the industrial hemp industry and asked who would be subject to the background check if the applicant is a limited liability company or corporation. He also inquired what the public safety need is for a 10-year lookback for some people and a 2-year lookback for others. 3:45:01 PM JOAN WILSON, Assistant Attorney General, Civil Division, Commercial, Fair Business & Child Support Section, Alaska Department of Law, Anchorage, Alaska, explained that 7 U.S.C. 1639p sets out the minimum requirements that a state plan must have to be acceptable by the federal government. In its language, the section says the following: In general, except as provided in clause (ii), any person convicted of a felony relating to a controlled substance under State or Federal law before, on, or after December 20, 2018, shall be ineligible during the 10-year period following the date of the conviction. MS. WILSON specified that in the case of cooperative associations, each person with the ability to benefit from the association would be subject to that bar. SENATOR KIEHL commented that hemp is not marijuana so the fewer barriers the better. CHAIR MICCICHE asked if the federal code would include employees or just members of the association who have ownership. MS. WILSON answered that her reading is the code includes people who benefit financially from the association in an ownership status. She said to include an employee would be quite a stretch. 3:47:28 PM DAVE SCHADE, Director, Division of Agriculture, Alaska Department of Natural Resources, Palmer, Alaska, testified that the division and department support SB 171. He said the division is trying to take a pilot program and make it a permanent program. He stated that the division analyzed the bill and recommended changes to give the department more leeway to allow conditioning from 1.0 percent THC to 0.3 percent thereby protecting the farmer from changes due to genetics or the environment. 3:49:02 PM CHAIR MICCICHE said he assumed the division will follow up with a letter on the suggested changes. MR. SCHADE answered yes. SENATOR BISHOP asked for a brief explanation of hemp farming, including the types of seeds the producers use, how the seeds are planted, and how the hemp is harvested. He remarked that neighboring hemp crops with higher THC levels could impact neighboring hemp crops. MR. SCHADE answered that there are hundreds of different varieties of industrial hemp that have a variety of uses. The product can be traditionally farming or grown in greenhouses. The department has set up the program in response to industrial hemp's many uses and has put in isolation distances and other factors to try to manage the crop differences. For example, growing for fiber is a variety that grows tall with a lot of mass and growing for buds might mean growing in a greenhouse. The department has developed a program that morphs depending on the different varieties and uses. 3:51:38 PM SENATOR KIEHL noted that the fiscal note showed $750,000 collected in year one. He asked how much the department is currently collecting in fees, how likely it is that fees will increase with passage of the bill, the number of current hemp farmers, and the expected increase in farmers. MR. SCHADE replied the division has not collected any fees because it is just finalizing the regulations for the handful of farmers in the pilot program. The division has identified approximately 20 manufacturers along with 700 to 1,000 retailers that are working in the industry. The industrial hemp program is designed to have regulations for registered growers, manufacturers, or retailers. A registrant can have multiple registration designations. Fees for the grower are fairly low but testing fees are expected to amount to several hundred thousand dollars. The division expects to register 600 to 1,000 entities that will require departmental resources in the $0.5 million range for the first months. Should the program grow, the division will have the leeway to hire more people because funding is receipt based. 3:53:54 PM SENATOR KIEHL commented that the cash seems to be in the manufacturing permit language in section 1. MR. SCHADE answered yes. He said the farming is relatively easy from a fee and supervision standpoint, but manufacturing is more intense where each manufacturer is going to have to get their product manufacturing system approved as well as working with the Alaska Department of Environmental Conservation (DEC) if the product is food related. The final stage is the retail market. He noted that the system is designed to track the product from the grower, to the manufactures, to the retail sales. Part of the concern is a lot of the cannabinoid products can have things in them that the department does not want. The concern is about heavy metals, pesticides, and to make sure zero THC is zero. The division will have a lot of focus on manufacturing. However, the state has a serious amount of product that is already there that the department must make sure is not synthetic. The product startup is going to be challenging. 