Legislature(2005 - 2006)CAPITOL 124

04/28/2005 05:00 PM OIL & GAS

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05:12:37 PM Start
05:14:01 PM HCR8
05:17:07 PM Alaska Oil and Gas Conservation Commission
05:23:22 PM HB254
05:57:41 PM HB286
06:20:00 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Confirmation hearing: AOGCC, TELECONFERENCED
Cathy Foerster
Heard & Held
Moved Out of Committee
Scheduled But Not Heard
Moved Out of Committee
Bills 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                                                               
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                                                               
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                                                               
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                                                               
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                                                                    
     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                                                                    
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.                                                                                         

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