Legislature(2009 - 2010)BUTROVICH 205
03/31/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB255 | |
| HB162 | |
| Overview by Dnr and Dor on Cook Inlet Incentives | |
| SB309 | |
| SB290 | |
| HB280 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | SB 309 | TELECONFERENCED | |
| *+ | SB 290 | TELECONFERENCED | |
| + | HB 280 | TELECONFERENCED | |
| = | SB 255 | ||
| = | HB 162 | ||
HB 280-NATURAL GAS: STORAGE/ TAX CREDITS
5:06:02 PM
CO-CHAIR WIELECHOWSKI announced HB 280 to be up for
consideration. [CSHB 280(FIN)am was before the committee.]
5:06:06 PM
REPRESENTATIVE MIKE HAWKER, sponsor of HB 280, said it
specifically addresses three issues regarding the needs of the
Cook Inlet: the need for gas storage for utilities and
proprietary storage for managing inventories, the need for
additional exploration, and long-term supply contracts.
He explained that the bigger components of the bill encourage
the development of gas storage facilities. It creates the first
regulatory framework for those facilities that don't exist now.
At the end of the day they will provide a volumetric-based
development credit based on certain criteria that a storage
facility has to meet. Any investment in storage in the Cook
Inlet is going to increase the gas to consumers and is a supply
chain cost. The development credit is intended specifically to
be consumer cost relief in that the credit is to be passed
through ultimately to consumers.
As far as encouraging development and further gas storage
Representative Hawker said he asked DNR to expedite permitting
of the storage facilities. It is important also to recognize
that while this bill offers the "pass through credit" for
development of gas storage facilities, for any entity to avail
themselves of those credits they must also accept RCA
regulation. This is an absolute linkage in the bill. The bill
protects the ability of individual producers to develop storage
for their own purposes for those companies who want to build
proprietary storage, but very specifically no credits are
available for it. Likewise, the RCA does not have regulatory
authority over those privately owned proprietary interest gas
storage facilities; unlike today.
5:11:17 PM
SENATOR FRENCH asked him to identify the sections that pertain
to gas storage credits and those that pertain to the RCA
matters.
5:12:11 PM
REPRESENTATIVE HAWKER responded that he wanted to present the
bill's themes first without reference to specific sections and
then he would go through a sectional. He said a couple of
significant applications for long-term contracts were not
approved by the RCA in the past several years. He asked the RCA
what it would need to approve them, because in hindsight they
would have been very good contracts to have approved. The bill
directs the RCA now when making a decision on a contract
application that they not only have to look at the specifics of
the contract, but at the consequences of saying no to that
contract. A number of sections increase access to existing tax
credits for explorers and developers working in the Cook Inlet.
REPRESENTATIVE HAWKER said this bill was developed with a great
deal of help from Larry Persily (Federal Gasline Czar), Roger
Marks (former Senior DOR Petroleum Economist), Jan Levy (former
DOL oil and gas attorney), and Julie Lucky, legislative staff.
5:15:12 PM
HB 280
Cook Inlet Recovery Act - Sectional Analysis
Prepared by Representative Mike Hawker's Office
Section 1: Sets out a short title for the legislation: Cook
Inlet Recovery Act (CIRA).
Section 2: Establishes an application process, criteria and
timeline for the Alaska Oil and Gas Conservation Commission
(AOGCC) to certify that a gas storage facility (GSF) meets the
minimum working gas storage capacity and daily delivery rate
requirements to be eligible for the financial incentives
provided in this bill.
5:17:01 PM
CO-CHAIR WIELECHOWSKI asked on page 2, line 10, if there was
"any magic" in selecting 500 mmcf and on line 13 being able to
withdraw a minimum of 10 mmcf.
