Legislature(2009 - 2010)BARNES 124

04/09/2010 01:00 PM House RESOURCES


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 1:30 pm Today --
+= SB 305 SEPARATE OIL & GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
+ SB 243 GEOTHERMAL RESOURCE:ROYALTY/PERMIT/FEE TELECONFERENCED
Moved HCS CSSB 243(RES) Out of Committee
+ SB 144 MUSK OXEN PERMITS TELECONFERENCED
<Bill Hearing Rescheduled to 4/12/10>
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 243-GEOTHERMAL RESOURCE:ROYALTY/PERMIT/FEE                                                                      
                                                                                                                                
3:50:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON  announced that the  next order of  business was                                                               
CS FOR SENATE  BILL NO. 243(FIN), "An Act  relating to geothermal                                                               
resources;  relating to  the  royalty  obligation for  geothermal                                                               
resources; transferring from the  Department of Natural Resources                                                               
to the Alaska Oil and  Gas Conservation Commission authority over                                                               
permitting and  inspection of geothermal  wells; providing  for a                                                               
regulatory cost  charge for geothermal  wells; and  providing for                                                               
an effective date."                                                                                                             
                                                                                                                                
3:51:26 PM                                                                                                                    
                                                                                                                                
SENATOR  LESIL McGUIRE,  Alaska  State  Legislature, as  sponsor,                                                               
introduced  SB  243.   She  said  the  bill proposes  two  policy                                                               
changes  in the  area of  geothermal energy.   She  remarked that                                                               
some areas  of Alaska  are already  working on  geothermal energy                                                               
projects, while  other areas have the  potential for exploration.                                                               
She said the first part  of the bill addresses royalty provisions                                                               
under  Alaska law.   She  reviewed that  at one  time, geothermal                                                               
leases  in Alaska  had a  set royalty  rate of  10 percent.   She                                                               
related that  she was part of  a group that discussed  making the                                                               
royalty rate  zero, because the rate  at the time was  thought to                                                               
be a  deterrent to geothermal activity  in the state.   The first                                                               
iteration of  the bill  proposed that  zero rate.   She  said the                                                               
premise was that geothermal energy  uses hot water, unlike energy                                                               
that uses hydrocarbons extracted permanently from Alaska.                                                                       
                                                                                                                                
SENATOR  McGUIRE  said  after  working  with  the  Department  of                                                               
Natural Resources and  listening to feedback from  members of the                                                               
Senate  Resources  Standing  Committee, the  group  decided  that                                                               
while there is  not a hydrocarbon that  is extracted permanently,                                                               
geothermal energy production  would lock up land,  which would be                                                               
unusable for  a variety of  other purposes; therefore,  the group                                                               
decided that the  responsible solution would be to  put a royalty                                                               
in place.   In deciding  what rate  to set, the  group considered                                                               
other rates, including  that of the federal  government, which is                                                               
1.75  percent  for the  first  10  years,  then 3.5  percent  for                                                               
ensuing years.  She indicated that  the group did not want to set                                                               
a rate  higher than  that of  the federal  government and  end up                                                               
with circumstances such  as that in the Continental  Shelf and in                                                               
parts  of Prudhoe  Bay,  where people  are  investing in  federal                                                               
lands because  the rates are  lower.  The royalty  provision set,                                                               
as under SB 243, matches the aforementioned federal rate.                                                                       
                                                                                                                                
3:54:54 PM                                                                                                                    
                                                                                                                                
SENATOR McGUIRE emphasized that the  bill is not being introduced                                                               
for  the benefit  of  any one  company.   She  said  she went  to                                                               
Iceland a  couple years ago  where she became  enthusiastic about                                                               
geothermal   energy,  and   since  then   has  been   working  to                                                               
incentivize the use  of geothermal energy.   During this process,                                                               
she  said, companies  entered into  discussions and  she realized                                                               
that some provisions  of Alaska law needed to be  clarified.  The                                                               
first clarification  was to put  a certain royalty rate  in place                                                               
so  that companies  can make  investment decisions.   The  second                                                               
clarification  was   to  formulate  a  regulatory   scheme  -  an                                                               
essential part  of the  bill that  she said  must be  passed this                                                               
year.  She explained that  currently, under state law, geothermal                                                               
leases  are  regulated  solely   by  the  Department  of  Natural                                                               
Resources.                                                                                                                      
                                                                                                                                
