Legislature(2003 - 2004)
04/09/2003 01:24 PM House RES
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HB 204-REGULATION OF NATURAL GAS PIPELINES Number 1350 CHAIR FATE announced that the next order of business would be HOUSE BILL NO. 204, "An Act relating to the regulation of natural gas pipelines under the Pipeline Act." [The bill was sponsored by Representative Chenault.] REPRESENTATIVE MASEK moved to adopt CSHB 204(O&G). There being no objection, it was so ordered. The committee took an at-ease from 1:40 p.m. to 1:41 p.m. Number 1442 A. BEN SCHOFFMANN, Project Manager, Alaska Business Unit, Domestic Production, Marathon Oil Company; Vice-President, Kenai Kachemak Pipeline, LLC (KKPL), gave a presentation and provided a 12-page handout. Referring to page 2 of the handout, he said HB 204 would permit all natural gas pipelines within the state to file a tariff with the Regulatory Commission of Alaska (RCA) that offers both firm and interruptible service under the Pipeline Act. He related his view that this is very similar to what was done through the legislature in 2000, allowing a North Slope pipeline to do that, and is also consistent with sound policy in the Lower 48, where the Federal Energy Regulatory Commission (FERC) regulates pipelines under the same premise with both firm and interruptible transportation. MR. SCHOFFMANN explained that firm service in a transportation pipeline occurs when a shipper commits to paying a monthly reservation charge and therefore is assured a set level of capacity; that payment is due whether or not the service is actually used. The pipeline, in turn, guarantees that the capacity is available as and when needed. By contrast, interruptible service is a pay-as-you-go concept that only requires payment from shippers if they actually use the service. The pipeline makes its best efforts to provide capacity, but in the event that there is a restriction for any reason, those shipments are subject to curtailment or interruption. This is important for pipeline investors to be able to ensure that they're going to have a level of business prior to making their investments. Number 1654 MR. SCHOFFMANN said that without the ability to offer firm and interruptible service, a pipeline would have to estimate how many customers it might have and wouldn't be assured of a stable revenue stream. He suggested pipeline investors like it because they can ensure that they will get business in advance and ensure that the pipeline they're building is at least going to be of the [appropriate] size for the set level of business; it gives some stability and reduces risk. Shippers also should like firm and interruptible service, he suggested, because it allows them to align their shipping services with their boats, gas supplies, and gas-sales contracts. MR. SCHOFFMANN explained that gas-sales contracts are typically made between producers and end users or customers; pipelines then come into the middle of that relationship. He said it's important to gas suppliers who sign contracts with customers on pretty much the same basis - firm sales or interruptible sales - to be able to have flexibility to make sure the pipeline can transport the volumes that they've sold either under firm terms or interruptible terms. Number 1714 MR. SCHOFFMANN suggested a producer who has pretty firm supplies may also wish to have firm transportation. Contrarily, there are producers who have signed contracts that are interruptible. It would make little sense for producers with interruptible sales contracts to sign up for firm transportation; they'd rather pay as they go. Similarly, he said, if they have yet to fully explore or delineate their gas reserves, it would be a little difficult to imagine why producers might want to sign up too much firm capacity when they still have a lot of unknowns. So this helps the producers to align transportation services with both their set gas-sales contracts and their gas supplies. MR. SCHOFFMANN said the fiscal note from the Department of Natural Resources (DNR), Division of Oil & Gas, indicates a zero impact. However, a statement on [RCA's] fiscal note expresses a concern about affiliate ownership as it may relate to the open access provisions. He offered his belief that those comments pretty much had to do with a general statement that contract carriage or firm and interruptible transportation is generally a good thing, but said [RCA] might envision some circumstances in which producer-affiliate ownership could be a problem. Mr. Schoffmann relayed his belief that this concern was largely mitigated by the comments in the RCA fiscal note. In addition, a producer-affiliate ownership is the primary model for Alaska, he suggested, primarily because the producer affiliates are the ones with the greatest incentive to make the investments. He said currently those concerns that may have been raised haven't developed. Number 1855 MR. SCHOFFMANN mentioned conversations he'd had with several smaller producers such as Aurora Gas LLC, Forest Oil Corporation, and Evergreen [Resources]. He talked about a