REPRESENTATIVE HAWKER answered they were the product of
consensus in discussions with the DNR and DOR. Initially they
considered a bill that would pay the credit up to double the
capacity, but recognized this credit does not flow to the
developer; 100 percent of it flows through to consumers. They
were trying to second-guess the volume of large capacity storage
that will be developed in Cook Inlet, and the DOR expressed
concern that they wanted the bill as close as possible to the
perspective development as possible. It was an effort to try to
mitigate the potential gaming of the system. The idea of the
flow-through volumetrics indicates they don't want to give
credits to someone building a storage facility that cannot
deliver sufficient gas to meek their peak demands. They might
consider expanding the size of the credits once they see an
actual project.
CO-CHAIR WIELECHOWSKI asked if it's projected that Cook Inlet
would need 10 million mmcf on any cold day.
REPRESENTATIVE HAWKER answered that's the minimum amount and a
fairly low number. They get 400 mmcf/day demand on really cold
days. The idea of the storage facilities is to meet the peaking
demands, not the sustained delivery. Section 2 also says if you
cease using a storage facility within the first 10 years the
state has a recovery provision on any credits provided that
would have be refunded by the developer. The AOGCC would have to
be notified on those cessations.
REPRESENTATIVE HAWKER continued the analysis:
5:19:46 PM
Section 3: Requires a GSF owner to notify the AOGCC if the
facility ceases operation.
-Provides definitions for terms used in CIRA.
-Requires the Director of the Division of Mining, Land and Water
to give priority to and expedite "when reasonably possible" any
applications, permits and lease assignments needed for
development and operation of a GSF.
5:20:30 PM
Section 4: Directs the Department of Natural Resources (DNR) to
waive any state land lease fees or rents for the first 10 years
of a GSF's operation. The waiver would stop if the storage
facility ceases commercial operations.
-States that any waivers of lease fees or rents would be public
record.
-Requires that the GSF pass on the financial benefits of any
lease exemption to utilities that use its service.
-Clarifies that any gas withdrawn from a GSF is considered to be
non-native gas and not subject to royalty until all non-native
gas is withdrawn.
SENATOR FRENCH asked if the director has already denied permits
to producers for their storage wells.
REPRESENTATIVE HAWKER answered that he heard that DNR's policy
is that they would not permit storage facilities unless they
were an open access facility. As presented to him in his
conversations with Mr. Banks, the concern is that more storage
capacity is needed right now and smaller producers may not have
the financial wherewithal to build their own. Until they have a
very vibrant third-party storage facility, the agency had
concluded that it was best to make all future storage facilities
open access. To him, this crossed his line of a little too much
government interference and didn't recognize the reality that he
sees in the Cook Inlet where the producers have the need to
manage their own inventory (warehousing). For example, Chevron
had substantial warehousing capability in the Drift River
Terminal Facility that sat at the foot of a volcano. That
storage facility has been taken off line after volcanic
activity. While it was oil storage, it is now interfering with
their ability to maximize and sustain ongoing production because
they don't have a warehouse to put their own product in.
The same thing with gas, he said. If producers don't have a
place to store their case, the state would be encouraging them
to shut in gas and not maximize production. This bill
anticipates seeing proposals for a very large open access third-
party owned project in the Cook Inlet in the near-term, but that
would deny benefits to someone who simply wants to manage their
own inventory.
5:24:37 PM
Section 5: Directs the Regulatory Commission of Alaska (RCA),
when considering the approval of a utility's gas supply
contract, to consider the impact on consumers if the commission
rejects a utility's gas supply contract and to recognize the
value of a utility holding a diversified portfolio of gas supply
contracts with different pricing mechanisms in order to protect
consumers from inadequate gas supplies and the risk of a single
pricing mechanism.
REPRESENTATIVE HAWKER explained if an open access third-party
owned facility is constructed on state land, the lease fees or
rents would be waived for the first 10 years of that facility's
operations.
He added that this bill also provides a regulatory framework for
"last in, first out" inventory accounting in these new storage
facilities. This means the last gas pumped into it is the first
gas that comes out. This is relevant because the last gas
(residual gas to maintain some pressure in the bottom of the
well) in the bottom of the well has not ever been produced and
when it is produced there will be a liability and obligation to
pay production taxes on it.