SENATOR McGUIRE  mentioned a utility  company drilling  in Pike's                                                               
Ridge and a  commissioner at the Alaska Oil  and Gas Conservation                                                               
Commission  (AOGCC)  who  looked  into that  drilling.    It  was                                                               
discovered  that the  area  being  drilled presented  hydrocarbon                                                               
deposits.   She  indicated  that the  utility  company and  AOGCC                                                               
worked  well together.    She further  indicated  that state  law                                                               
could be  enacted to benefit this  situation.  She said  under SB
243,  AOGCC  would  assume   responsibility  for  regulating  the                                                               
conservation  of  the  state's  geothermal  resource  to  prevent                                                               
waste.   It  would also  assume  responsibility for  "the act  of                                                               
drilling for a geothermal resource  itself."  She said she thinks                                                               
that  is  important  for  the  protection  of  both  the  state's                                                               
resource and its workers.                                                                                                       
                                                                                                                                
3:57:09 PM                                                                                                                    
                                                                                                                                
SENATOR  McGUIRE related  that under  SB 243,  the Department  of                                                               
Natural  Resources   would  oversee  leasing,   unitization,  and                                                               
general  land  management  issues.    She  asked  that  when  the                                                               
committee  considers SB  243, it  keeps in  mind the  months that                                                               
have  gone into  its existence  and  the integral  nature of  the                                                               
parts of the bill.                                                                                                              
                                                                                                                                
3:58:19 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOHNSON  indicated  that  he had  found  out  that  the                                                               
original 10 percent [royalty rate]  had not been selected for any                                                               
particular reason.                                                                                                              
                                                                                                                                
3:58:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  noted  that the  phrase,  "that  includes                                                           
state land", had been added  after "geothermal" in Sections 6 and                                                           
7, on page 3.  He  then directed attention to Section 5(a), which                                                               
read,  "The  commission has  jurisdiction  over  all persons  and                                                               
property,  public  and  private,   necessary  to  carry  out  the                                                               
purposes and  intent of  this chapter."   He  further highlighted                                                               
language  in Section  5(b), which  read:   "The authority  of the                                                               
commission applies to  all land in the state  lawfully subject to                                                               
the police power of the  state, including private land, municipal                                                               
land, state land, land of the  United States, and land subject to                                                               
the jurisdiction of the United States".   He asked if the bill is                                                               
structured such that  a geothermal resource on  private land that                                                               
is subject to  the police powers of the state  is included, or if                                                               
Section  6  and  7  "specifically  exclude  that  unless  it  ...                                                               
includes some portion of state-owned land."                                                                                     
                                                                                                                                
3:59:45 PM                                                                                                                    
                                                                                                                                
MICHAEL  PAWLOWSKI, Staff,  Senator Lesil  McGuire, Alaska  State                                                               
Legislature,  on behalf  of Senator  McGuire, sponsor,  indicated                                                               
that the  language in Section  7 means that [lessees]  would need                                                               
the  authority  [of  the  commissioner]  to  enter  into  a  unit                                                               
agreement related to a system  that includes state land.  Section                                                               
6,  he said,  refers to  the  commissioner of  AOGCC.   Regarding                                                               
Section  5, he  said DNR  deals with  state land,  but geothermal                                                               
resource development  might happen  outside of  state land.   The                                                               
AOGCC commissioner  has the authority over  plans of development,                                                               
exploration, and  drilling regardless of  whether it is  on state                                                               
or federal land.                                                                                                                
                                                                                                                                
4:01:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON said  he wants to know if  the bill sponsor                                                               
intended for  royalties to apply  when the entire resource  is on                                                               
private land.                                                                                                                   
                                                                                                                                
4:02:05 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI   offered  his  understanding  that   the  royalty                                                               
provision would  not apply to  private land.   For example,  if a                                                               
Native corporation  owned the subsurface rights,  the state would                                                               
not  collect the  royalty on  that land.   The  royalty provision                                                               
applies when the  state owns the subsurface rights, he  said.  He                                                               
further   offered  his   understanding  that   AOGCC's  role   in                                                               
investigation and conservation would extend to private land.                                                                    
                                                                                                                                
