Legislature(2009 - 2010)BUTROVICH 205
03/11/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Finish Overview of Agia Regulatins | |
| SB242 | |
| SB243 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 242 | TELECONFERENCED | |
| += | SB 243 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 243-NO ROYALTY ON GEOTHERMAL RESOURCE
4:29:56 PM
CO-CHAIR MCGUIRE announced SB 243 to be up for consideration.
SENATOR WAGONER moved to adopt CSSB 243(RES), 26-LS1346\R. There
were no objections and it was so ordered.
MIKE PAWLOWSKI, staff to Senator Wielechowski, said the
committee substitute (CS) version R represents a departure from
the change made in SB 242 where they increased the overall level
of state subsidy. The original version of SB 243 repealed
royalties on geothermal and made them a flat zero. Looking
around the country at royalties in other states and the federal
model, they decided to reinstitute the federal royalty rate of
1.75 percent of gross revenues for 10 years and then 3.5 percent
of gross revenues thereafter for geothermal projects.
4:31:57 PM
CO-CHAIR MCGUIRE said the Senate has a diverse range of
opinions. Many agree that hot water is not a nonrenewable
resource that is being removed from the subsurface of Alaska and
therefore not subject to the typical considerations they would
have about resources being developed and shared for the maximum
benefit. Some felt a level of royalty was appropriate. But what
she didn't want Alaska to do is become uncompetitive if they
were going to put royalty in. Using the federal level, at least,
guaranteed that people won't be developing federal land over
state land. States that have a 10-percent royalty on the gross
income for geothermal development haven't had success with it.
The goal is to incentivize people to develop geothermal energy
so either no royalty or low royalty gets us there, she reasoned.
4:32:29 PM
SENATOR HUGGINS asked if Nevada has the most success with
geothermal and what their tax rate is.
MR. PAWLOWSKI said Ormat has a large geothermal development in
Nevada and they could speak to that.
CO-CHAIR MCGUIRE said one of the things she likes about Ormat is
that they have been doing it the longest. It was interesting to
see what other jurisdictions are doing relative to developing
geothermal.
MR. PAWLOWSKI said one of the Division of Oil & Gas
conversations around geothermal leases is that while it is hot
water it is also a property right and that maintaining some sort
of royalty is an appropriate rationale for leasing that
property.
4:34:10 PM
CO-CHAIR WIELECHOWSKI asked if the administration has a position
on royalty change.
JONNE SLEMONS, Division of Oil and Gas, Department of Natural
Resources (DNR), said she didn't oppose the bill. She could see
the rationale behind using the federal royalty rate. However,
the DNR commissioner does currently have the ability to waive,
extend or modify royalty rates for any mineral including
geothermal in AS 38.05.140(d). That statute appears to provide
ultimate flexibility to the commissioner in determining under
what conditions and at what rate royalty should be applied. This
bill could be considered redundant of those powers.
4:36:02 PM
CO-CHAIR WIELECHOWSKI asked what the purpose of the royalty is
from the state's perspective.
ALAN DENNIS, Division of Oil and Gas, Department of Natural
Resources (DNR), answered that the laws, the Constitution and
the department's regulations all speak to using the state's
resources to the maximum benefit of its citizens. These are
property rights and they belong to the citizens, and if private
companies are using that for their benefit it wouldn't pass
those principles.
4:37:28 PM
CO-CHAIR MCGUIRE thanked them both for being on line for the
committee. She said they are aware of the commissioner's
flexibility within the statute, but like other areas of mineral
management, they are choosing to make that policy statement so
people can make business decisions accordingly.
4:38:38 PM
PAUL THOMSEN, Director of Policy and Business Development for
Ormat Technologies, said a barrel of hot water is worth about 15
cents. When they are looking at developing a geothermal project
in the Railbelt, they are working in a confined and regulated
market. When they look at the project costs today they would
need a price of 14 cents for those barrels of hot water from the
utility to make their project pencil. Unlike other developers
they don't have the luxury of exporting the product. They have
to find a local off-taker and deal with the local market. That
is how they look at the incentives in SB 242 and SB 243
impacting their project as well as the ratepayers in the
Railbelt area and other areas that may have geothermal
development coming on line.
4:39:43 PM
SENATOR STEDMAN joined the committee.
MR. THOMSEN said without any incentives and a 10 percent royalty
on gross electricity sales today they would need a price of 14
cents. If SB 243 were implemented (taking the federal rate of
1.75 percent for the first 10 years and 3.5 percent thereafter),
they would be able to lower the price of the needed power
purchase agreement by 1 cent. Staff had requested a walk-through
of that calculation, so his slide 2 showed a 50 MW project; if
you multiply that by their availability or capacity factor
(0.95), multiply that by the hours in a year (8760), times the
$130 MWh (13 cent rate), times the average royalty rate (2.8
percent), times a 25-year power purchase agreement (PPA), they
would pay the State of Alaska $38 million in royalties.
What does it mean to lower the price by 1 cent? They took the
same calculation and showed that would result in a saving of
$104 million to the Railbelt ratepayers. He clarified that Ormat
is talking about selling the power to a wholesaler; they are not
in the business of distributing it to constituents at large. The
total economic benefit of this bill for Ormat would be around
$140 million.
SENATOR STEVENS asked him to explain how the ratepayer is
protected in this system.
MR. THOMSEN answered simply put any tax or royalty is going to
be a "pass through" for Ormat. They cannot recover those costs
through the RCA or through increased taxes. So, lowering the
amount of royalty they have to pass through to the constituents
is where they will see that savings. Not having to deal with a
10 percent royalty on gross proceeds brings the cost of the
project down drastically.