5:27:10 PM
Section 6: Requires that a utility's cost of gas storage that is
passed on to consumers reflect the financial benefits of any tax
credits and state lease exemptions provided in this legislation.
It also stipulates that a portfolio representing diversified-
terms of gas supply contracts is a good thing.
5:28:19 PM
Section 7: Specifies that the Regulatory Commission of Alaska
(RCA) has jurisdiction over natural gas storage services
provided for gas that is owned by a regulated utility and that
any benefits provided in this legislation flows through to the
consumer.
Section 8: Further defines "natural gas storage facility" and
clarifies what is considered part of the storage facility.
-Further defines that RCA regulation of gas storage facilities
is limited to facilities operated primarily or exclusively for
third-party customers; regulation does not extend to a
proprietary storage facility operated exclusively or primarily
to hold gas owned by the storage facility owner or operator.
REPRESENTATIVE HAWKER explained that a potential loophole was
discovered by DNR and DOR that it potentially could be argued
that a large natural gas pipeline (if it were to be built),
since it is a vessel capable of storing gas, someone might argue
that it would fall under the parameters of this legislation,
which was not at all the intent. So language clarifies that a
natural gas storage facility that is part of a regulated natural
gas pipeline is not also regulated by the utility.
5:29:51 PM
Section 9: Clarifies that the names of taxpayers and the amount
of credits claimed for gas storage facilities under this
legislation shall be public information.
-Requires the Department of Revenue (DOR) to furnish the
information to the RCA.
REPRESENTATIVE HAWKER explained that this section specifies that
the RCA does have jurisdiction over gas storage services for gas
that is owned by a regulated utility. They are looking at a
couple levels of storage and in this case this gas would be
purchased on the market by a utility that has developed the gas
storage facility itself. Other provisions talk about how a
third-party facility that provides services to a public utility
is also regulated.
5:30:32 PM
SENATOR FRENCH asked if he was referring to the definition on
page 8, lines 18 and 19.
REPRESENTATIVE HAWKER answered yes.
Section 10: Establishes a credit against corporate income taxes
of $1.50 per thousand cubic feet of new gas storage capacity
opened in Alaska during 2011-2015. The credit is limited to $15
million per GSF. This section sets out minimum capacity and
deliverability requirements to qualify for the credit, including
that the GSF must be available for use by regulated utilities
and, if utilizing state land, must be in compliance with its DNR
storage lease. The credit can be refunded by the state at full
value if the owner does not have enough taxable income to fully
utilize it.
REPRESENTATIVE HAWKER explained this section picks up the third-
party customer coverage.
CO-CHAIR WIELECHOWSKI asked if the definition of "natural gas
storage facility" included the LNG plant in Nikiski.
REPRESENTATIVE HAWKER answered as they have defined the ability
for someone to get a credit under this bill, it had to be
delivering gas to consumers. An export plant and facility was
not contemplated for the benefits.
CO-CHAIR WIELECHOWSKI asked if they released some of their gas
on the really cold winter days.
REPRESENTATIVE HAWKER replied anecdotally he was aware that when
the peak demand of coldest days had occurred in Southcentral
Alaska in a past couple of winters, ConocoPhillips, who owns and
operates that facility, actually voluntarily diverted gas that
they had committed to export to customers overseas into the
supply chain for consumers. Their good-friends relationship with
their consumers in Asia allowed them to do that.
5:34:26 PM
Section 11: Sunsets the rule that limits how certain tax credits
arising from activity in Cook Inlet or from producing gas for
in-state use are used on January 1, 2011. This would allow a
Cook Inlet explorer or producer to explore or produce elsewhere
in the state and have full access to the credits it earned from
its Cook Inlet activities. This section also makes sure that the
names of producers and amounts of credit are public. It is
necessary that the information is available to the RCA.
5:35:26 PM
CO-CHAIR WIELECHOWSKI asked if this would be a good place to
stop and pick up at a future hearing.
REPRESENTATIVE HAWKER answered yes.
[HB 280 was held in committee.]
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