4:02:58 PM                                                                                                                    
                                                                                                                                
CATHY P.  FOERSTER, Commissioner,  Alaska Oil &  Gas Conservation                                                               
Commission (AOGCC), Department of  Administration, in response to                                                               
Representative Seaton, stated that  AOGCC will have police powers                                                               
throughout  the state  as  it  does for  oil,  except for  Denali                                                               
National  Park and  Preserve and  a few  pieces of  federal land.                                                               
She explained that  it does not matter who owns  the land - AOGCC                                                               
must ensure  appropriate drilling practices  and the best  use of                                                               
the  resource.   She further  emphasized that  it doesn't  matter                                                               
whether the land  is owned by the state,  the federal government,                                                               
a  Native  corporation,  or  a private  individual  -  AOGCC  has                                                               
authority for all of those lands in  terms of oil and gas, and it                                                               
makes  sense to  have it  for land  on which  geothermal activity                                                               
takes place.                                                                                                                    
                                                                                                                                
4:04:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON noted that  the bill specifies 120 degrees.                                                               
He asked if there is a portion  of the bill that would provide an                                                               
exemption   for  ground   source,  seawater   source,  geothermal                                                               
recovery, or hydrothermal recovery.                                                                                             
                                                                                                                                
4:05:10 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI deferred  to Kevin Banks to  clarify the definition                                                               
section of the bill.                                                                                                            
                                                                                                                                
4:05:30 PM                                                                                                                    
                                                                                                                                
CO-CHAIR NEUMAN  relayed that  sea water  and ground  water pumps                                                               
would  not  qualify  under the  specification  for  120  degrees;                                                               
therefore, they would need the exemption.                                                                                       
                                                                                                                                
4:06:05 PM                                                                                                                    
                                                                                                                                
SENATOR  McGUIRE directed  attention to  language on  page 7,  in                                                               
Section 17,  which defines geothermal resources  as "natural heat                                                               
of the earth  at temperatures greater than  120 degrees Celsius".                                                               
Seawater that  is heated up  and cooled down for  energy purposes                                                               
would not qualify.                                                                                                              
                                                                                                                                
4:06:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  directed attention to language  on page 8,                                                               
lines 1-2,  which read, "or  other resource extraction  device or                                                               
any commercial  use of the natural  heat of the earth".   He said                                                               
the use  of the word "or"  seems to separate "any  commercial use                                                               
of the natural  heat of the earth".   He said he  wants to ensure                                                               
there is no conflict created through the wording.                                                                               
                                                                                                                                
4:07:19 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  related that there  is concern that  under current                                                               
statutory definition  of geothermal,  nothing in Alaska  could be                                                               
considered to  be geothermal, "because  the temperature  might be                                                               
too low."   He  stated that commercial  use of  geothermal energy                                                               
means  using the  heat  of the  ground  for commercial  purposes,                                                               
generating  power,  and   selling  that  power.     He  said  the                                                               
definition  needed  to be  tightened  to  address the  commercial                                                               
application of geothermal energy.                                                                                               
                                                                                                                                
4:08:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON   noted  that  the   Juneau  International                                                               
Airport  is  installing ground  source  heat  pumps to  heat  the                                                               
entire facility, and  he questioned whether that  is a commercial                                                               
use of the natural  heat of the earth.  He said,  "I just want to                                                               
make  sure that  we don't  inadvertently  tap into  that for  any                                                               
other way."                                                                                                                     
                                                                                                                                
4:08:59 PM                                                                                                                    
                                                                                                                                
MR.   PAWLOWSKI  requested   that  the   Department  of   Natural                                                               
Resources' opinion be put on the record.                                                                                        
                                                                                                                                
4:09:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOHNSON  said  he understands  Representative  Seaton's                                                               
concern.  He  recognized that Representative Seaton  had to leave                                                               
for another meeting,  and said unless he objects to  the bill, he                                                               
would like to pass the bill out of committee.                                                                                   
                                                                                                                                
4:09:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON said  he does not have an  objection to the                                                               
bill, but wants clarification on  the record regarding the intent                                                               
of "this language" in the bill.                                                                                                 
                                                                                                                                
4:11:57 PM                                                                                                                    
                                                                                                                                
KEVIN BANKS,  Director, Division  of Oil  and Gas,  Department of                                                               
Natural  Resources (DNR),  clarified that  all of  the provisions                                                               
that are moving  over to AOGCC are existing  statutes that govern                                                               
geothermal  unitization   and  conservation  and   are  currently                                                               
embedded in the Department of  Natural Resources as a consequence                                                               
of statutes  written three decades ago.   He said it  is the view                                                               
of both  DNR and AOGCC that  a more practical use  of the state's                                                               
resources   for  managing   these  resources   with  respect   to                                                               
conservation and correlative rights need  to be in the purview of                                                               
AOGCC, because it has the  experience in unitization with respect                                                               
to private and municipal land owners.                                                                                           
                                                                                                                                
