03/17/2014 01:00 PM House RESOURCES

             HB 367-DIESEL FUEL STORAGE TAX CREDIT                                                                          
                                                                                                                                
1:58:44 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  announced that the  final order of  business is                                                               
HOUSE  BILL NO.  367,  "An  Act creating  a  diesel fuel  storage                                                               
facility tax  credit for public  utilities; and providing  for an                                                               
effective date."                                                                                                                
                                                                                                                                
1:59:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DOUG  ISAACSON, Alaska State  Legislature, offered                                                               
some of  the history to the  introduction of the bill,  its need,                                                               
and  its  broader application.    He  reported that  the  closure                                                               
announcement by  Flint Hills Refinery revealed  an adverse effect                                                               
to   the  consumer   as  the   availability   of  fuel   storage,                                                               
specifically  HAGO (heavy  atmospheric gas  oil) and  LAGO (light                                                               
atmospheric  gas oil),  to Golden  Valley  Power for  electricity                                                               
generation  would  now   be  limited.    He   explained  that  an                                                               
agreeable, competitive  lease price  between Golden  Valley Power                                                               
and Flint  Hills would  be necessary to  forego the  necessity of                                                               
building new tanks  for the storage of five to  ten days of fuel.                                                               
He  shared   that  the   Alaska  Village   Electric  Cooperative,                                                               
Incorporated  (AVEC)  had submitted  a  letter,  dated March  17,                                                               
2014, detailing  its needs and  its support of the  proposed bill                                                               
[Included in members' packets].   He reported that AVEC owned and                                                               
operated  47  bulk fuel  tank  farms,  about  half of  which  had                                                               
benefited from  the Denali  Commission funding  for improvements.                                                               
He declared that it was necessary  to address the "woeful need of                                                               
upgrades and expansion."  He noted  that it was not his intention                                                               
to keep Alaska  indentured to diesel fuel, although  it was clear                                                               
that  diesel  would  be  around   for  decades  to  come  as  its                                                               
infrastructure was  already in place.   He explained that  HB 367                                                               
would offer  a tax credit  similar to the previously  offered gas                                                               
storage credits.   Although the proposed bill would  allow for up                                                               
to  $15 million  in credit,  it was  more likely  to be  about $5                                                               
million,  or 50  percent  of  the cost.    He  declared that  the                                                               
proposed  bill  was  not  trying  to  incentivize  other  refined                                                               
products to  Alaska, but  to offer the  lowest delivered  cost to                                                               
the  consumer  in  Alaska.   Therefore,  the  beneficiaries  were                                                               
restricted to Alaska  regulated utilities, and he  noted that the                                                               
attached  fiscal note  [Included  in  members' packets]  revealed                                                               
there were  not a lot  of these.   He declared that  the proposed                                                               
bill would  offer the possibility  for substantial relief  to the                                                               
affected communities  in the service  districts and  minimize the                                                               
economic  impact on  communities dependent  on Flint  Hills fuel.                                                               
He said that encouraging industry  and affordable power should be                                                               
of great importance to the state.                                                                                               
                                                                                                                                
2:05:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P.  WILSON  noted  that  these  tax  credits  had                                                               
originally  been   intended  for  small   communities  throughout                                                               
Alaska, but  this proposed  bill would now  offer this  credit to                                                               
much larger communities and would set a different precedent.                                                                    
                                                                                                                                
REPRESENTATIVE  ISAACSON, in  response,  said that  AVEC had  not                                                               
been  a past  recipient  and  its 55  community  members had  not                                                               
received storage  credits of  this nature.   He pointed  out that                                                               
the proposed bill restricted this  to Alaska regulated utilities.                                                               
He said that the Golden  Valley Electric Association region would                                                               
continue to  need HAGO  and LAGO fuel  until an  alternative fuel                                                               
could  be found  for  its antiquated  diesel  driven turbines  in                                                               
North  Pole.   He  described  the maximum  usage  from the  other                                                               
electric generation  in the  area.  He  stated that  the proposed                                                               
bill  would  allow  the  opportunity  for  fuel  storage  to  the                                                               
Fairbanks  and North  Pole area  in addition  to the  other small                                                               
communities.                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON pointed out  that her community  "is in                                                               
the same boat  certain times of the year."   She relayed that the                                                               
community paid extra when it was necessary to use diesel fuel.                                                                  
                                                                                                                                
