04/02/2010 09:00 AM Senate FINANCE

SENATE BILL NO. 243                                                                                                           
                                                                                                                                
     "An Act removing the royalty obligation for geothermal                                                                     
     resources."                                                                                                                
                                                                                                                                
Co-Chair Hoffman MOVED to ADOPT  CSSB 243 (FIN), labeled 26-                                                                    
LS1346\S, Bullock, 3/26/10.                                                                                                     
                                                                                                                                
Co-Chair Stedman OBJECTED.                                                                                                      
                                                                                                                                
MIKE  PAWLOWSKI,  STAFF,  SENATOR LESIL  MCGUIRE,  explained                                                                    
that the changes in Version S  of the bill attempt to remedy                                                                    
problems  that  the  committee   identified  in  a  previous                                                                    
hearing.  Geothermal resource,  while  it  is renewable,  is                                                                    
also  subject to  waste. The  CS attempts  to delineate  the                                                                    
responsibility  for the  regulation of  geothermal resources                                                                    
between the  Department of Natural  Resources (DNR)  and the                                                                    
Alaska Oil  and Gas Conservation Commission  (AOGCC). The CS                                                                    
charges AOGCC  with regulating drilling and  exploration and                                                                    
waste of geothermal  resources. The CS charges  DNR with the                                                                    
regulation  of  utilization  and land  management.  This  is                                                                    
similar to the structure in place for oil and gas matters.                                                                      
                                                                                                                                
Mr. Pawlowski detailed the sections of the bill:                                                                                
                                                                                                                                
Section 1 amends  AS 31.05.030  clarifying  that the  Alaska                                                                    
          Oil  and Gas  Conservation Commission  (AOGCC) has                                                                    
          jurisdiction over the  exploration and development                                                                    
          of   geothermal   resources;    except   for   the                                                                    
          management of leases and units.                                                                                       
                                                                                                                                
Section 2 amends the  royalty rate for  geothermal resources                                                                    
          in  AS  38.05.181(g)  to reflect  federal  royalty                                                                    
          rates; 1.75%  of gross income during  the first 10                                                                    
          years and 3.5% of gross income thereafter.                                                                            
                                                                                                                                
Section 3 adds  a  new  section   to  AS  41.06  delineating                                                                    
          jurisdiction  over  geothermal  resources  between                                                                    
          the  AOGCC  and  Department of  Natural  Resources                                                                    
          (DNR).                                                                                                                
                                                                                                                                
Section 4 amends  AS   41.06.010  to  allow  the   AOGCC  to                                                                    
          investigate the waste of geothermal resources.                                                                        
                                                                                                                                
Section 5 repeals and  reenacts AS 41.06.020 to  set out the                                                                    
          jurisdiction  of the  AOGCC over  all land  in the                                                                    
          state  and  to allow  for  the  suspension of  the                                                                    
          application  of  chapter  06 on  federal  land  if                                                                    
          similarly  regulated  by  Federal  government  and                                                                    
         clarifies the application of the chapter.                                                                              
                                                                                                                                
Section 6 amends AS  41.06.030(a) to clarify that  a plan of                                                                    
          development   and  operation   for  a   geothermal                                                                    
          resource must be filed with the AOGCC.                                                                                
                                                                                                                                
Section 7 amends   AS    41.06.030(b)   to    clarify   that                                                                    
          unitization  by  DNR   of  a  geothermal  resource                                                                    
          system  under  AS  41.06.030 when  the  geothermal                                                                    
          resource system includes state land.                                                                                  
                                                                                                                                
Section 8 amends AS  41.06.030(c) to conform to  the changes                                                                    
          made in section 7.                                                                                                    
                                                                                                                                
Section 9 amends AS 41.06.030 by  inserting a new subsection                                                                    
          (e) that  allows the commissioner of  DNR to adopt                                                                    
          regulations  necessary to  implement the  purposes                                                                    
          and intent of chapter 6.                                                                                              
                                                                                                                                
          Section 10amends AS 41.06 by  adding a new section                                                                    
          41.06.035 allowing  the AOGCC to issue  orders and                                                                    
          impose requirements  to prevent waste  and protect                                                                    
          correlative  rights on  any geothermal  operation.                                                                    
          This  section  also  allows  the  AOGCC  to  adopt                                                                    
          regulations.                                                                                                          
                                                                                                                                
Section 11  repeals and  reenacts AS  41.06.040(a) governing                                                                    
          the authority  of the  AOGCC to  adopt regulations                                                                    
          governing  the safe  development  of a  geothermal                                                                    
          resource.                                                                                                             
                                                                                                                                
Section 12  amends AS  41.06.040 (b) to  allow the  AOGCC to                                                                    
          require  a geothermal  operator to  file a  surety                                                                    
          bond.                                                                                                                 
                                                                                                                                
