Legislature(2005 - 2006)CAPITOL 124
04/28/2005 05:00 PM OIL & GAS
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|Alaska Oil and Gas Conservation Commission|
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 286 - VALUE OF ROYALTY ON GAS PRODUCTION 5:57:41 PM CHAIR KOHRING announced that the final 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." SARA NIELSEN, Staff to Representative Ralph Samuels, Alaska State Legislature, sponsor, presented HB 286 on behalf of Representative Samuels. She stated: House Bill 286 is a simple housekeeping bill that was brought forward by [Anchorage] Municipal Light and Power (ML&P). This bill amends current statute by adding language that allows the Department of Natural Resources [DNR] to use the gas transfer price set by the [Regulatory Commission of Alaska (RCA)], much like DNR uses the contract price for gas. The transfer price is the rate that ML&P is required to charge itself for the Beluga Field gas that [it] uses. [The Department of Natural Resources] agreed to let ML&P ... continue to use the current statute based on the "ML&P/Shell" contract even after ML&P bought Shell's interest in the field, but that contract expires at the end of this year. While ML&P's share in the Beluga River Field will assure ML&P of a supply of gas without this legislation, ML&P will be unable to continue to use current statute for its gas. The proposed change is consistent with the purpose of the original law, and also will help ensure that Anchorage electric consumers have certainty and stability in their electric rates. 5:59:55 PM JIM POSEY, General Manager, Anchorage Municipal Light and Power (ML&P), by way of introduction, reiterated a few of Ms. Nielsen's comments. 6:01:12 PM REPRESENTATIVE ROKEBERG asked how the price is set. MR. POSEY replied that the RCA sets a transfer price that's based on the interest payments on the $120 million that [ML&P] used to buy the field. He added, "It is a price set by the RCA that allows us to sell it to ourselves and have a reasonable rate without having harm to our rate payers." CHAIR KOHRING ascertained that regulatory counsel for ML&P was available for questions. 6:02:24 PM MARK MYERS, Director, Central Office, Division of Oil & Gas, Department of Natural Resources (DNR), stated that the DNR supports HB 286. He added: It was ... recognized previously by the legislature that utilities need a stable price, and under AS 38.05.180(aa), they ... don't have to use our "higher of" provision - they actually use the sales price in providing gas to their customers. And then the state gets that sales price, not the "higher of" value, which [is] an average of those received by other producers from the same producing area. So [it] provides a mechanism to provide a stabile rate and base for royalty gas sold to public utilities, and it recognized [that] the good of a public utility is in the best interest of the state. So we have an unusual situation here, where the public utility [that] uses the gas is also the gas producer, and that's never been covered in our law before. So this amendment allows that affiliated producer and marketer/seller of the gas to use a simple value. And, again, sometimes there can be concerns of affiliated transfers, that they don't represent actual value; however, in this case, because you have an independent price-setting agency, ... [the] RCA, that provides sort of an independent review of that price to make sure it's not artificially low or unreasonable. So in this case, again, if [the] DNR would disagree, they still could go back and challenge it, but in general I think we would be satisfied with the RCA. ... So we're very comfortable; this is well within the intent of what [the original AS 38.05.180(aa)] was supposed to do. 6:04:37 PM REPRESENTATIVE ROKEBERG said that according to prior testimony, it seems as though the prices would be relatively low if they are based solely on the interest rates paid on the original purchase price. He asked how the state's interests will be protected. MARTIN T. SCHULTZ, Commercial Analyst, Audit Section, Central Office, Division of Oil & Gas, Department of Natural Resources (DNR), explained that under HB 286, the ML&P - or any other entity - would still have to apply to the DNR to have its gas valued at the transfer price, which would be reviewed by the DNR commissioner, and the DNR could decline to use the transfer price to establish royalty value if the commissioner believes that that price is unreasonably low. He mentioned that proposed AS 38.05.180(aa)(2) outlines the aforementioned review process. REPRESENTATIVE ROKEBERG asked whether ML&P pays royalty fees to the state. MR. SHULTZ said yes. REPRESENTATIVE ROKEBERG asked for clarification. MR. SCHULTZ said that ML&P currently pays royalty on the gas it uses "internally" at its affiliated utility, and that price is based on the negotiated third party contract price that was used when [Shell Western E&P Inc.] sold gas to ML&P. Therefore, currently, the "higher of" value is not applied to that gas. 6:07:26 PM MR. MYERS added that the royalty rate itself is consistent with the "under the lease" contract. The only question left to debate is what the actual sale price would be, since the gas is being taken "in-value" rather than "in-kind." He predicted that the RCA would not want to use a price if it were determined to be artificially low, and also that the DNR would not allow such a price anyway. The goal is to treat the ML&P just like every other utility and provide it with a long-term stable price. 