REPRESENTATIVE ISAACSON  replied that there was  currently a fuel                                                               
surcharge on each  monthly bill in his region, and  it was always                                                               
in excess of the cost to  generate power.  He declared that there                                                               
was  not a  firm supply  of  hydro power  or natural  gas in  the                                                               
Fairbanks region.                                                                                                               
                                                                                                                                
REPRESENTATIVE P.  WILSON said  that she  still had  concerns for                                                               
the proposed bill.                                                                                                              
                                                                                                                                
REPRESENTATIVE ISAACSON  explained that there were  Golden Valley                                                               
Electric Association representatives  to specifically address any                                                               
of her concerns.                                                                                                                
                                                                                                                                
2:10:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ISAACSON,   in  response  to   Co-Chair  Saddler,                                                               
explained that HAGO  and LAGO were specific cuts  in the refining                                                               
tower,  as   different  products  were  distilled   at  different                                                               
temperatures.                                                                                                                   
                                                                                                                                
CO-CHAIR SADDLER asked what HAGO stood for.                                                                                     
                                                                                                                                
REPRESENTATIVE ISAACSON  said that  he would  report back  to its                                                               
meaning.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  OLSON offered  his understanding  that the  Healy                                                               
Coal plant  would be coming  on line in  the near future,  and he                                                               
asked for  clarification that this  excess capacity would  not be                                                               
sufficient to replace the aforementioned generators.                                                                            
                                                                                                                                
REPRESENTATIVE ISAACSON replied that  this was his understanding,                                                               
and he  deferred to Golden  Valley Electric Association  for more                                                               
information.                                                                                                                    
                                                                                                                                
2:12:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  requested a  spreadsheet to  the breakdown                                                               
in  price per  kilowatt from  Golden Valley  Electric Association                                                               
versus the remote villages included in the proposed bill.                                                                       
                                                                                                                                
REPRESENTATIVE ISAACSON  offered his belief that  AVEC and Golden                                                               
Valley could each supply this to the committee.                                                                                 
                                                                                                                                
CO-CHAIR FEIGE shared that the  power company in his district was                                                               
Matanuska   Electric,  a   public   utility   and  a   non-profit                                                               
corporation.    He questioned  whether  the  public utility  paid                                                               
taxes, and  asked what tax  liability the public  utilities would                                                               
write this refundable  credit against, as most of  them were non-                                                               
profits.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  ISAACSON,  in  response,  directed  attention  to                                                               
Section 1,  lines 8-9, which  covered both scenarios  and allowed                                                               
for a payment in lieu of a tax credit.                                                                                          
                                                                                                                                
CO-CHAIR FEIGE  asked for clarification  that if there was  not a                                                               
tax liability there would be a payment.                                                                                         
                                                                                                                                
REPRESENTATIVE ISAACSON expressed his agreement.                                                                                
                                                                                                                                
REPRESENTATIVE  SEATON requested  an explanation  to the  uses of                                                               
the  oil and  gas tax  credit  fund mentioned  on page  2 of  the                                                               
fiscal note analysis [Included in  members' packets] and asked if                                                               
this could deplete that fund.                                                                                                   
                                                                                                                                
REPRESENTATIVE ISAACSON  replied that he  would get back  with an                                                               
answer.                                                                                                                         
                                                                                                                                
REPRESENTATIVE  TARR  said  that  she would  hold  her  questions                                                               
regarding the  fiscal note  until someone  from DNR  could answer                                                               
them.                                                                                                                           
                                                                                                                                
2:15:32 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER opened public testimony.                                                                                       
                                                                                                                                
2:15:51 PM                                                                                                                    
                                                                                                                                
MEERA  KOHLER,   President  and  CEO,  Alaska   Village  Electric                                                               
Cooperative, noted that  AVEC served 55 villages  which were very                                                               
dependent on diesel  fuel for energy.  She said  that most of the                                                               
tank farms were a little  bigger than 100,000 gallons, with about                                                               
22 of the  tank farms still in  need of upgrades.   She said that                                                               
this  opportunity for  a  tax credit  for half  of  the cost  for                                                               
refurbishing the  tank farms was  "extremely attractive  and very                                                               
important because  otherwise the  only opportunity we  would have                                                               
is to  take out loans that  simply adds costs to  very, very high                                                               
cost of electricity already."                                                                                                   
                                                                                                                                