3:55:39 PM SENATOR KIEHL stated his intention to review the retail piece in the bill. SENATOR COGHILL asked how the state is going to manage flexibility with the modified language in section 3 while still fitting within the U.S. code on USDA penalties. MR. SCHADE replied that is the dilemma. He explained that the USDA provided an interim final rule that set a one-year expiration for pilot programs. None of the states are happy with the rule but there is no workaround for parts of it such as the 10-year lookback for felony convictions relating to controlled substances. He said all states are probably looking for flexibility on the THC levels and testing time and Alaska will argue for rule exceptions due to its logistical issues. However, if the statute says that the division absolutely must follow the federal guidelines, then negotiating and working through the issues will be more difficult. 3:57:58 PM CHAIR MICCICHE asked how the department will pay for the program until there is sufficient participation from growers, manufacturers, and retailers. MR. SCHADE answered that the division has two general-funded positions in the current budget to standup the receipt -funded program. He assured the committee that he will not hire people until there is industry support to build the program over time. He said he has always been concerned when running a program on receipts to make sure there are receipts. The dilemma is stepping up a program with out the receipts in the first place. 3:59:23 PM SENATOR COGHILL noted that the requirement under [AS 03.05.010(c)] to put a stop order on product that exceeds the THC levels is not part of the bill. He asked how the department will deal with the product and the producer if the stop order statute uses the word "may." MR. SCHADE emphasized that producers are prohibited from taking a crop out of the field unless the division tests and approves the crop below 0.3 percent, or the division provides written approval to take the crop out of the field. Even without the stop order there is no sale because the division is in control all along. The stop order is more for a marijuana-considered crop that tests 1.0 percent THC, which is outside the bounds of the industrial hemp program. The shall-to-may revision changes the requirement for the division to issue a notice of violation and a $500 fine even if there was an unintended error and an intent to fix. He explained that the division did not want to completely delete a notice of violation because of the possibility of a bad actor. SENATOR BISHOP asked if producers would grow most of their industrial hemp in hoop houses rather than on thousand-acre fields that use combines for harvesting. He said he is trying to imagine how the division applies a stop order after testing for a 100 or 200-acre field. He emphasized that he is not trying to inhibit the process but rather is looking for a better understanding of where the state thinks the market is headed. 4:02:35 PM ROB CARTER, Agronomist, Division of Agriculture, Alaska Department of Natural Resources, Palmer, Alaska, replied there will be individuals producing on large acreage if they choose to participate in the program. The division has seen exponential growth in industrial hemp fields across the nation for biomass, fiber, or green manure. They expect applicants to grow on large scale, traditional agriculture using traditional farming methods, depending on the hemp variety grown and intended use. He explained that an offered notice of violation or stop sale occurs if the division's sample shows the raw industrial hemp tested above 0.3 percent and below 1.0 percent THC. The proposed regulations would have an option to recondition the lot by blending with another lot. However, the farmer cannot process or move the lot from the farm or the farm's drying facility. 4:04:53 PM CHAIR MICCICHE opened public testimony. Seeing none, he said public testimony will remain open for future meetings. 4:05:18 PM CHAIR MICCICHE held SB 171 in committee. 4:05:31 PM At ease. SB 161-GEOTHERMAL RESOURCES  4:05:55 PM CHAIR MICCICHE announced that the final order of business would be SENATE BILL NO. 161, "An Act relating to geothermal resources; relating to the definition of 'geothermal resources'; and providing for an effective date." 4:06:32 PM LAURA OGAN, Legislative Liaison & Special Projects, Alaska Department of Natural Resources, Anchorage, Alaska, explained that SB 161 seeks to attract attention to Alaska's geothermal exploration program. The bill will align with the state's existing oil and gas exploration license program and will diversify the state's energy portfolio. It will also increase the potential for affordable renewable energy to both rural communities and remote resource extraction projects. 4:07:31 PM CHAIR MICCICHE welcomed Senator Reinbold to the committee meeting. 4:07:47 PM STEVEN MASTERMAN, Director, Division of Geological and Geophysical Surveys, Alaska Department of Natural Resources, Fairbanks, Alaska, explained that geothermal resources offer the potential for sustainable, affordable, local and renewable power generation. He said Governor Dunleavy's administration supports enhancing geothermal energy development in Alaska and SB 161 is a progressive step in that direction. MR. MASTERMAN specified that the bill removes obstacles for exploration and development of Alaska's geothermal resources in a number of ways. The bill provides for five-year exploration licenses instead of the current two-year permits with one additional year, to allow more time to meet the challenges of bringing remote exploration projects into production. MR. MASTERMAN explained that SB 161 changes the statutory terminology for permits to lease to more closely align the geothermal program with the state's dominant model of