03/29/2010 09:00 AM Senate FINANCE

SENATE BILL NO. 243                                                                                                           
                                                                                                                                
     "An Act removing the royalty obligation for geothermal                                                                     
     resources."                                                                                                                
                                                                                                                                
9:34:30 AM                                                                                                                    
                                                                                                                                
MIKE  PAWLOWSKI,  STAFF,  SENATOR  LESIL  MCGUIRE,  SPONSOR,                                                                    
explained that the bill attempts  to find a rational royalty                                                                    
regime for the development  of geothermal resources on state                                                                    
lands  in Alaska.  Originally,  the bill  started  out as  a                                                                    
complete negation of all royalty  on geothermal. However, in                                                                    
working  with  the  administration   and  in  the  Resources                                                                    
Committee,  understanding  was  reached  that  a  geothermal                                                                    
lease still  is actually a   property right  and, therefore,                                                                    
while  geothermal resources  themselves are  not exportable,                                                                    
some royalty  is necessary to maintain  the state's interest                                                                    
in  that the  state has  issued a  lease for  the geothermal                                                                    
resources. There  is one major geothermal  project currently                                                                    
being developed on state land.                                                                                                  
                                                                                                                                
Mr.   Pawlowski  related   that  Section   1  of   the  bill                                                                    
establishes a federal royalty rate  of 1.75 percent on gross                                                                    
income for the  first ten years, followed by  3.5 percent of                                                                    
gross income  for the following  ten years. The goal  of the                                                                    
bill  is to  find a  rational royalty  regime that  attracts                                                                    
development and ensures a fair return to the state.                                                                             
                                                                                                                                
9:36:32 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman asked  how many  geothermal facilities  in                                                                    
the  state pay  a  royalty. Mr.  Pawlowski  said that  there                                                                    
currently were none. Several  projects under development are                                                                    
not on state land.                                                                                                              
                                                                                                                                
Co-Chair   Stedman   requested   an  explanation   of   what                                                                    
geothermal  energy   is  and  what   happens  after   it  is                                                                    
extracted. Mr.  Pawlowski understood that  geothermal energy                                                                    
comes from  hot rocks  in the  ground. Water  under pressure                                                                    
flows upwards and drives  turbans producing electricity. The                                                                    
water is re-injected to maintain pressure.                                                                                      
                                                                                                                                
Co-Chair Stedman summarized that it  was "hot water" and the                                                                    
hotter the  water, the  more value  it has.  As long  as the                                                                    
water is  re-injected into  the ground there  is no  loss of                                                                    
the resource.                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  recalled  a discussion  about  California                                                                    
where  water  is not  re-injected  and  there are  depletion                                                                    
issues in reservoirs. Mr. Pawlowski  reported that there was                                                                    
an extensive  discussion of this  topic with  the Department                                                                    
of  Natural  Resources  and  with the  Alaska  Oil  and  Gas                                                                    
Conservation Commission.                                                                                                        
                                                                                                                                
9:38:55 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman   asked  for  more  information   about  a                                                                    
geothermal project in Anchorage.  Mr. Pawlowski replied that                                                                    
it  is  Ormat  Technology's   Mt.  Spurr  Project.  Co-Chair                                                                    
Hoffman asked  how much revenue  would come to the  state in                                                                    
the  first   ten  years  from   that  project,   under  this                                                                    
legislation. Mr.  Pawlowski referred  to information  in the                                                                    
packets  which  calculates the  revenue  over  the first  25                                                                    
years. Co-Chair Hoffman asked what  that total would be. Mr.                                                                    
Pawlowski said it would be $38 million.                                                                                         
                                                                                                                                
Co-Chair  Hoffman  asked  how  the tax  on  natural  gas  is                                                                    
calculated. Mr. Pawlowski clarified  that the tax on natural                                                                    
gas in Cook  Inlet is calculated as a royalty.  The lease of                                                                    
land for  geothermal land is,  in effect, a  property right,                                                                    
and  a certain  amount of  royalty  is in  the state's  best                                                                    
interest, which is  why the federal rate of  1.75 percent is                                                                    
used. Under current law the rate is 10 to 15 percent.                                                                           
                                                                                                                                
9:40:40 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman asked for a  definition of "geothermal land                                                                    
lease" versus  "volume of water use".  Mr. Pawlowski related                                                                    
that for a geothermal lease,  a specific land area is leased                                                                    
and  the  right  to  develop   the  geothermal  resource  is                                                                    
conferred. He  could not explain the  volumetric development                                                                    
of a geothermal resource.                                                                                                       
                                                                                                                                
Senator Olson spoke of the  modification of the federal rate                                                                    
and wondered if other  geothermal projects would receive the                                                                    
same break.  Mr. Pawlowski  referred to  Section 2,  page 2,                                                                    
lines  3  -  5,  which   directs  the  Commissioner  of  the                                                                    
Department of  Natural Resources to offer  the royalty rates                                                                    
to any exiting lessee.                                                                                                          
                                                                                                                                
Co-Chair Stedman noted  two zero fiscal notes,  one from the                                                                    
Department  of  Revenue  and  one  from  the  Department  of                                                                    
Natural Resources.                                                                                                              
                                                                                                                                
9:42:37 AM                                                                                                                    
                                                                                                                                
PAUL    THOMSEN,    DIRECTOR,   ORMAT    TECHNOLOGY,    (via                                                                    
teleconference),  related that  his company  has leased  the                                                                    
acreage  of  Mt.  Spurr  in   order  to  develop  the  first                                                                    
commercial  geothermal power  plant in  Alaska. He  spoke in                                                                    
support of  the bill.  He agreed  with bringing  the royalty                                                                    
rate  down  to the  federal  level  in  order to  allow  the                                                                    
development to  be more competitive  and allow a  savings to                                                                    
ratepayers.                                                                                                                     
                                                                                                                                