6:08:46 PM REPRESENTATIVE ROKEBERG said it seems like one could, under the bill and using the transfer price, have a price lower that what it is currently. MR. SCHULTZ reiterated that if the transfer price was determined to be an unfair price, then the DNR commissioner would decline to use it. 6:09:49 PM REPRESENTATIVE ROKEBERG asked whether a finding would have to be made any time there's a change in the price. MR. MYERS said he didn't think the question would automatically go back to the RCA; instead, the issue would be decided by the commissioner of the DNR. He added that if ML&P's "rate base was based" on a higher gas sales price, then it could go to the RCA and ask for a rate increase. 6:10:37 PM REPRESENTATIVE ROKEBERG noted that proposed AS 38.05.180(aa)(1)(B) says, "the transfer is an affiliated interest, as that term is defined in AS 42.05.990, and the transfer price between the lessee and the utility is established by an order of the Regulatory Commission of Alaska". He asked whether that language applies to a different set of circumstances. MR. MYERS explained that that language is the default; if the DNR doesn't think that that price is justifiable, it can decline to use it. He reiterated that AS 38.05.180(aa)(2) outlines the review process criteria, and that the ML&P could go to the RCA and ask for a rate increase. REPRESENTATIVE KERTTULA referred to page 2, line 13-14, and noted that it says in part, "and ... unless". She characterized that sentence construction as confusing, and asked for clarification. MR. SCHULTZ replied that under the way the statute is currently structured, which will remain the same even with the change proposed by the bill, the producer makes an application to the DNR for the treatment specified in AS 38.05.180(aa) and it gets to use its contract - or, under a change proposed in the bill, its transfer price - unless the commissioner makes a written finding declining to use that price. Thus, if the DNR didn't issue any finding, the contract price or transfer price would be used. 6:14:05 PM REPRESENTATIVE KERTTULA noted that line 9, page 2, contains the word "or", and suggested that its use may constitute a grammatical error. 6:14:32 PM KATE GIARD, Chair, Commissioner, Regulatory Commission of Alaska (RCA), Department of Commerce, Community, & Economic Development (DCCED), said that the RCA has read the legislation and is comfortable with it. In response to questions posed earlier, she said: The RCA issued order number U-96-36, ... which discusses and clarifies, for the members, the method of calculating the transfer price that is discussed in this legislation. And annually, from this point forward, ML&P will file with us a calculation of their transfer price, and it's based on their actual production costs times their debt-service ratio. So they'll take their costs - and for purposes of illustration, let's just pretend it's a $1 million - then they'll multiply that $1 million times their debt-service coverage rate, which is 1.6. So we then will calculate from that; we'll have their actual production costs and we'll have their debt-service coverage that we set, and we'll ... review their proposed calculations to us of the ... transfer price. So to answer the questions that Representative Rokeberg ... [asked], the calculation will be fully analyzed and vetted here within the commission. Frequently, when ML&P proposes or brings forward a tariff, which they'll do every single year now - we've ordered them to do that - there's an opportunity ... for the public advocate, which is an arm of the attorney general, to participate in the evaluation of that calculation. And so there is, through this process, a coming to the RCA - a mechanism for the public to weigh in. And obviously the advocate would be looking at those costs, making sure that they're not too low or too high, as well as [having] an opportunity to opine on whether ... they're fair and reasonable. So all of that is brought before us, and we take it into consideration when we make a calculation. And I appreciate that the Department of Natural Resources probably wanted to put a failsafe ... [mechanism in the bill], but believe, truly, that it'd be a very rare event, where we would fully vet a calculation of this nature and then that it would have a problem with it. 6:17:22 PM CHAIR KOHRING, after ascertaining that no one else wished to testify, closed public testimony on HB 286. 6:17:54 PM REPRESENTATIVE ROKEBERG moved to report HB 286 out of committee with individual recommendations and the accompanying zero fiscal notes. There being no objection, HB 286 was reported from the House Special Committee on Oil and Gas.