petroleum leasing. It allows conversion of geothermal exploration licenses to production leases upon mutual state lessee approval of a workplan instead of upon production of commercial quantities to provide the state more flexibility in incubating a new resource industry. He detailed that the bill nearly doubles the maximum size of geothermal lease holdings to 100,000 acres to accommodate the expansive size of geothermal resource systems. This will attract greater interest in geothermal resources because developers will have a greater opportunity to explore the appropriate area to delineate geothermal systems. MR. MASTERMAN specified that SB 161 eliminates statutory reference to surface owners' preferential rights to purchase subsurface geothermal exploration rights to eliminate uncertainty among geothermal explorers and investors. It updates and refines the definition of a geothermal resource and provides an exclusion for domestic use of geothermal energy. He said that by enacting SB 161, Alaska will continue to responsibly manage its natural resources in a manner to provide maximum benefits to Alaskans through the development of needed energy sources. 4:10:36 PM MR. MASTERMAN provided the following sectional analysis of SB 161: Section 1 Relates to refining the responsibilities between the Division of Oil and Gas, and the Alaska Oil and Gas Conservation Committee. Sections 2-4 Relates to changing from permits to leases. Section 5 Increases the allowable acreage an entity can hold to 100,000 acres. Section 6 Amends the duration of geothermal leases and allows license conversion to leases. Section 7 Adds new clauses that allows the creation of similar unit agreements to those within the Division of Oil and Gas currently utilizes to manage oil and gas development. Section 8 Refines the definition of a geothermal resource. Section 9 Clarifies that DNR manages leasing and licensing of geothermal resources. Section 10 Exempts domestic use of geothermal energy from leasing requirements. Section 11 Updates the definition of geothermal resources. Sections 12-16 Conforming changes and provides for effective dates. 4:11:59 PM MR. MASTERMAN said the Alaska Oil and Gas Conservation Committee and the Division of Oil and Gas submitted zero fiscal notes. The fiscal note from the Division of Geological and Geophysical Surveys (DGGS) reflects restarting the Geothermal Program, which was terminated five years ago. The program would synthesize and provide data on Alaska's geothermal resources to support the Division of Oil and Gas leasing of geothermal resources, and to attract and assist companies wishing to develop the state's resources. The DGGS position would monitor developments in the quickly changing geothermal technology and seek to attract federal funding to support investigations to develop the state's geothermal resources. 4:13:40 PM SENATOR KIEHL noted the earlier testimony about removing the preferential right of a surface owner to the geothermal resources under their land and the deleted language that talks about notice. He asked, should the bill pass as currently drafted, what notice a surface owner would receive when there's a proposal to lease the geothermal rights under their land. 4:15:05 PM TOM STOKES, Director, Division of Oil and Gas, Alaska Department of Natural Resources, Anchorage, Alaska, answered that the notice would be similar to oil leases where entities on the division's mailing list would receive public notice and public comment would be solicited. SENATOR KIEHL asked if the mailing list includes all the surface owners. MR. STOKES answered yes. CHAIR MICCICHE directed attention to the language in section 7, lines 28-30, "The commissioner may not reduce royalty on geothermal lease issued under this section in connection with a unit agreement." He asked how royalties are paid on geothermal resources and if the payment is British thermal unit (BTU) based. MR. STOKES answered that the current geothermal royalty rate is 1.75 percent of gross revenue. CHAIR MICCICHE asked if gross revenue means that there is no royalty payment if the geothermal operation is not profitable. MR. STOKES answered that the royalty rate is based on gross revenue, not net revenue. 4:17:19 PM CHAIR MICCICHE summarized that the 1.75 percent is an expense that is not based on the profitability of the operation. MR. STOKES answered correct. CHAIR MICCICHE asked for an explanation of the sentence, "Except as provided in (f) and (j)." MR. STOKES explained that the rate charged to the company initially would be on a per acre rental cost basis. Once the lease becomes commercially viable, the rate would change from a per acre rental to the royalty rental. CHAIR MICCICHE referenced subsection (j) in section 7 on page 4, lines 3-5 and asked if it allows the commission to adjust royalty requirements on a postproduction basis. MR. STOKES said he believes the subsection is referring to renewals subsequent to the initial 20-year lease. 