Legislature(2009 - 2010)BARNES 124
03/12/2010 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB280 | |
| HB306 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 280 | TELECONFERENCED | |
| *+ | HB 229 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 306 | TELECONFERENCED | |
HB 280-NATURAL GAS
1:05:47 PM
CO-CHAIR JOHNSON announced that the first order of business is
HOUSE BILL NO. 280, "An Act relating to natural gas; relating to
a gas storage facility; relating to the Regulatory Commission of
Alaska; relating to the participation by the attorney general in
a matter involving the approval of a rate or a gas supply
contract; relating to an income tax credit for a gas storage
facility; relating to oil and gas production tax credits;
relating to the powers and duties of the Alaska Oil and Gas
Conservation Commission; relating to production tax credits for
certain losses and expenditures, including exploration
expenditures; relating to the powers and duties of the director
of the division of lands and to lease fees for the storage of
gas on state land; and providing for an effective date."
[Before the committee was CSHB 280(L&C).]
1:06:13 PM
CO-CHAIR NEUMAN moved to adopt the proposed committee substitute
(CS) for HB 280, Version 26-LS1185\C, Bullock, 3/9/10, as a work
draft. There being no objection, Version C was before the
committee.
REPRESENTATIVE SEATON objected for purposes of learning what the
changes are.
1:07:20 PM
REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, joint
prime sponsor of HB 280, directed attention to the one-page
written explanation of the differences between Version C and
CSHB 280(L&C). In response to Co-Chair Johnson, he said HB 280
is intended to help bring back the vitality of the Cook Inlet
basin and increase gas production to meet the needs of
Southcentral Alaska, Anchorage, and the Railbelt. He introduced
his staff members that worked on this bill - Larry Persily,
Janice Levy, and Juli Lucky - and noted that consultants Dan
Dickinson and Roger Marks also assisted with the bill.
1:11:15 PM
REPRESENTATIVE HAWKER explained that HB 280 is a response to the
challenge of keeping the lights and heat on in his community
during the winter. Gas supply in the Cook Inlet basin is
depleting and there is a real probability of being unable to
meet peak winter demands in a very short period of time. He
said the first issue is recognizing there is a problem and
solving it. In solving the problem, HB 280 would also provide
consumer cost relief. The bill has statewide application in
that it would provide the same advantages to the Fairbanks area
as it would the Cook Inlet because gas storage will also be a
necessity for Fairbanks, regardless of the city's source of gas.
Storage was unnecessary when Cook Inlet gas was abundant, but
that is no longer the case and storage is now needed to keep
enough gas on hand to meet the peak winter demand.
1:13:37 PM
REPRESENTATIVE HAWKER related that on February 15, 2010, the
United Kingdom government approved construction of a $1 billion,
50 billion cubic foot natural gas storage facility. That
facility is aimed at correcting years of government and market
failure to build enough backup capacity to keep pace with demand
and to fill unexpected supply disruptions. He said HB 280 would
do the same for Alaska, but rather than a government-invested
solution, it would be a free-market approach to developing the
storage that is needed to provide energy security.
1:14:52 PM
REPRESENTATIVE HAWKER noted that every stakeholder in Cook
Inlet, from the municipalities to the utilities, has publicly
stated that storage is essential to the future energy
infrastructure. Storage will add an additional cost to the
supply chain of gas, resulting in an upward pressure on consumer
prices. An important part of HB 280 is that it would lessen
those costs to consumers.
REPRESENTATIVE HAWKER said HB 280 would also address the need
for regulatory certainty because, at this moment, regulatory
uncertainty is impeding the development and progress on any
storage projects. The Regulatory Commission of Alaska (RCA)
recently sent a message to the legislature asking for
clarification of its regulatory responsibility with regard to
gas storage activities in Alaska, and HB 280 would answer that.