letter of support from Aurora Gas LLC stating that it very much favored the expansion of infrastructure to help them, as a smaller producer, get access to the markets with their gas. He said he was given permission by Forest Oil Corporation to say that it had looked at the bill and had no problems with it. Mr. Schoffmann reporting that his initial conversations with Evergreen Resources seemed favorable but that he had yet to see anything final from them. MR. SCHOFFMANN offered his belief that this producer-affiliate issue is really not one that comes into play with this bill. Furthermore, he said, FERC has not discriminated against producer-affiliate ownership elsewhere; for that matter, the revisions made to the legislation in 2000 didn't place any such restrictions on North Slope gas pipeline. Number 1921 CHAIR FATE asked how firm transportation service meshed with open seasons and capacity, and how interruptible transportation service fits into this picture. MR. SCHOFFMANN relayed his belief that RCA has the authority to ensure that there is no discrimination with respect to the pipeline capacity and how that is allocated. It is a fairly common practice, he suggested, to hold an open season for a contract for interruptible service. He said KKPL did that and attempted to at least apprise RCA and let them have some input into that process. MR. SCHOFFMANN relayed his belief that RCA could mandate that as a part of ensuring that all interested parties had a chance to commit to these pipelines, and that they could do that under their existing authority before they offered to grant a certificate of convenience and necessity under AS 42.06. He said it is always in RCA's purview to review how capacity is being allocated, however, to make sure there is not discrimination; furthermore, RCA has the ability to force expansion if it finds that capacity isn't being fairly offered to those who have need or who feel there is some discrimination. Number 2152 MARK MYERS, Director, Division of Oil & Gas, Department of Natural Resources, testified. He said in the case of RCA's authority, it allows them to force mandatory expansion; however, FERC does not have that same authority to force it, so the RCA has greater authority in this manner than does FERC. CHAIR FATE, noting that this deals with all pipelines, asked what would be the case if this dealt with a major pipeline that would have authority. MR. MYERS said in the case of the interstate pipeline, there is no requirement for mandatory expansion of the pipeline under current law. Number 2193 REPRESENTATIVE KERTTULA offered her understanding that capacity would have to be granted. MR. MYERS said it's more of an historical situation in which there's a lot of expansion capacity available; with a lot of competing pipelines in the Lower 48, there aren't too many conditions of having only a single pipeline or very limited infrastructure. He said he thinks the FERC standards are different, and noted that from an Alaskan standpoint, the ability to expand is liked. The Natural Gas Act doesn't allow FERC to order expansion, so it is mandated in federal law. He said he was unsure of the historical reasons for it, and that the concept of the RCA's having the authority to mandate expansion was liked. That's appropriate when there are a limited amount of pipelines and a limited capacity on this pipeline, he suggested. Number 2249 REPRESENTATIVE KERTTULA said she thought that was what was confusing her, because she kept [relating it to] the Trans- Alaska Pipeline System (TAPS), a common carrier. She offered her understanding that [under this bill] the gas pipelines aren't common carriers, but would enter into contracts under an open season for either firm or interruptible service. She asked if the way around that, if [a company] were to get locked out, would be to go to RCA and [request] expansion. MR. MYERS said that is exactly right: under common carriage, the transported oil or gas is prorated for the amount of gas available, whereas with contract carriage there is a commitment to take or pay on that capacity. So it's a very different type of system. REPRESENTATIVE KERTTULA said she is most concerned about what would be done for access for the smaller, independent gas companies, and that she wants to feel assured access isn't somehow being closed off to them. She mentioned the debate about what was done with TAPS and the state's not maintaining any ownership. She asked for clarification. Number 2329 MR. MYERS said the particular case is the KKPL pipeline, which so far has received nomination for only 63 percent of the line's capacity. Up front, it's not a very difficult issue if there is extra capacity in the line and it's built to a larger size; Mr. Myers said it wasn't his intention to [imply] there is a big deal here with this particular pipeline. MR. MYERS told members the fiscal note reflects that [DNR] doesn't foresee a problem and that it is looking into the future at cases wherein a pipeline may be built to a much smaller capacity than is available in the gas market. Under that