4:19:22 PM SENATOR KIEHL asked if the bill maintains the division in the existing statutes between little guys and industrial operations or if people will have to lease a minimum of 40 acres to tap into geothermal to heat their cabins in the winter. MR. STOKES replied the bill refers to commercial operations. An individual owner does not need a license to utilize geothermal resources under personal property. SENATOR KIEHL asked if an individual will continue to be able to use the geothermal resources under their property if a company leases those resources. MR. STOKES answered that it would only change if the individual owner turned their geothermal resource into a commercial operation. SENATOR KIEHL pointed out that there are some communities around the state that are using geothermal resources. He asked how potential conflicts will be worked out in the future if there was commercial interest in those geothermal resources. 4:21:44 PM MR. STOKES answered that those details would have to be worked out. He reiterated that the intent is for commercial operation and not for local usage. CHAIR MICCICHE suggested the department think about Senator Kiehl's question and provide the committee with their vision of how they will address a geothermal conflict. He said he knows of instances where Alaskans have used local resources for generations. SENATOR BISHOP referred to subsection (a) in section 2 that read, "The commissioner may, under regulations adopted by the commissioner, grant prospecting licenses and leases to a qualified person to explore for, develop, or used geothermal resources." He pointed out that a drill site has drilling fluids, drilling mud, and cement and asked what the department is thinking about for their regulations. MR. STOKES replied it would be equivalent to what the department does with oil and gas. The lessee would have to apply for a license and within the application the department would understand their level of operations and address any hazards or associated drilling. 4:23:53 PM CHAIR MICCICHE asked if he agrees that a prospecting license or lease is not required for exploration. MR. STOKES answered no; a commercial entity is required to have a license for exploration. CHAIR MICCICHE summarized that a license is not required for exploration or development if the intent is for domestic, noncommercial, or small-scale industrial use, and the ground temperature is not more than 30 degrees Celsius. MR. STOKES answered correct. SENATOR GIESSEL asked if the department could provide a map showing the potential geothermal areas in the state, including the nearby population centers that might be using the energy sources. MR. MASTERMAN answered yes. 4:25:21 PM CHAIR MICCICHE asked if there is a fairly good probability that there is domestic noncommercial or small-scale industrial use throughout the state that the department is not knowledgeable about. He inquired if there is a reason why the smaller-scale users would register with the department at some point in their production process. MR. MASTERMAN replied the technology for home-use systems that use ground source heat pumps will evolve, become more efficient, and develop into more widespread use. The department is trying to segregate that small-scale use from the heavier industrialized use that might be generating power for a community-scale operation or a large industrial facility. He noted that the warmer parts of the state will more likely see greater expansion and less so in places that are colder. CHAIR MICCICHE explained that his question ties to Senator Giessel's query on what the department knows about geothermal resources and Senator Kiehl's question about protecting smaller- scale users with regards to their unlikely affect on a commercial entity. 4:27:40 PM MR. MASTERMAN said there are a number of ways that other states have addressed the issue of safeguarding and segregating home use of geothermal energy from industrial uses. He pointed out that industrial uses of geothermal energy require a nearby hot spring system, fumarole system, or a local volcanic field that provides the large-scale heat source for a commercial operation. There are only a couple of places in the state where those things overlap with surface ownership or subsurface use of the geothermal resource and most small-scale users will steer clear because of the associated extra costs. Most residential- type uses will be shallow and on the low temperature side of the temperature spectrum. He said there will be a natural separation between small-scale users and commercial operations. 4:29:45 PM CHAIR MICCICHE said the committee did not want to put the geothermal presenters on the spot. He suggested that the queries will provide something to think about for a follow-up meeting. SENATOR GIESSEL asked if there are tax credits available for exploration and geothermal energy production. MR. MASTERMAN answered that he not familiar with that. SENATOR GIESSEL said the reason she asked is that the state gets itself into a revenue dilemma with tax credits. She said her intent is to make sure that there are not random exploration tax credit applications out there for geothermal energy. CHAIR MICCICHE said he would like additional information at the next meeting. He recalled when there was excitement a few years ago on the westside of Cook Inlet for a geothermal program. He said he did not know if the program sunsetted. SENATOR KIEHL noted that he could not track what the bill was changing and why. He asked the presenters to follow up on what the state is defining as geothermal resources. CHAIR MICCICHE said the committee would like their questions answered before moving the bill forward. 4:32:20 PM CHAIR MICCICHE held SB 161 in committee. 4:32:57 PM There being no further business to come before the committee, Chair Micciche adjourned the Senate Resources Standing Committee meeting at 4:32 p.m.