1:16:25 PM
REPRESENTATIVE HAWKER, in response to Co-Chair Johnson, began a
review of the changes that would be made by Version C. He said
changes to Section 2 are changes around the parameters of what
type of facility would qualify for the incentive tax credit for
the development. Version C would tighten this up and "right
size" the bill to mitigate any potential gaming. He noted that
gas can be stored in pipelines, called packing; Version C
changes Section 2 so that pipeline packing is eliminated from
being considered storage. Changes to Section 8 clarify the
boundaries and facilities of a gas storage facility that would
be subject to regulation by the RCA. It specifies that RCA
regulation extends only to gas storage facilities operated
exclusively or primarily for delivery of gas to consumers and
not to the world market.
1:18:35 PM
REPRESENTATIVE SEATON understood that Version C would not extend
RCA regulation. He asked whether the credit would be extended.
REPRESENTATIVE HAWKER responded no, the credit was not extended
in the first version and is not extended in Version C.
REPRESENTATIVE SEATON presumed it would be underground storage
that is covered by Version C. He inquired whether tank storage
would also qualify.
REPRESENTATIVE HAWKER replied that Version C provides
requirements for both physical size and deliverability.
Realistically, it would be underground storage because to
qualify an aboveground tank would have to accommodate 100
million cubic feet annual injection or withdrawal and be large
enough to hold 500 million cubic feet of gas.
1:20:02 PM
REPRESENTATIVE TUCK asked whether the RCA would have authority
over new proprietary gas storage that is not necessarily third
party.
REPRESENTATIVE HAWKER answered Version C goes strictly to
providing third-party storage of gas for delivery to consumers.
At the moment, it is unclear as to the extent the RCA may wish
to apply that regulatory authority beyond the clearly stated
responsibility in the bill.
REPRESENTATIVE HAWKER continued his discussion of the changes.
In Sections 10, 17, and 19, Version C changes the transferable
tax credit to a refundable tax credit. This change was at the
request of the Department of Revenue to ease the accounting and
management activities that would be involved in monitoring the
credits. He said Section 10 relates to "right-sizing" the bill
by cutting in half the maximum tax credit available for a gas
storage facility.
1:21:43 PM
REPRESENTATIVE SEATON inquired whether the refundable tax
credits would be limited to gas storage credits or would apply
to both oil and gas credits.
REPRESENTATIVE HAWKER responded that Version C makes no changes
to the transferable or refundable nature of any existing credits
in statute. It would apply only to the development credit for
gas storage facilities that originate in HB 280.
REPRESENTATIVE SEATON removed his objection to Version C. There
being no further objection, Version C was before the committee.
REPRESENTATIVE HAWKER reiterated that Version C addresses the
RCA request for clarification of its responsibility to regulate
storage facilities, and it clarifies what would be allowable
from the standpoint of inventory management within a
contemplated storage facility.
1:23:08 PM
CO-CHAIR NEUMAN asked whether HB 280 relates just to Cook Inlet
and whether the sponsor statement still applies to Version C
given the changes that have been made.
REPRESENTATIVE HAWKER replied the provisions related to
investment tax credits for the development of storage would be
applicable statewide. The bill was brought forward because of
the immediate, impending problem within the Cook Inlet basin
that is the result of the production decline inside that area.
Motivation for the bill came while he was flying over the Kenai
Peninsula and saw shuttered buildings where once stood a vibrant
economic zone. The underlying business conducted there - oil
and gas development in Cook Inlet - is the foundation for the
entire energy security of Southcentral Alaska. This decline in
productivity in Cook Inlet is putting the Southcentral region at
risk of an impending winter disaster when there is not enough
gas to keep the lights, heat, and electricity on.
REPRESENTATIVE EDGMON observed that this is a statewide issue in
that rural Alaska is also very much dependent upon inexpensive,
or at least stable, fuel costs in the Southcentral region; it is
a symbiotic relationship. Work is continuing to get stable fuel
to Bush Alaska as well.
1:26:54 PM
CO-CHAIR NEUMAN noted that in Prudhoe Bay the natural gas
liquids (NGLs) are re-injected into the well to make it easier
to pump the oil. He inquired whether the intent is to consider
that as gas storage and include that process in HB 280.