REPRESENTATIVE  TARR  asked if  the  22  tank  farms in  need  of                                                               
upgrades were  each a separate  entity to apply for  the proposed                                                               
tax credit.                                                                                                                     
                                                                                                                                
MS.  KOHLER,  in  response,  said  that the  22  tank  farms  all                                                               
belonged  to the  Alaska Village  Electric Cooperative,  although                                                               
there may be other public  utilities that were looking to improve                                                               
diesel  fuel storage  facilities.   She  said that  the State  of                                                               
Alaska was making an updated assessment  of tank farms, as it had                                                               
not been done  since the late 1990s, and that  this would give an                                                               
idea  of the  continuing  need.   She  explained  that the  local                                                               
utility  in a  small  village  could be  run  by  the local  city                                                               
government or the  local tribal corporation, which  often did not                                                               
have a  lot of  borrowing capacity.   She  stated that  even with                                                               
this  credit,  it would  still  be  necessary  for them  to  find                                                               
outside financing to  supplement the remainder of the  cost.  She                                                               
questioned the demand  from these small villages  because of this                                                               
cost.   She reported  that utilities similar  to AVEC  which were                                                               
funded  through loans  from the  Rural  Utility Collaborative  or                                                               
private lenders had  the ability to leverage the  money from this                                                               
tax fund.  She  stated that AVEC did pay a  gross receipts tax as                                                               
a cooperative,  which was a  modest tax back  to the state.   She                                                               
said  that the  tax break  was  not a  significant component  for                                                               
AVEC.                                                                                                                           
                                                                                                                                
CO-CHAIR SADDLER  asked if there was  an estimate to the  cost of                                                               
the upgrade to the aforementioned 22 tank farms.                                                                                
                                                                                                                                
MS. KOHLER,  in response, explained that  a small tank farm  in a                                                               
village  scenario  would cost  about  $12-$13  per gallon  for  a                                                               
capacity  of about  150,000  to 200,000  gallons;  however, in  a                                                               
larger tank  farm, 500,000 gallons  to a few million  gallons, it                                                               
would cost  about $2-$2.50  per gallon.   She  said that  a major                                                               
refurbishment  of the  existing  tank  farms, salvaging  whatever                                                               
tanks possible, would cost about  $1 million for a 150,000 gallon                                                               
tank farm.   She  estimated a total  investment of  about $70-$75                                                               
million to refurbish all 22 tank farms.                                                                                         
                                                                                                                                
REPRESENTATIVE  TARR asked  if AVEC  could apply  for the  credit                                                               
from all the projects it was working on.                                                                                        
                                                                                                                                
MS.  KOHLER offered  her  belief  that this  would  be the  case,                                                               
although she  opined that the intent  of the bill was  to support                                                               
facilities  which began  work  after the  effective  date of  the                                                               
bill.   She said  that AVEC did  not work on  more than  2-3 tank                                                               
farms  each year,  which would  be an  investment of  about $5-$7                                                               
million each year for tank farm upgrades and refurbishments.                                                                    
                                                                                                                                
2:24:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON,  referring  to  page 2,  line  4  of  the                                                               
proposed bill, read that a  storage facility would not qualify if                                                               
it  had been  in  operation  as a  diesel  fuel storage  facility                                                               
before the effective  date of the proposed bill.   He offered his                                                               
belief  that the  proposed  bill was  only  referencing new  tank                                                               
farms and new tanks, and not refurbishments or upgrades.                                                                        
                                                                                                                                
MS. KOHLER offered  her understanding that the intent  was to not                                                               
include facilities  which were completed  prior to  the effective                                                               
date,  but  that an  existing  tank  farm  of more  than  100,000                                                               
gallons   would  qualify   for  funding   toward  a   substantial                                                               
refurbishment.                                                                                                                  
                                                                                                                                
CO-CHAIR SADDLER  offered his belief  that the  proposed language                                                               
said that if the facility, and  not a specific tank, were used as                                                               
a diesel facility, it would not qualify.                                                                                        
                                                                                                                                