In  response to  a  question from  Representative Guttenberg,  he                                                               
said if there  were mixed ownership of a  geothermal resource, in                                                               
which a  municipality is  involved, and  the development  of that                                                               
resource should  occur, then the municipality's  participation in                                                               
the  resource and  the benefits  it acquires  from that  resource                                                               
would also come under the purview  of AGOCC.  He added, "And they                                                               
would ...  share in  the cost  of its  development, just  as they                                                               
would share  in the revenues."   This would avoid a  situation in                                                               
which private  developers pursue  the development of  a resource,                                                               
and then  somehow the  municipalities would be  off the  hook for                                                               
paying  their share  of  it  or lose  their  benefits should  the                                                               
development occur on their land.                                                                                                
                                                                                                                                
4:14:17 PM                                                                                                                    
                                                                                                                                
MR.  BANKS, regarding  Representative Seaton's  previous question                                                               
about the  120 degree Celsius  cutoff, said the  department wants                                                               
to ensure that commercial uses  of geothermal resources when they                                                               
are  less than  120  degrees  and are  on  state  land should  be                                                               
subject to royalty  provisions.  If that occurs  on private land,                                                               
there  would be  no state  royalty,  he said;  however, there  is                                                               
still a need to define  geothermal resources sufficiently so that                                                               
AOGCC's  responsibilities can  be invoked  to ensure  that people                                                               
are not  drilling wells  that are  unsafe.   The language  in the                                                               
bill  was  intended  to  exclude heat  pumps  for  domestic  use.                                                               
Regarding the Juneau  International Airport, he said  he does not                                                               
know  who owns  the subsurface  resources underneath  the airport                                                               
where the  geothermal heat is  being extracted.   He said  to the                                                               
extent that an  entity such as an airport or  other business that                                                               
happens  to be  using geothermal  fluids that  are less  than 120                                                               
degrees,  he  suspects they  would  have  to  be regulated  as  a                                                               
geothermal resource "under this definition."                                                                                    
                                                                                                                                
4:15:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR NEUMAN  noted that 120  degrees Celsius is  super heated                                                               
water, above boiling  point.  He mentioned a rod  that can be put                                                               
into  the ground  to transfer  heat  and indicated  that that  is                                                               
"pretty well  covered in the bill."   He encouraged a  variety of                                                               
methods for  capturing geothermal energy.   He directed attention                                                               
to page 1, and indicated that  under SB 243, DNR would handle the                                                               
permitting  processes, while  AOGCC  would  handle the  technical                                                               
aspect  of  geothermal resources.    He  said  there would  be  a                                                               
combined effort  to have oversight  practices that  ensure things                                                               
are safely done.  He then  directed attention to language on page                                                               
2, which establishes  the royalty of 1.75  percent, which matches                                                               
the federal rate.  He said there  is value to state land to those                                                               
who hunt  and fish  on it,  for example, and  he opined  that the                                                               
time  frame  for  the  royalties   reflects  this  and  is  "very                                                               
reasonable."                                                                                                                    
                                                                                                                                
4:18:01 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON opened public testimony.                                                                                       
                                                                                                                                
4:18:43 PM                                                                                                                    
                                                                                                                                
PAUL THOMSEN, Director of Policy  and Business Development, Ormat                                                               
Technologies (OT),  Inc., testifying in  support of SB  243, said                                                               
OT leased  36,000 acres at Mt.  Spurr, and is looking  to develop                                                               
on  state land.    He  said OT  thinks  the proposed  legislation                                                               
encapsulates  what has  been discussed  earlier  and would  bring                                                               
royalty  rates "into  the market,"  which allows  his company  to                                                               
compete.    He  stated  that  what  is  unique  about  geothermal                                                               
development is that the product  developed will remain within the                                                               
state of Alaska.   He said he thinks the  sponsor recognized that                                                               
in the bill and tried to reduce  the impact to the rate payers in                                                               
Alaska.                                                                                                                         
                                                                                                                                
4:19:49 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON  closed public  testimony after  ascertaining no                                                               
one else wished to testify.                                                                                                     
                                                                                                                                
4:20:42 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOHNSON  moved  to adopt  Conceptual  Amendment  1,  as                                                               
follows:                                                                                                                        
                                                                                                                                
     Page 8, lines 1-2, between "device" and ";":                                                                               
       Delete "or any commercial use of the natural heat                                                                        
     of the earth"                                                                                                              
                                                                                                                                
