Legislature(1999 - 2000)
03/23/2000 01:55 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 290
An Act relating to stranded gas pipeline carriers and
to the intrastate regulation by the Regulatory
Commission of Alaska of pipelines and pipeline
facilities of stranded gas pipeline carriers.
LORALI MEIER, STAFF, REPRESENTATIVE BEVERLY MASEK, stated
that before a North Slope natural gas pipeline project can
proceed, certain amendments to existing State statutes would
be required. These changes are intended to:
? 1) Apply to all potential North Slope natural gas
pipeline projects,
? 2) Clarify respective State and federal jurisdictions
in regulating such projects,
? 3) Be complementary to a non-discriminatory federal
process which will apply to any export volumes of North
Slope natural gas,
? 4) Provide for local (in State) gas transportation and
sales; and
? 5) Provide needed exemption from public utility
designation for a North Slope natural gas pipeline
project.
Ms. Meier noted that HB 290 would amend the Pipeline Act (AS
42.06) to define a North Slope natural gas pipeline and
would clarify that the Regulatory Commission of Alaska's
(RCA) authority in regulating a North Slope natural gas
pipeline, extends only to the intrastate transportation of
gas through such a system, so as to define a fair,
predictable and timely process to identify and dedicate
sufficient initial capacity in a North Slope natural gas
pipeline. Also it would establish the criteria for needed
pipeline system expansions over the life of a North Slope
natural gas pipeline system to accommodate increased demand
for in State gas supplies.
Ms. Meier pointed out that HB 290 would amend the Public
Utilities Act (AS 42.05) to clarify that North Slope natural
gas pipeline systems are exempt from the requirement of
operating as a public utility. The bill would also amend
the right-of-way Leasing Act (AS 38.35) to limit the
requirement of common carriage for North Slope natural gas
pipeline systems to the transportation of intrastate gas
volumes.
Ms. Meier stated that HB 290 would define the types of
intrastate transportation services that would be available
in a North Slope natural gas pipeline system. The
legislation will provide that the North Slope natural gas
pipeline carrier may charge separate rates for those
services. Additionally, they would charge a reservation fee
for reserving capacity in a North Slope natural gas pipeline
system.
Ms. Meier concluded that collectively, these changes are
intended to provide greater certainty and predictability in
the regulation of North Slope natural gas pipeline systems.
The increased certainty would enhance the ability of gas
export project sponsors to market Alaska's North Slope
natural gas reserves, to compete more effectively with
alternative export projects and to attract the large
investments required to construct and operate the pipeline
and related facilities.
In response to Co-Chair Mulder, Ms. Meier explained that the
proposed legislation was the "second phase" of the Stranded
Gas Act. She added that the Stranded Gas Act established a
regulatory framework for a natural gas pipeline system. It
applies to any project as well but is not project specific.
Representative J. Davies asked the significance of why the
pipeline would not be operated as a private carrier but
instead it would be operated as a common carrier. Ms. Meier
replied that any project sponsor would not want to
distribute natural gas to a residential area. They would
want to leave that up to the Fairbanks Natural Gas Industry.
The local distribution companies will act as public
utilities.
JIM EASON, REPRESENTATIVE, ANS LNG SPONSOR GROUP, ANCHORAGE,
spoke to the group's membership. He reiterated that the
intent of the bill is straightforward and was written to
provide clarity of federal and State regulations for a
pipeline. Additionally, it is intended that the regulatory
commission would regulate the intrastate portion, the part
in the State available for use. The Department of Energy
would regulate the export portion.
Mr. Eason clarified that the legislation provides for a
system to establish how much gas would need to be moved to
insure that such a project would be creating a system large
enough to be able to compete in projected demand for instate
use.
Mr. Eason emphasized that the most important purpose of the
legislation is to provide certainty to the market and to
insure that the volume of gas needed to contract will be
available for a long period of time. He added that it is
important to insure that the need to guarantee the gas in
State is accommodated, which could be accomplished through
the oversight of the regulatory commission.
KEN BOYD, (TESTIFIED VIA TELECONFERENCE), DIRECTOR, DIVISON
OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES, offered to
answer questions of the Committee. He noted that the bill
is outside the Division of Oil and Gas and involves the RCA
and the State Pipeline Coordinators Office.