REPRESENTATIVE HAWKER answered no.
CO-CHAIR JOHNSON understood Cook Inlet gas is a much drier gas.
REPRESENTATIVE SEATON noted that gas is sold to North Slope
entities in addition to re-injection in the Prudhoe Bay fields.
He asked whether this could be considered a gas storage field,
given that he believes over 100 million cubic feet of gas per
year is being sold.
REPRESENTATIVE HAWKER responded the practical answer is no
because those are active wells, not storage wells or storage
leases. The bill would require certification of gas storage
facility capacity by the Alaska Oil and Gas Conservation
Commission (AOGCC), and it is very clearly not the intent to
take an operating well and somehow be able to call it a storage
facility.
1:29:27 PM
REPRESENTATIVE HAWKER resumed highlighting the provisions of HB
280, Version C. He said the bill would provide clarification to
potential owners and developers of storage facilities about the
difference between storing gas and producing gas. When gas is
produced, royalty and production taxes must be paid. Storing
gas is an inventorying activity and the bill would offer an
investment tax credit for qualified storage facilities. The
Department of Revenue, the Department of Natural Resources, and
others participated in developing the bill to ensure tight
definitions that prevent gaming. The bill would provide the
regulatory certainty that is being asked for by saying that RCA
regulates gas storage.
REPRESENTATIVE HAWKER said HB 280 would specifically require
Last In, First Out (LIFO) accounting of the gas inventory - the
last gas pumped into the facility is the first gas pumped out by
volumetric measurement. These underground pressure vessels are
former gas production facilities and leases that may already
have recoverable gas in them, but that gas would be used as the
cushion gas or the spring to push the injected gas back out. It
would be considered production if more gas is taken out than is
put in, and taxes would then have to be paid.
1:31:51 PM
REPRESENTATIVE HAWKER pointed out that just the ability to store
gas is not enough to solve the impending problem. More gas is
needed as well. Therefore, HB 280 would encourage additional
exploration through provisions that make Cook Inlet investment
more attractive to both new producers and existing stakeholders
in the inlet. Current production is out of five major gas
domes, but now it is at the point of where the geology amounts
to chasing small bubbles of gas in a three-dimensional space.
The bill would encourage new exploration by expanding some
access to existing tax credits through the crossing of
limitation borders and minimally enhancing some of those
credits. He emphasized that in HB 280 these issues are
addressed only for the Cook Inlet; other bills are currently in
the legislature that would apply the same provisions to the
entire state. He said he did not want to touch the North Slope
in this regard because it is too sensitive of an issue; he is
looking to build legislative alignment and support for the
immediate issues within the Cook Inlet.
1:34:27 PM
REPRESENTATIVE HAWKER concluded by stating that HB 280 is a very
simple bill that would provide gas to keep on the lights and
heat during cold winter days in Anchorage. The bill would also
protect consumers by mitigating the inevitable cost increases
resulting from the development of storage facilities. The bill
would answer a current unknown by imposing regulation on the
emerging energy storage industry. Further, HB 280 would provide
operating clarity for the developers of the emerging energy
storage industry so they clearly know the difference between gas
storage and gas production.
1:36:01 PM
CO-CHAIR NEUMAN inquired whether any work is ongoing to renew
the "Nikiski export facility". He surmised a storage facility
would benefit this export facility.
REPRESENTATIVE HAWKER replied that through this point in time,
the ability to export Cook Inlet gas is exactly what has made
the Cook Inlet gas economy and process work. He explained that
gas wells operate best by keeping production at a fairly stable
level. However, consumer demand is not stable and varies
radically between the colder winter days and warmer summer days,
and on those low demand days something must be done with the
surplus gas. Since the mid-1960s, the export facility has taken
that surplus on low demand days and exported it. Likewise,
there was a time when production levels were so high that the
surplus was also taken by the "Agrium plant". Closure of the
Agrium plant was the first casualty of Cook Inlet's declining
gas production. There is now risk that the export facility will
be lost through not being re-licensed for export. If that
occurred today, it would force underproduction of the existing
wells and there would not be enough gas produced to meet
consumer demand on winter days. He noted that time is drawing
short to protect the people of Southcentral Alaska because the
current export license expires on March 31, 2011.