Section 13  amends AS  41.06.040(c) to  require notification                                                                    
          of  the AOGCC  rather than  the DNR  is geothermal                                                                    
          exploration  encounters   hydrocarbons  and  other                                                                    
          fissionable materials.                                                                                                
                                                                                                                                
Section   14  amends   AS   41.06.040(d)   to  replace   the                                                                    
          commissioner  of  DNR  with   the  AOGCC  for  the                                                                    
          purposes   of   authorizing    inspection   of   a                                                                    
          geothermal operation.                                                                                                 
                                                                                                                                
Section 15  repeals and reenacts AS  41.06.050 governing the                                                                    
          AOGCC    permitting    process   for    geothermal                                                                    
          exploration and development drilling.                                                                                 
                                                                                                                                
Section  16  amends  AS  41.06   by  adding  a  new  section                                                                    
          41.06.055  authorizing  a regulatory  cost  charge                                                                    
          for geothermal wells.                                                                                                 
                                                                                                                                
Section  17  repeals  and reenacts  AS  41.06.060  providing                                                                    
          definitions for AS 41.06                                                                                              
                                                                                                                                
Section   18  repeals   AS   41.06.030(d)  governing   lease                                                                    
          operations under  an approved plan  of development                                                                    
          and  AS  41.06.040(e)  the  exemption  from  AOGCC                                                                    
          authority of geothermal resources.                                                                                    
                                                                                                                                
Section 19 adds  a new section to the uncodified  law of the                                                                    
          State  of Alaska  that applies  the royalty  rates                                                                    
          established by  section 2  to leases  entered into                                                                    
          or  renewed after  the effective  date of  the act                                                                    
          and directs  the commissioner of DNR  to offer the                                                                    
          royalty  rates  established  by section  2  to  an                                                                    
          existing lessee.                                                                                                      
                                                                                                                                
Section 20 adds  a new section to the uncodified  law of the                                                                    
          State  of Alaska  that governs  the transition  of                                                                    
          authorities over  geothermal resources established                                                                    
          in this act.                                                                                                          
                                                                                                                                
Section 21 adds  a new section to the uncodified  law of the                                                                    
          State  of  Alaska  that  gives  direction  to  the                                                                    
          reviser of statutes.                                                                                                  
                                                                                                                                
Section 22 immediate effective date for section 20                                                                              
                                                                                                                                
Section 23 effective date of July 1, 2010                                                                                       
                                                                                                                                
9:19:31 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman WITHDREW his  OBJECTION to adopting Version                                                                    
S. There being NO further OBJECTION, it was so ordered.                                                                         
                                                                                                                                
Senator  Huggins inquired  if  the  legislation was  "common                                                                    
practice" for bringing  on new sources of  energy. He opined                                                                    
that geothermal  energy will be  one of the features  of the                                                                    
state's  future energy  portfolio and  will be  abundant and                                                                    
affordable. Mr. Pawlowski agreed.  He stated that the intent                                                                    
of  the CS  is to  adopt a  modern framework  for geothermal                                                                    
exploration and development.                                                                                                    
                                                                                                                                
Co-Chair  Stedman  asked  for  more  information  about  the                                                                    
percentage of  the lease  fee, now and  after 10  years. Mr.                                                                    
Pawlowski reported that the royalty  rate in current statute                                                                    
is anywhere between  10 percent and 15 percent  of the gross                                                                    
electricity sales.  The commissioner of DNR  has the ability                                                                    
to reduce  that. Since geothermal energy  is not exportable,                                                                    
in order to  make Alaska competitive for  the development of                                                                    
geothermal resources,  the federal  rate of 1.75  percent on                                                                    
gross  electricity  sales  for   the  first  ten  years  was                                                                    
adopted. That  rate changes  to a 3.5  percent of  the gross                                                                    
sales  for  the  following  10 years.  Per  the  committee's                                                                    
request, Senator  McGuire's office submitted  an explanation                                                                    
of the annual rate under a specific project.                                                                                    
                                                                                                                                
9:21:47 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman MOVED  to  report CSSB  243  (FIN) out  of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal  note. There being NO  OBJECTION, it was                                                                    
so ordered.                                                                                                                     
                                                                                                                                
Co-Chair Stedman noted three fiscal notes.                                                                                      
                                                                                                                                
CSSB  243 (FIN)  was REPORTED  out of  Committee with  a "do                                                                    
pass"  recommendation and  with  a new  zero  fiscal by  the                                                                    
Department of Natural  Resources, a new zero  fiscal note by                                                                    
the   Department  of   Administration,   and  a   previously                                                                    
published zero FN 2 (REV).                                                                                                      
                                                                                                                                
9:22:45 AM