REPRESENTATIVE ISAACSON  replied "that's one of  the tweaks we'll                                                               
bring back to you."                                                                                                             
                                                                                                                                
MS. KOHLER,  in response to  Co-Chair Feige, said that  AVEC tank                                                               
farms were  under US Coast  Guard and EPA jurisdiction,  and were                                                               
inspected two  to three times  each year, with  minor maintenance                                                               
performed   throughout  the   year.     She  reported   that  EPA                                                               
requirements would  necessitate stricter  testing to  ensure tank                                                               
integrity.  She  acknowledged that it was an  ongoing struggle to                                                               
add extra  cost to an already  expensive bill to pay  for upgrade                                                               
projects.  She said that AVEC  spent about $1 million annually on                                                               
tank  farm operations,  and that  there was  not very  much money                                                               
left.  She called it "a hand to mouth existence."                                                                               
                                                                                                                                
CO-CHAIR  FEIGE asked  how  much  money did  AVEC  set aside  for                                                               
programmed replacement of  tanks, or were they  simply looking to                                                               
the State of Alaska for capital money for replacements.                                                                         
                                                                                                                                
MS. KOHLER  replied that AVEC had  never looked to the  state for                                                               
funds  to replace  tank farms,  as it  had never  been available.                                                               
She said  that the  funding from the  Denali Commission  had been                                                               
the  first time  that any  significant  money had  been put  into                                                               
major upgrades  to the  tank farms.   She  shared that  the gross                                                               
revenue  from non-fuel  sources was  about $18  million annually,                                                               
which  paid  for  generation maintenance,  overhauls,  tank  farm                                                               
operations and  maintenance, spill response,  and administration,                                                               
noting that  "there has never been  a lot available."   There had                                                               
not been  a lot  of investment since  the initial  investments in                                                               
tank farms  40 years  prior.   She reported  that there  would be                                                               
$100,000  - $150,000  on  an  individual tank  farm  for a  major                                                               
refurbishment on a  couple of locations on an annual  basis.  She                                                               
pointed out  that this  only addressed  the electric  utility and                                                               
did not  address the remaining  75 percent  of tank storage  in a                                                               
village which was non-utility.                                                                                                  
                                                                                                                                
CO-CHAIR  SADDLER asked  that she  report back  to the  committee                                                               
with "a clear idea  of the total cost that what  it might take to                                                               
refurbish the tanks that your co-operatives rely on."                                                                           
                                                                                                                                
REPRESENTATIVE  P.   WILSON  noted   that  page  2   stated  that                                                               
qualification  for the  credit in  this section  required that  a                                                               
diesel  fuel storage  facility must  have a  diesel derived  fuel                                                               
volume of  at least 100,000  gallons.   She pointed out  that, as                                                               
there had been  testimony to a need for  smaller facilities, this                                                               
should be adjusted.                                                                                                             
                                                                                                                                
2:32:24 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER opened public testimony on HB 367.                                                                             
                                                                                                                                
2:32:59 PM                                                                                                                    
                                                                                                                                
LUKE  HOPKINS, Mayor,  Fairbanks  North Star  Borough, said  that                                                               
ensuring that the  borough and the surrounding  region had enough                                                               
diesel fuel  storage for electrical  generation was  an important                                                               
piece   for  financial   relief  to   the  electric   cooperative                                                               
association.                                                                                                                    
                                                                                                                                
2:34:19 PM                                                                                                                    
                                                                                                                                
COREY  BORGESON,  President  and   CEO,  Golden  Valley  Electric                                                               
Association (GVEA), said that the  potential closing of the Flint                                                               
Hills Refinery  brought a significant  number of issues  to GVEA,                                                               
and that  fuel storage  was one  of them.   He  acknowledged that                                                               
Flint Hills  had control of  a significant amount of  storage, on                                                               
what was considered  a very contaminated site.   He declared that                                                               
it was essential for GVEA to  have its own storage facilities for                                                               
HAGO and  LAGO from the North  Pole refinery.  He  said that HAGO                                                               
could  not  be  transported  into Alaska,  as  it  needed  warmer                                                               
temperatures for  transportation.  He remarked  that an alternate                                                               
fuel  source, even  with the  Healy Coal  plant and  LNG trucking                                                               
project, would  always be needed  in the community.   He declared                                                               
that the fuel storage was very important to the utility.                                                                        
                                                                                                                                