1:40:20 PM
REPRESENTATIVE SEATON observed that the reason for the tax
credit is to keep consumer prices low. However, producers have
stated over the past that the price is so low the value is not
there to engage in exploration and development in the Cook
Inlet. He asked whether trying to keep consumer prices low
defeats the initiative for exploration and development.
REPRESENTATIVE HAWKER answered there are two issues. The issue
of storage is the mission-critical component of ensuring there
is enough gas available for delivery on peak-demand days. The
bill would require that every penny of the investment tax credit
for storage capacity development be passed on to the consumer,
and this provision is why HB 280 is a bill to minimize
consumers' exposure to the necessarily increasing costs. In
exchange for this benefit to consumers, the bill would provide
regulatory certainty on how to operate storage that does not
currently exist, as regulatory uncertainty is impeding
development of storage. Encouraging exploration and production
of the stratigraphic gas traps in Cook Inlet is an entirely
separate matter than the consumer-oriented storage facilities.
He reiterated that both storage and exploration need to be
encouraged. The State of Alaska currently requires amortization
of exploration incentive credits over a period of two years; HB
280 would drop that to one year, which would improve a company's
cash flow and make Alaska more competitive with the rest of the
world.
1:44:34 PM
REPRESENTATIVE SEATON inquired whether HB 280 would allow a
producer to use its Cook Inlet credits to offset its North Slope
production instead of having to reinvest in Cook Inlet. He
noted that when production taxes were designed they were
specifically set apart because the Cook Inlet tax regime is so
different at basically no tax.
REPRESENTATIVE HAWKER, to provide an understanding of the
question asked, explained that when production taxes were
changed on a statewide basis in previous legislative sessions,
the Cook Inlet was ring-fenced and allowed to operate under the
rules of the previous economic limit factor (ELF) rather than
going to the profit-sharing taxes. This kept the production
taxes in Cook Inlet from going up. Beneficial credits were
added for exploration and development in the profit-sharing tax
bills. It was recognized that a company operating in both the
Cook Inlet and other parts of the state could take an investment
credit based in Cook Inlet, where its taxes were lower already,
and file a single tax return on a statewide basis that used
those credits to offset higher taxes in the other regions. For
purposes of utilizing tax credits, the original bill said that a
company generating a tax credit in the Cook Inlet must first
figure out what its taxes would have been in the Cook Inlet
without the ring-fencing under ELF and then discount its tax
credit by the amount it would have had to use to offset the
differential between the production tax under the profit-sharing
method and the lower taxes in the Cook Inlet.
1:47:01 PM
REPRESENTATIVE HAWKER said his own take is that production needs
to be encouraged all across the state; however, in Cook Inlet it
is critical that production be increased. While he appreciates
the argument that companies are not paying as much tax in Cook
Inlet and so should not be allowed to utilize the credits, that
is telling people not to bother with the Cook Inlet and to
instead invest where there are higher tax credits. He said he
thinks that may have had unintended detrimental consequences in
discouraging investment in the Cook Inlet. The single thing
most needed from investment in the state is additional
exploration and production. He said he therefore thinks it is
appropriate to bring forward a change and a compromise of the
limitation that was provided for in the earlier legislation.
1:49:05 PM
REPRESENTATIVE HAWKER, in response to Representative Guttenberg,
explained that HB 280 contains a tax recovery provision, meaning
that if a credit is received for starting a gas storage facility
and then that facility ceases operation, the state will receive
the credit back from the operator. The notice provision in HB
280 means the operator has the affirmative responsibility to
tell the state if it ceases to comply with that requirement and
that it triggers recapture of the credit the operator has been
given. So, the notice requirement means an operator cannot
suddenly stop operations and hope the state does not catch it.
1:51:35 PM
REPRESENTATIVE GUTTENBERG asked what would happen if an operator
failed to meet the bill's requirement to cycle [100 million
cubic feet of gas per year] for reasons beyond the operator's
control.