REPRESENTATIVE EDGMON objected for discussion purposes.                                                                         
                                                                                                                                
4:21:13 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  pointed out that commercial  development might not                                                               
reach the 120 degree Celsius  temperature, which would mean large                                                               
commercial  development   might  not  qualify   under  Conceptual                                                               
Amendment 1.                                                                                                                    
                                                                                                                                
4:21:46 PM                                                                                                                    
                                                                                                                                
SENATOR  McGUIRE suggested  instead that  the committee  consider                                                               
defining commercial use itself to mean  the sale of heat or power                                                               
to a third party.                                                                                                               
                                                                                                                                
4:22:28 PM                                                                                                                    
                                                                                                                                
MR. BANKS  said DNR can  accept the  suggestion made by  the bill                                                               
sponsor.                                                                                                                        
                                                                                                                                
CO-CHAIR JOHNSON withdrew Conceptual Amendment 1.                                                                               
                                                                                                                                
4:22:46 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOHNSON  moved  to adopt  Conceptual  Amendment  2,  as                                                               
follows:                                                                                                                        
                                                                                                                                
     Page 8, lines 1-2, between "or" and ";":                                                                                   
       Delete "any commercial use of the natural heat of                                                                        
     the earth"                                                                                                                 
          Insert "sale of heat or energy to a third party"                                                                      
                                                                                                                                
4:23:18 PM                                                                                                                    
                                                                                                                                
SENATOR McGUIRE  suggested instead that  the language on  lines 1                                                               
and 2  could be left as  is and a definition  of "commercial use"                                                               
could be added in the definition section of the bill.                                                                           
                                                                                                                                
4:23:36 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON moved to amend  Conceptual Amendment 2 such that                                                               
on  page  8,  following  paragraph   (9),  a  new  definition  of                                                               
"commercial use"  would be added to  read:  "the sale  of heat or                                                               
power to  a third party".   There being no  objection, Conceptual                                                               
Amendment 2, as amended, was adopted.                                                                                           
                                                                                                                                
4:24:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   EDGMON  expressed   his  hope   that  Conceptual                                                               
Amendment 2, as amended, accomplishes what was intended.                                                                        
                                                                                                                                
4:24:30 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOHNSON  clarified  that  the purpose  of  the  adopted                                                               
amendment is to  exclude heat pumps used for personal  use or the                                                               
aforementioned  use  at  the Juneau  International  Airport,  for                                                               
example.   He  said  he  would work  with  the  sponsor and  bill                                                               
drafters to ensure that purpose is clear.                                                                                       
                                                                                                                                
4:25:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR NEUMAN  moved to report  CSSB 243(FIN), as  amended, out                                                               
of   committee   with    individual   recommendations   and   the                                                               
accompanying fiscal  notes.  There  being no objection,  HCS CSSB
243(RES)  was  reported  out  of  the  House  Resources  Standing                                                               
Committee.                                                                                                                      

Document Name Date/Time Subjects
Corrected Sectional Analysis Sb 243 version P.pdf HRES 4/9/2010 1:00:00 PM
SB 243
CSSB0243 P Fin.pdf HRES 4/9/2010 1:00:00 PM
SB 243
Geothermal Royalty Rates.pdf HRES 4/9/2010 1:00:00 PM
Ormat SB243 for Senate Resouce Hearing 3.10.10 ver0 (2).pdf HRES 4/9/2010 1:00:00 PM
SB 243
Royalty Sheet SB 243 SFIN.pdf HRES 4/9/2010 1:00:00 PM
SB 243
SB0243-3-1-040210-DNR-N.pdf HRES 4/9/2010 1:00:00 PM
SB 243
USGS Geothermal Packet.pdf HRES 4/9/2010 1:00:00 PM
SB0243-4-1-040210-ADM-N.pdf HRES 4/9/2010 1:00:00 PM
SB 243
CSSB305 Conceptual Amendment by Rep Guttenberg.pdf HRES 4/9/2010 1:00:00 PM
SB 305
CSSB305 Amendment WA.2.pdf HRES 4/9/2010 1:00:00 PM
SB 305
CSSB305 Conceptual amend to Amendment WA.2.pdf HRES 4/9/2010 1:00:00 PM
SB 305
SB 305 David Wood Memo 3.02.10.pdf HRES 4/9/2010 1:00:00 PM
SB 305
SB 305 Logsdon 4.09.10.pdf HRES 4/9/2010 1:00:00 PM
SB 305