04/30/2005 02:15 PM House L&C

HB 286-VALUE OF ROYALTY ON GAS PROD./ TAX CREDIT                                                                              
                                                                                                                                
CHAIR ANDERSON  announced that the  next order of  business would                                                               
be  HOUSE  BILL   NO.  286,  "An  Act  amending   the  manner  of                                                               
determining the royalty  received by the state  on gas production                                                               
by  directing the  commissioner of  natural resources  to accept,                                                               
under certain  circumstances, the  transfer price  of the  gas if                                                               
established by transfer price order  of the Regulatory Commission                                                               
of Alaska; and providing for an effective date."                                                                                
                                                                                                                                
REPRESENTATIVE RALPH SAMUELS,  Alaska State Legislature, sponsor,                                                               
explained  that  HB  286 is  housekeeping  legislation  that  was                                                               
brought  forth   by  Municipal  Light   &  Power  (ML&P).     The                                                               
legislation  addresses the  method  for  determining the  royalty                                                               
received by  the state  [on gas production].   The  Department of                                                               
Natural Resources (DNR)  calculates the royalty value  based on a                                                               
contract between  ML&P and Shell.   Then ML&P bought  an interest                                                               
in the Beluga River Field from  Shell and DNR agreed to allow the                                                               
rate as if the contract were  still in place.  The aforementioned                                                               
contract expires in  2005.  Therefore, HB 286 would  allow DNR to                                                               
use the  gas transfer price  set by the Regulatory  Commission of                                                               
Alaska (RCA)  much like DNR used  for the contract price  for the                                                               
gas.                                                                                                                            
                                                                                                                                
2:55:45 PM                                                                                                                    
                                                                                                                                
JIM POSEY,  General Manager, Municipal  Light &  Power, specified                                                               
that HB  286 allows a matrix  of calculations for the  price that                                                               
ML&P pays royalty on  to be first done through the  RCA.  If that                                                               
rate is  sufficient for royalty  purposes, then it  passes muster                                                               
for  DNR.   However, if  DNR  determines later  that the  royalty                                                               
value is lower,  then a second matrix through the  DNR process is                                                               
utilized in  order to establish a  royalty for the gas  ML&P uses                                                               
to run  its turbines.   Mr. Posey echoed  Representative Samuels'                                                               
earlier comment that HB 286  is a housekeeping measure that keeps                                                               
two competing agencies from having concurrent jurisdiction.                                                                     
                                                                                                                                
2:57:37 PM                                                                                                                    
                                                                                                                                
KATE GIARD, Commissioner/Chair,  Regulatory Commission of Alaska,                                                               
Department  of   Commerce,  Community,  &   Economic  Development                                                               
(DCCED), informed  the committee  that the  RCA has  reviewed the                                                               
statutory  revision,   which  is   in  keeping  with   the  RCA's                                                               
understanding of its responsibilities in  terms of opining on the                                                               
transfer price on  an annual basis.  There is  no additional cost                                                               
to the RCA for this legislation  because it's part of the process                                                               
ordered  in U9636,  the  docket when  ML&P  purchased the  Beluga                                                               
Field; order 39 describes the methods for calculating.                                                                          
                                                                                                                                
2:58:22 PM                                                                                                                    
                                                                                                                                
MS.  GIARD, in  response  to  Representative Rokeberg,  explained                                                               
that the  formula takes  the actual cost  of production  less the                                                               
sales, which  is then  multiplied by  a margin.   The  margin for                                                               
[ML&P]  is 1.6,  which  is ML&P's  debt  service coverage  ratio.                                                               
Therefore, the  calculations are  based on the  actual production                                                               
costs.                                                                                                                          
                                                                                                                                
MARTIN  SCHULTZ,   Audit  Section,  Division  of   Oil  and  Gas,                                                               
Department  of Natural  Resources,  related DNR's  support of  HB
.  He informed the  committee that when DNR determines royalty                                                               
value under  state leases, it  reviews either the  contract price                                                               
the producer receives for the gas  or what other producers in the                                                               
same area  receive.   The aforementioned is  referred to  as "the                                                               
higher  of" comparison  in which  the  state is  entitled to  the                                                               
higher of those  two values.  He explained  that AS 38.05.180(aa)                                                               
allows a  producer that  sells to  a gas  or electric  utility to                                                               
have royalty value certainty.                                                                                                   
                                                                                                                                
3:00:00 PM                                                                                                                    
                                                                                                                                
MR. SCHULTZ  said that  HB 286  would expand  the coverage  of AS                                                               
38.05.180(aa)  to  include  a  transfer  price  that  a  producer                                                               
receives  on gas  deliveries  to an  affiliated  gas or  electric                                                               
utility.   Therefore,  it's consistent  with the  current statute                                                               
and DNR supports the legislation.                                                                                               
                                                                                                                                
3:00:37 PM                                                                                                                    
                                                                                                                                
ANDY LEIMAN, Municipal  Light & Power, related  ML&P's support of                                                               
HB 286.                                                                                                                         
                                                                                                                                
3:01:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG moved  to report HB 286  out of committee                                                               
with  individual  recommendations  and  the  accompanying  fiscal                                                               
notes.  There being no objection, it was so ordered.