REPRESENTATIVE HAWKER deferred to Larry Persily.
LARRY PERSILY, Staff, Representative Mike Hawker, Alaska State
Legislature, responded that the sponsors tried to set a limit by
requiring that a facility be in operation in return for
receiving the incentives and certainty provided by HB 280. The
sponsors did not want to take the chance that someone could take
an old depleted reservoir with a well, claim storage, take a
credit, and then not do much with it. The 100 million cubic
feet is an arbitrary number and a pretty low threshold, given
that a couple of existing storage operations proprietary right
now in Cook Inlet have capacity for 1 billion or 5-6 billion
cubic feet. He therefore cannot conceive that someone could say
the reason for not operating is because of a warm winter. The
sponsors tried to pick a number that is reasonable but not so
high that ceased operations would be declared when they really
have not. Should an operation cease, the state would pro-rate
and take back the credit.
1:53:52 PM
REPRESENTATIVE HAWKER allowed that Representative Guttenberg may
have brought up a point that is not actually addressed by the
bill, which is the possibility of something like a natural event
that is beyond the control of the owner/operator of the storage
facility. The bill, as written, may not provide a safety valve
that would allow the commissioner to overlook a violation of the
statute. He said that is something to take a look at.
REPRESENTATIVE GUTTENBERG suggested this could be put into the
regulations because HB 280 gives the director a lot of leeway.
1:54:47 PM
REPRESENTATIVE GUTTENBERG requested Representative Hawker to
expand on the provisions of Section 20, Version C.
REPRESENTATIVE HAWKER replied many folks would argue that Cook
Inlet is over-regulated and that the Regulatory Commission of
Alaska has made decisions that were not of benefit to the
community and may have exacerbated the problems. As a result of
having no clear guidance, the RCA did not approve some contracts
for long-term gas supply, and had those contracts been approved,
industry would be scrambling hard today to bring gas up. The
sponsors of HB 280 are trying to include some tooth that says
the regulatory authorities should be encouraged to approve long-
term supply contracts without trying to set any empirical
measure by which to tell them to do it. For example, Mr.
Pickett of the RCA has pointed out that there is nothing telling
the RCA that it must consider what would happen if it does not
approve a contract. Section 20 and Section 5, Version C, add
this new philosophic guidance that the RCA must consider the
consequences of saying no.
1:58:37 PM
REPRESENTATIVE TUCK understood HB 280 has two parts: one that
would pave the way for third party storage and the other to
incentivize exploration in the Cook Inlet region. He inquired
whether there is the potential that third party storage may not
be necessary should HB 280 be passed and exploration is
incentivized, but the LNG export license is not renewed.
REPRESENTATIVE HAWKER answered there is unanimous concurrence
among the stakeholders in the inlet that storage is an absolute
necessity, even if LNG export stops. Gas will still be needed
to meet those peak requirements and to do that there needs to be
increased capacity to pull gas out of the ground, which takes
storage. If the export facility continues to operate, a buffer
of gas storage will still be needed for those days of excess gas
production and days of insufficient gas production.
2:00:43 PM
CO-CHAIR JOHNSON held over HB 280. He noted that this is a key
issue for his community, so the committee will be returning to
the bill as quickly as possible.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CS HB 280 (LC).pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |
| HB280 Background.pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |
| HB280 Overview.pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |
| HB280 Sectional Summary.pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |
| HB280 Sponsor Statement.pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |
| HB 280-1-1-021710-ADM-N.pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |
| HB 280-2-2-021710-CED-N.pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |
| HB 280 WD v. C.pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |
| HB 280 Changes v. C.pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |
| HB 280 v. C Sectional Analysis.pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |
| HB 280 v. C Overview.pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |
| CSHB280-DNR-OG-03-05-10.pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |
| CSHB280-REV-TAX-03-07-10 Cook Inlet Recovery Act.pdf |
HRES 3/12/2010 1:00:00 PM |
HB 280 |