REPRESENTATIVE OLSON  asked for  the approximate price  for power                                                               
generated by the  two generators at Flint Hills  versus the price                                                               
for coal at the Healy plant.                                                                                                    
                                                                                                                                
MR.  BORGESON explained  that these  were  measured in  different                                                               
ways.    In  kilowatt  hours  when  dispatching  the  power,  the                                                               
generators had  a cost of $0.23  per kilowatt hour for  HAGO fuel                                                               
and $0.16 per  kilowatt hour for naphtha fuel.   He reported that                                                               
the utility  spent about $61  million on naphtha and  $13 million                                                               
for HAGO.                                                                                                                       
                                                                                                                                
CO-CHAIR SADDLER asked about the coal cost.                                                                                     
                                                                                                                                
MR. BORGESON replied  that the cost was about  $0.65 per kilowatt                                                               
hour for fuel, although including  labor would be about $0.12 per                                                               
kilowatt hour.                                                                                                                  
                                                                                                                                
MR. BORGESON, in response, said  that the turbines at Flint Hills                                                               
generated about  180 megawatts  and the  coal plant  generated an                                                               
additional 50 megawatts.                                                                                                        
                                                                                                                                
REPRESENTATIVE P. WILSON asked for  the amount of tank storage at                                                               
the Flint Hills facility.                                                                                                       
                                                                                                                                
2:42:12 PM                                                                                                                    
                                                                                                                                
LYNN  THOMPSON, Vice  President for  Power Supply,  Golden Valley                                                               
Electric  Association (GVEA),  said that  GVEA had  50,000 gallon                                                               
storage tanks each for HAGO and  naphtha, and that GVEA relied on                                                               
the  Flint Hills  refinery to  pipe in  product for  the turbines                                                               
when they were being operated.                                                                                                  
                                                                                                                                
2:42:52 PM                                                                                                                    
                                                                                                                                
ANNA ATCHISON,  Kinross Fort  Knox Mine, said  that the  mine was                                                               
the largest gold producer in Alaska,  and that it was the largest                                                               
customer to GVEA, as  it took a lot of power  and fuel to produce                                                               
gold from a low  grade ore body.  She relayed  that the mine used                                                               
about 24  million kilowatt hours  each month, the  second largest                                                               
non-labor cost.   She  pointed out  that the  mine was  the fifth                                                               
largest private  employer in the  borough, and, as  its employees                                                               
also  lived  in  the  area,   they  were  also  affected  by  the                                                               
uncertainty  for  the  future of  energy,  especially  since  the                                                               
announcement for  the closure of  the Flint Hills Refinery.   She                                                               
declared support  for HB 367  and the  efforts of GVEA  to reduce                                                               
and stabilize power costs for all rate payers.                                                                                  
                                                                                                                                
MS. ATCHISON,  in response to Representative  Seaton, offered her                                                               
belief  that the  mine paid  about  $0.19 per  kilowatt hour  for                                                               
electricity  to the  mine, although  she  could get  back to  the                                                               
committee with an exact number.                                                                                                 
                                                                                                                                
2:45:00 PM                                                                                                                    
                                                                                                                                
JOMO   STEWART,  Energy   Project  Manager,   Fairbanks  Economic                                                               
Development Corporation, spoke in support  of HB 367, noting that                                                               
energy was  "a big, big  deal" when people  live in a  cold, dark                                                               
metropolitan area.  He said that  it was a necessary component of                                                               
the  economy  and  that   its  availability,  affordability,  and                                                               
reliability impacted  all the other  aspects of the economy.   He                                                               
directed attention to  earlier efforts by the  state to recognize                                                               
this  necessity for  energy storage.   He  listed state  programs                                                               
which  included participation  with  the  Denali Commission,  and                                                               
various energy  and LNG  storage tax  credits including  the Cook                                                               
Inlet  tax incentives  and credits.   He  reiterated support  for                                                               
proposed HB 367.                                                                                                                
                                                                                                                                
2:47:04 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER closed public testimony and held over HB 367.