Representative J. Davies asked about the volume limit. Mr.
Eason responded that the regulatory commission would approve
the construction of a line larger than any previously
constructed before the commission. He believed that the
cost could be assessed fairly. The intent of the language
would insure that the pipeline sponsor would not be required
to build a line.
Representative J. Davies questioned the language
"substantiated by written commitments and contract"
previously mentioned. He asked if that would include more
than the sponsor group. Ms. Eason did not believe that it
would specifically include the sponsor and its contracts, as
it would be for export purposes. The intent is that the
regulatory commission could monitor the in state use. It is
important that there a system be in place, which could
expand the capacity as in State demand grows. It is
critical to have some idea of the expected demand in the
State.
ROGER MARKS, (TESTIFIED VIA TELECONFERENCE), DEPARTMENT OF
REVENUE, ANCHORAGE, noted that he had been coordinating
review of the bill for the Administration. The
Administration endorses the bill except for one problem on
the tariff structure. He noted that Nan Thompson was on
line to address that concern.
JERRY MCCUTCHEON, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE,
stated that there is no such thing as stranded gas as
associated with an oil reservoir. He noted that there were
only two that he knew about which could qualify for stranded
gas. He did not believe that the proposal would be
beneficial to the residents of the State. He emphasized
that the gas line would cost half of the actual recoverable
oil.
NAN THOMPSON, (TESTIFIED VIA TELECONFERENCE), REGULATORY
COMMISSION OF ALASKA, ANCHORAGE, stated that the interest of
the Regulatory Commission would be to protect the interest
of potential instate users. She noted that from her
perspective, the bill is "almost" there, with only one more
issue remaining. That issue is the tariffing methodology.
The issue has been raised but has not been discussed
thoroughly enough for everyone to understand the
implications of it. She asked to assist in that endeavor.
Ms. Thompson noted that Co-Chair Therriault had asked for a
list of items that would be excluded from a utility pipeline
tariff. There are Alaska Public Utility Commission (APUC)
decisions excluding the following types of expenses from
utility rates, but no comparable decision excluding them
from pipeline rates:
? Public relations costs
? Lobbying expenses
? Charitable contributions
? Association dues
? Extraordinary management compensation
? Research and development costs
? Acquisition adjustments
? Pensions and employee benefits
Ms. Thompson noted that only imagination and conscience
limit the types of expenses, which a pipeline owner could
ask be included in the tariff. The sponsor group correctly
noted that RCA would have the authority to exclude these
expenses when they are presented for review. However, RCA
could not exclude them with the assurance that the pipeline
owner would not appeal. An appeal could mean time delays
and uncertainty in the business environment and additional
legal expenses for RCA and carriers. The carriers would be
entitled to argue that those legal expenses should be
included in their rates.
Ms. Thompson noted that the difference between the utility
and pipeline tariff methodology, and how it affects RCA's
decision-making process, is well-ar1iculated in a 1992
pipeline decision which states that:
"The methodology the Commission uses to determine the
value of the property of public utilities is set by
statute, A.S. 42.05.441 (b) reads as follows: `In
determining the value for rate-making purposes of
public utility property used and useful in rendering
service to the public, the commission shall be guided
by the acquisition cost, or, if lower, the original
cost of the property to the person first devoting it to
public service, less accrued depreciation. plus
materials and supplies and a reasonable allowance for
cash working capital when required.' There is no
similar provision under AS 42.06. Thus, the Commission
is free to determine the appropriate way to value
pipeline property for the purposes of ratemaking."
Ms. Thompson noted that the Alaska Public Utilities
Commission (APUC) went on, in that forty-page opinion, to
discuss the options and arguments of the parties and make a
decision. RCA can determine what is just and reasonable,
but the lack of case law in this area to guide the RCA and
the pipeline owners creates room for arguments. She noted
that arguments mean delay and litigation expenses and a less
predictable environment for instate shippers. The RCA would
generally follow its utility tariff decisions, except where
the Federal Energy Regulatory Commission (FERC), the federal
agency with pipeline jurisdiction, has a different rule.