SENATOR HUGGINS said it is important to Ormat as a business to
have a structure to count on and asked if they might come back
and ask for royalty relief if for some reason what is
represented in this bill is too onerous for their business
model.
MR. THOMSEN said he had hit the nail on the head. This bill
would limit their total liability from a very potentially high
royalty payment. He explained when they calculate the total cost
of the project in SB 242, they plug in how much the power plant
will cost, what the leases cost, and the potential royalty rate
- and for something that is variable they have to put in the
highest potential exposure to the project. This bill would
dramatically bring that down from a potential of 10 percent on
gross proceeds to a maximum of 2.8 percent on the average to
still potentially be waived if a project is struggling. He
reminded them that this is on top of the $3 million they paid
for leasing 36,000 acres from the state.
CO-CHAIR WIELECHOWSKI asked if this project would be regulated
by the RCA so they can ensure that these benefits are passed on
to consumers.
MR. THOMSEN answered absolutely.
CO-CHAIR WIELECHOWSKI said if the state were to collect a 10-
percent royalty rate, it would get around $380 million, and by
reducing it to 1.75 percent it would collect around $38 million,
a lot less.
MR. THOMSEN reiterated that they would have to get 14 cents from
the ratepayer if they have to pay a royalty. But shifting that
burden from the ratepayers to DNR is a policy decision for the
legislature to make.
CO-CHAIR WIELECHOWSKI said the cost of their project is $275
million and if that meant their credit would be around $82
million.
MR. THOMSEN answered yes.
SENATOR STEDMAN asked him to clarify the difference between a
wholesale rate and what a customer would actually be paying.
MR. THOMSEN said his understanding is that the utility or off-
taker of this power would get the product at a wholesale price
and then mark it up for transmission and delivery to the
ratepayer, and he would let the utility comment on what their
mark up for that is.
CO-CHAIR MCGUIRE stated they asked that the RCA regulate the
contract with the utility to decide on rate of return and to
show how the state tax credits and royalty relief would end up
benefiting the wholesale rate they could offer the utility which
would in turn be passed on to the consumer.
4:48:18 PM
CO-CHAIR WIELECHOWSKI asked if Ormat's project would be
regulated by the RCA or the power sales agreement.
MR. THOMSEN replied that Ormat Technologies would be regulated
directly. There would be three layers of regulation - Ormat as
the entity selling the power, the state-owned utility that is
buying the power, and then the broader decisions the RCA makes
on top of that.
CO-CHAIR WIELECHOWSKI asked if Ormat had any intention of coming
back and asking to be deregulated at any point in time.
MR. THOMSEN said they don't have those plans; the current
regulation scheme in Alaska wouldn't stop them from developing
this project at this time.
CO-CHAIR WIELECHOWSKI said he wanted it clear if this bill
should pass that Ormat's huge tax breaks go through to the
consumer. He would not like to see for this to pass giving them
big tax breaks and then for them to come back in a year or two
asking for deregulation. That would be a worst case scenario
from his perspective.
MR. THOMSEN responded that once the contract is approved it is a
fixed price long-term contract. Because all of those entities in
Alaska are regulated, they don't have much flexibility. However
the utilities are going to have to get to a price that they are
feel comfortable with in signing a contract with Ormat. They
need to take that to the RCA to make sure they agree that it's
in the public's best interest. Once that contract is approved it
is binding for the life of the project.
The reason he sounds hesitant with the word "regulation" is not
because they don't intend on honoring their contract, but rather
if they refinance this project at a later date, being a
regulated entity doesn't really translate outside of the bounds
of the State of Alaska. Being regulated in Nevada or California
is very different, and he didn't want to see the standards for
which they enter into a contract in Alaska be changed even
though any change or amendment would take approval from both
sides.
CO-CHAIR WIELECHOWSKI moved to a slightly different topic of
royalty and asked what the rate is in Nevada.
MR. THOMSEN replied that Nevada has no royalty.
CO-CHAIR WIELECHOWSKI asked if they collect any higher income
taxes or do they make it up anywhere else.
MR. THOMSEN replied no. Nevada has a sales tax and an income
tax, but geothermal is granted a 50-percent abatement of both of
those taxes.
CO-CHAIR WIELECHOWSKI asked what the sales tax would be charged
on for Ormat.
MR. THOMSEN answered on the sale of equipment into the state,
buying trucks and things like that for the project. It's very
minimal.
4:54:17 PM
SENATOR HUGGINS asked how federal incentives would apply here.
MR. THOMSEN answered that Ormat is eligible for both a
production and an investment tax credit, but they have to choose
which one. Unfortunately both of those federal incentives get
renewed typically on two-year cycles. Building a geothermal
project takes about five or six years. So, they are always
entering into projects without knowing when the federal tax
credits will expire. Today as part of the federal stimulus bill,
geothermal, wind and solar are eligible for a 30-percent
investment refundable tax credit mirrored here in Alaska.
Unfortunately those incentives expire in 2012 and they don't
know if they will be extended or renewed.
The 30 percent was part of the federal ARRA bill which tried to
get new investment. If that should not be extended they could
fall back to the original tax credit which was a 10 percent
investment tax credit or a $.02/KWh production tax credit; those
expire around 2015. For those to apply to this project would
require an extension. So for this project's model they have
scheduled no federal incentives.
SENATOR HUGGINS asked how many jobs would be created by this
project.
MR. THOMSEN replied that during the construction phase they tend
to act as the general and will try to employ as many locals as
possible, in the triple digits. During the operation phase it's
in the low double-digits.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 242 Version E.pdf |
SRES 3/11/2010 3:30:00 PM |
SB 242 |
| SB 243 Version R.pdf |
SRES 3/11/2010 3:30:00 PM |
SB 243 |