scenario, whoever nominated gas first in that initial open season would have that committed capacity; someone else would have to either get the pipeline to expand, which could be done voluntarily, or go to RCA on an interstate line and request that RCA require expansion, and go through the hearing process. MR. MYERS continued, saying the other way to obtain gas is to get interruptible gas; if someone nominates and takes that firm capacity and doesn't use it, someone [else] still can, through the RCA, get use of that capacity until that other user has a need for it; so there is interruptible capacity that is available. MR. MYERS said RCA definitely has greater authority on contract carriage gas, and it's not nearly as problematic in the state as the case where there is no mandatory expansion requirements. It does put the burden on additional users, if they get in that situation, to go to RCA and go through the hearing process to get that expanded capacity, which could potentially delay some projects. He offered his belief that, overall, there is a mechanism for people to get their gas in the line over the long term, through the RCA, if they trust in the agency's authority and discretion to use that authority. Number 2463 JIM STRANDBERG, Commissioner, Regulatory Commission of Alaska, concurred with Mr. Myers. He stressed that the added ability for contract carriage is going to be a benefit. He offered his belief that it is going to help in attracting investment, and that if contract carriage was in fact allowed in a pipeline, were some person or company to come along later and want to convey gas over that pipeline, [RCA] would still be able to evoke common-carrier statutory jurisdiction, and to really facilitate that producer in getting access to the pipeline. He said the two ways available to do it are either to require an increase in the pipeline capacity or to take a look at the way the firm capacity is being used. He said if someone isn't using that capacity, it is believed that room could be made for the new producer. Mr. Strandberg said both of these types of carriage very well could occur. Number 2554 REPRESENTATIVE KERTTULA pointed out that she hadn't received a the RCA's fiscal note. She asked if it had been submitted. MR. STRANDBERG said yes, it was a zero fiscal note. In further response, he read the fiscal note analysis, which stated [original punctuation provided]: While not explicitly stated, the services allowed by this bill are typically regarded as contract carriage. The 2000 Legislature allowed it for transportation of natural gas from the North Slope, partially to bring State statutes into accord with FERC rules for interstate gas transport. This language expands the statutory recognition of contract carriage to all parts of the State. Because common carrier language is retained in AS 42.06, RCA retains the ability to provide any and all shippers access to transport service on intrastate pipelines through its regulatory processes. There are no fiscal impacts on RCA from this bill, however it is expected that where producers elect to own and operate a pipeline, which is allowed under state statute, contract carriage with service under these statutory terms will be proposed to RCA in pipeline tariff filings. RCA will consider this under the statutory public interest standard. RCA's budget is funded through the Regulatory Cost Charge (RCC) mechanism and direct charge mechanisms. No general funds are allocated for support of the agency. The RCC is recalculated each year and allows the agency to recover its operating costs through an assessment on the revenues of the utilities and pipeline carriers it regulates. The RCC is capped at 0.8 % of regulated utilities annual gross revenues. Number 2554 CHAIR FATE asked Mr. Strandberg to fax RCA's fiscal note to the committee for review. The committee took an at-ease from 2:05 p.m. to 2:06 p.m. CHAIR FATE offered his belief that the committee had done a good job in trying to determine the coordination of RCA and the Division of Oil & Gas. He said there seemed to be no objections from the departments and that he hoped everybody understood the testimony relating to open seasons and capacity. He noted his intention to move the bill forward. CHAIR FATE asked whether anyone else wished to testify. He then closed public testimony. Number 2757 REPRESENTATIVE KERTTULA offered her understanding that there will still be common-carrier rules; that [the bill] is just allowing these contracts; and that, ultimately, RCA will have to make a ruling if there are objections or concerns. She said with that, she does not object. CHAIR FATE remarked that he hadn't realized [RCA] has the power to force expansion and that it would certainly help exploration. Number 2788 REPRESENTATIVE MASEK moved to report CSHB 204(O&G) out of committee with individual recommendations and the accompanying fiscal notes; she asked for unanimous consent. There being no objection, CSHB 204(O&G) was reported from the House Resources Standing Committee.
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