Thus, a prospective in-state shipper would have to reference
federal case law to predict the likely outcome of a pipeline
tariff case.
Ms. Thompson advised that the APUC has set rates for only
two oil pipelines in this State. The Kenai Pipeline case
cited above was one, and Cook Inlet Pipeline was the other.
Both cases were extensively litigated. The APUC has set
tariffs for all other oil pipelines based on settlements
between the affected parties.
Ms. Thompson concluded that APUC has set rates for only one
gas pipeline under the pipeline statute. The affected
parties agreed to those rates as part of a comprehensive
settlement package that has no predetermined value. All
other gas pipeline tariffs have been set using a utility
tariff methodology.
Co-Chair Therriault asked for clarification of what was
involved in the various tariff methodologies. Ms. Thompson
stated that in the utility statute #381, lists all the
exclusions and the exceptions to it. She indicated that the
other differences have been derived from decision-making
laws. She admitted that this is difficult to articulate and
offered to provide it in writing to the members. Ms.
Thompson pointed out that if there were a clear rule, it
would be easier to predict the outcome. She offered to
provide a comprehensive list.
Co-Chair Therriault noted that the interest is that the
tariff gets applied against the value of the resource or
passed on to the users. Ms. Thompson commented that
ultimately the impact of this would be, that if the
utilities have to pay less, those lower costs would be
passed on to their consumers.
Mr. Eason responded to comments made by the previous
speakers. He observed that the focus of testimony had been
the issue of lobbying and regulatory costs. Mr. Eason
believed, based on prior conversations, that case law exists
dealing with their handling of utility tariff issues. He
added that concerns of costs were directed where the
regulatory commissioner was dealing with "settled" tariffs.
Mr. Eason stated that the rate making involved has been a
different process than he would have envisioned. Mr. Eason
noted that other pipeline disputes have been resolved
through settlement to determine what would and would not be
allowed as a tariff.
Mr. Eason advised that Ang Lng had accurately reflected
their understanding of the Commissioner's authority. He did
not foresee the likelihood of disputes coming at that point.
The decisions of permitting and certificating, and the terms
would be addressed by the Commission. Mr. Eason added that
Ang Lng, consequently, does not see the same urgency to
establish the ratemaking methodology at this time.
Mr. Eason stated that they are opposed to enclosing a
utility rate making methodology. He noted that under either
statute, the chairman has broad authority to allow or
disallow changes. He emphasized that the proposed
legislation does not allow anything to happen which the
regulatory commissioner can not portray. HB 290 would
foreclose any discussion of rates on return and methodology.
Mr. Eason commented that the Commissioner pointed out that
there are existing pipelines in the State that are regulated
under the utilities act. He noted that all of those
pipelines requested that inclusion. None of them were
required to do that. He reiterated that any project
developed to move North Slope natural gas, would be the only
pipeline required to file tariffs under the proposed system.
Co-Chair Therriault asked Ms. Thompson to respond to the
"just and reasonable" reference which would preclude many
unjustified expenses.
Ms. Thompson agreed with Mr. Eason that all of the current
pipelines using the utility tariff making methodology have
requested that treatment. She thought that Mr. Eason was
suggesting the opposite of her argument which is that the
pipeline owners do stand to have less of a recovery. Under
either tariffing methodology, the commission is responsible
for guaranteeing that the rates are just and reasonable.
They would get a fair rate of return under either
methodology. It is more likely, because of the uncertainty
in the legal field that they stand a chance to make even a
little more under a pipeline methodology. She agreed that
was something that RCA could control and that the public
would have the opportunity to comment.
Ms. Thompson noted that her concern was with the potential
in state users who are trying to decide even before they see
the tariff, if they want to participate in the project. The
way that the bill is written, when the pipeline is being
designed, the utilities would have to make a decision on how
much gas they would want to use in the next several years to
insure an adequate capacity to accommodate that. Ms.
Thompson stated that it would be easier to make that
business decision if there were some certainty in what the
shipping rates were going to be. Ms. Thompson continued,
the in-state shipper will have a better idea of what they
are going to pay in order to make a better business decision
regarding whether or not they will want to participate.