Senator Olson  asked what  the risks to  the project  are if                                                                    
the bill  does not  get passed.  Mr. Thomsen  explained that                                                                    
since  they  do not  export  and  they  are operating  in  a                                                                    
regulated  market,  if the  royalty  rate  is high,  then  a                                                                    
higher rate will be charged to  the utility. He said if rate                                                                    
is where it  is today, it would require the  utility to fund                                                                    
a power purchase price at  14 cents. The project already has                                                                    
a low rate of return.  He maintained that the ratepayers are                                                                    
looking for a lower range.                                                                                                      
                                                                                                                                
Senator Olson  asked where else  in the United  States there                                                                    
are geothermal  projects and what  their royalty  rates are.                                                                    
Mr.  Thomsen  replied  that  there  are  power  projects  in                                                                    
Hawaii, California,  and Nevada. There are  also third-party                                                                    
projects  in Wyoming  and Utah.  Almost all  are on  federal                                                                    
lands  operated by  the Bureau  of Land  Management and  pay                                                                    
federal   royalty   rates.   California   and   Hawaii   are                                                                    
exceptions. California  has a very  high royalty rate  of 10                                                                    
percent, but  on a very  small project. Western  states tend                                                                    
to have a high state royalty rates.                                                                                             
                                                                                                                                
9:47:18 AM                                                                                                                    
                                                                                                                                
CATHY  FOERSTER, ENGINEERING  COMMISSIONER,  ALASKA OIL  AND                                                                    
GAS  CONSERVATION (AOGCC),  (via teleconference),  explained                                                                    
that the royalty portion of  the bill does not affect AOGCC.                                                                    
The part of the bill  that does affect AOGCC transfers some,                                                                    
but  not all,  authority  for the  regulation of  geothermal                                                                    
operations from  DNR to  AOGCC. The  authorities transferred                                                                    
are  the  authority  to  regulate  drilling  and  production                                                                    
operations,  the authority  to  protect correlative  rights,                                                                    
and  the   authority  to  prevent  physical   waste  of  the                                                                    
resource.  The   DNR  will   retain  its   authorities  over                                                                    
correlative  rights and  prevention of  waste pertaining  to                                                                    
state  lands. These  authorities are  consistent with  AOGCC                                                                    
oil and gas operations.                                                                                                         
                                                                                                                                
Ms.  Foerster continued  to say  that AOGCC  already has  in                                                                    
place  the  expertise to  take  on  these authorities.  Most                                                                    
importantly,  AOGCC has  experienced drilling  engineers who                                                                    
know  what to  look for  when approving  a drilling  or well                                                                    
work   permit  to   ensure  safety   and  good   operational                                                                    
practices, and experienced field inspectors.                                                                                    
                                                                                                                                
Co-Chair  Stedman  pointed  out  that the  bill  before  the                                                                    
committee  is Version  E, the  original  bill. He  requested                                                                    
comments on the lease rates.                                                                                                    
                                                                                                                                
9:50:05 AM                                                                                                                    
                                                                                                                                
Ms.  Foerster addressed  the question  about  the impact  on                                                                    
geothermal operations if  the bill does not  pass. She noted                                                                    
that there  would be  an additional  cost to  DNR to  hire a                                                                    
contract for the needed expertise previously described.                                                                         
                                                                                                                                
Co-Chair Stedman clarified that the  bill would be set aside                                                                    
and brought back later.                                                                                                         
                                                                                                                                
9:50:52 AM                                                                                                                    
                                                                                                                                
KEVIN BANKS,  DIRECTOR, DIVISION OF OIL  AND GAS, DEPARTMENT                                                                    
OF NATURAL  RESOURCES (via teleconference),  explained DNR's                                                                    
involvement and  how the bill  would affect  the department.                                                                    
He related that  DNR has the authority  to manage geothermal                                                                    
lands in  Alaska and to  take care of safety  issues related                                                                    
to  geothermal drilling.  The current  bill  would create  a                                                                    
situation where DNR would be  competitive with federal lands                                                                    
that  could  be  developed   for  geothermal  resources.  He                                                                    
acknowledged  that the  economics  of  a geothermal  project                                                                    
differ  substantially  from  an  oil and  gas  project.  The                                                                    
development  of   a  geothermal  resource  will   depend  on                                                                    
establishing  fairly   long-term  contracts   with  existing                                                                    
utilities.  The price  of the  electricity sold  to in-state                                                                    
utilities  must  be  competitive with  existing  sources  of                                                                    
energy.                                                                                                                         
                                                                                                                                
Mr.  Banks  thought  that   Ormat  provided  an  interesting                                                                    
discussion of the three parts  of their economics and costs.                                                                    
He offered to discuss those if requested.                                                                                       
                                                                                                                                
Mr. Banks noted  that there were 16 previous  lease sales on                                                                    
Mt. Spurr. He said there was  a proposal to put forth a best                                                                    
interest  finding  on a  lease  sale  at Mt.  Augustine.  He                                                                    
pointed  out  that DNR  also  has  oversight at  the  Naknek                                                                    
Project.                                                                                                                        
                                                                                                                                
9:53:59 AM                                                                                                                    
                                                                                                                                
Mr. Pawlowski thanked the committee for hearing the bill.                                                                       
                                                                                                                                
SB  243  was  HEARD  and   HELD  in  Committee  for  further                                                                    
consideration.