Ms. Thompson noted that Mr. Eason's initial comments were
regarding the settlement. Most of the pipeline tariffs in
the State have been settled between the parties. She
believed that a settlement would not be likely to occur in
the case proposed by Mr. Eason. The concern is that when
there are a number of potential users, that group would be
too big to make it likely to reach a settlement. The impact
is that there is not much case law or precedence in this
State regarding what is an acceptable settlement. She
stated that it would be easier to make the decision if the
shipping rates were known.
Representative G. Davis asked if the proposed amendment
would address Ms. Thompson's concern. Ms. Thompson replied
that the change required to change a utility methodology so
to promote the in-state use of gas should be left to the in-
State users.
Mr. Eason advised that Chairman Thompson is fully committed
to the public's interest. He believed that her view was
that the public interest is advanced by the utility rate
making methodology.
(TAPE CHANGE HFC OO - 81, SIDE 1)
Mr. Eason noted that they both believe that the majority of
the pipeline tariffs settlements are established by
settlement. The concern voiced by Ms. Thompson is that
there will not be a settlement. Mr. Eason, however,
disagreed. He advised that a small group is undertaking
this task and that they would want to "sit down and settle".
He observed that Mr. Eason spoke to promoting the use of in-
State gas. He noted that there have been lengthy
discussions with in-State users of gas. In the process of
designing the language to determine the threshold, those
users suggested that fears expressed by Ms. Thompson were
premature and inappropriate.
Co-Chair Therriault stated that he wants the gas-line to be
developed and that he wants the best price possible for his
constituents without jeopardizing the pipeline. He noted
that he sympathized with what the price to the consumer
would be. Mr. Eason emphasized that the difficulty is that
no one knows the answers. Millions of dollars are being
spent with uncertainty of whether a market exists and
whether or not the cost can be cut significantly to maintain
the safety and integrity of the pipeline. Within that mix
lays are all the concerns regarding the future prices of gas
and he recognized that everyone has valid concerns.
Mr. Eason noted that the issue is that they can not define
the sensitivities on the fiscal side. Those discussions
will happen in public settings when the facts and numbers
are on the table. He asked if it made sense to have a
pipeline act and a utilities act if enough methodology is
not available to use it. The Legislature decided to have
both and to have provisions for either party to present
their arguments. Mr. Eason reiterated that this would be the
first time that a project would be required to file a rate-
making methodology. He acknowledged that it would be a
large policy step; the final implications are not yet known.
This project would be regulated under the pipeline act and
tariffed under the other. The situation will be and will
establish a one-time deal.
Co-Chair Therriault stated that what is allowed under "just
and reasonable" would provide more certainty for the in-
State user and for Ang Lng. Ms. Eason disagreed. He stated
that the commission has the authority to specify what would
be disallowed, and could include items that have already
been established under existing case law. He noted that Ms.
Thompson's concern is that there is and has been litigation
over whether or not they have the authority to exclude
certain items after they have already been settled. Mr.
Eason believed that was a very different scenario than what
this case presents.
Ms. Thompson countered that the statute states that both the
utility and the pipeline tariffing statutes that the
Commission will approve just and reasonable rates. The
utility has a couple of specific exclusions. There is case
law, which defines what is reasonable and just, and the
treatment in certain kinds of expenses which are allowable.
Ms. Thompson stated that when a party has an economic
interest, there is not clear precedent case law, then the
lawyers will have a difficult time proceeding with that
case. It could end up in an appeal which would then have to
go to the Superior Court. She noted that she was troubled
that in those situations, the prospective in-State users
would not know what they would be required to pay.
Co-Chair Therriault requested that Ms. Thompson provide a
list of those items which are not allowed, under the utility
method. He advised that HB 290 would be HELD in Committee.
He advised that there was an amendment, 1-LS1269\K.4,
Chenoweth, 3/24/00, in member's packets that addressed the
use of the resource. [Copy on File].
Mr. Eason stated that he had concern with the title change
recommended by the amendment.
Mr. Boyd added that he shared Mr. Eason's concern with the
title change in the amendment. He believed that the
amendment would place local need above the projected revenue
need of the State as a whole.
HB 290 was HELD in Committee for further consideration.
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