Legislature(2013 - 2014)BUTROVICH 205
04/04/2013 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB4 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | HB 4 | ||
HB 4-ALASKA GASLINE DEVELOPMENT CORP; RCA
3:39:26 PM
CHAIR GIESSEL announced HB 4 to be up for consideration [CSSSHB
4(FIN) labeled 28-LS0021\I was before the committee]. She said
that Mr. Richards and Mr. Kleppin from the Alaska Gasline
Development Authority (AGDC) would talk about contract and
common carriers and confidentiality and its implications for
costs and moving a project forward.
3:39:33 PM
FRANK RICHARDS, Manager, Pipeline Engineering, Alaska Gasline
Development Authority (AGDC), Anchorage, Alaska, introduced
himself saying they were asked to talk about contract carriers,
versus common carriage, where it is being used within the United
States and how it can be used within Alaska. He turned the
discussion over the Mr. Kleppin.
3:40:35 PM
SENATOR MCGUIRE joined the committee.
3:40:43 PM
DARYL KLEPPIN, Commercial Manager, Alaska Gasline Development
Authority (AGDC), Anchorage, Alaska, said he would first cover a
bit of context about the history of common carriage and contract
carriage and said the Interstate Commerce Act was passed in 1887
and that set up the Interstate Commerce Commission (ICC). Its
primary function because of monopolistic practices with
railroads was regulating common carriage on railroads. The
Interstate Commerce Act was amended in 1906 to include
regulation of common carrier oil pipelines. The ICC regulated
common carrier oil pipelines from 1906 to 1977 when that
regulatory authority was transferred to the Federal Energy
Regulatory Commission (FERC). Natural gas came into the picture
in 1938 with the Natural Gas Act that set the regulatory
structure for natural gas. Today FERC regulates about 200,000
miles of liquids pipelines and a similar footprint for gas
pipelines in the Lower 48.
3:42:23 PM
MR. KLEPPIN explained that one of the structures of common
carriage is that the shippers use it on as needed basis. They
make nominations and deliver product that can vary literally
from month to month, and typically, common carriers have to keep
some capacity available in the pipeline for anybody that would
show up.
3:42:47 PM
SENATOR FRENCH asked him to talk about where one would find a
common carrier and a contract carrier. Is it about competition,
the density of the marketplace or access to the pipeline, and
what sort of factors would one look for in general that would
lead one to say this would be a common carrier and the other
would be a contract carrier?
MR. KLEPPIN replied that globally he couldn't speak to where
there are common carriers or contract carriers. In his work,
it's mainly a construct of U.S. regulation and typically it
isn't seen in the North Sea.
SENATOR FRENCH asked how many miles of gas pipeline there are in
the Lower 48.
MR. KLEPPIN replied roughly about 200,000 miles of common
carrier pipelines for liquids.
SENATOR FRENCH asked how many for contract carriers.
3:44:44 PM
MR. KLEPPIN replied that he hadn't found an exact number, but
it's a comparable number for gas. He explained that another
thing around common carriage is there are no long term
contractual commitments, although that has shifted a bit in the
last 10 years. Another issue common to both, is having credit
worthy shippers (people that you let into your pipeline have the
financial resources to pay the bills). And as with all pipelines
there are other criteria: quality specs for products like oil,
gas, and heating oil. They also have delivery points where
product is taken off and those have different "spec" criteria.
Another issue with common carriers is typically they are not at
100 percent capacity, because they have to have space available
for anyone who shows up on an ad hoc basis. Nominations for
pipeline capacity are taken for three months out and are
allocated based on those. If nominations exceed the capacity of
the pipeline, typically everyone gets a prorated share of their
nomination. So, for example, if your pipeline carried 100
barrels of oil and there was a nomination for 150 barrels, then
everyone would get pro-rated back to 100 barrels (two-thirds).
There are other pro-rata schemes, but that is the most common
one.
Another difference with common carrier functions is if someone
nominates 100 barrels of oil and shows up with only 90 barrels,
he only pays for the 90 barrels that was shipped. So, there is
no payment for everything nominated. The TransAlaska Pipeline
System (TAPS) is the biggest example in Alaska of a common
carrier pipeline; however, it has a bit of a bi-furcated
regulatory scheme with both the FERC and the Regulatory
Commission of Alaska (RCA) being involved.
MR. KLEPPIN said in the Lower 48, common carrier pipelines are
very typical for big trunk lines. They came into being when the
companies had discovered an oil field and tried to build a
refinery next to it; most times they decided that wasn't
economic, so they centralized the refineries and built the
pipelines to connect the refineries.
3:47:26 PM
A lot of the original oil pipeline structure was owned by the
company that owned the refinery in the oil field. So,
historically, the amendments to the ICC in the early 1900s were
set up to try and prevent monopolistic practices and give
everybody access. Once that was done, there weren't a lot of
tariff disputes during the ICC period of regulation.
SENATOR FRENCH went back to TAPS and asked why FERC is involved
in what looks like an intrastate pipeline.
MR. KLEPPIN answered the history of that decision was that
fundamentally the pipeline is intrastate, but the market was
interstate. The logic behind FERC regulation was that by federal
statute all the oil had to land in the United States. Now, it's
all shipped to the West Coast, but back then there wasn't enough
capacity; a lot of it was shipped to the East Coast either
through the Panama Canal or around South America.
SENATOR FRENCH asked why FERC wouldn't be interested in half the
volume of this pipeline that will be exported from Alaska.
MR. KLEPPIN answered that the explanation given to him was that
the product will be consumed in Alaska or taken and modified by
someone here for export to a country outside of the United
States.
3:49:43 PM
SENATOR FRENCH asked for a further explanation of why TAPS is
regulated both by FERC and the RCA and the pipeline in HB 4 is
structured such that it would be regulated at a fairly light
level by the RCA, and he wanted to know if there was any
potential that FERC might become interested in this pipeline,
because, at least half its throughput will be exported from
Alaska and it will become either an interstate pipeline or an
international pipeline.
STUART GOERING, Assistant Attorney General, Department of Law
(DOL), Anchorage, Alaska, answered that regulation of TAPS is
under the Interstate Commerce Act that allows for concurrent
jurisdiction between state regulatory commissions and the FERC.
Any natural gas pipeline actually falls under several different
federal provisions, the primary one of which would be the
Natural Gas Act, but under some circumstances it could also fall
under the Alaska Natural Gas Transportation Act. As a result of
that, the jurisdictional structure is different.
FERC attorneys indicate that there are several ways the FERC
might acquire an interest in a pipeline like this; they have
both mandatory and discretionary jurisdiction potential. They
would have mandatory jurisdiction under the Alaska Natural Gas
Transportation Act if the pipeline route were to cross through a
foreign country: Canada, for example. And their discretionary
jurisdiction would come in principally if there was a
"regulatory vacuum" at the state level on an interstate commerce
issue.
3:52:26 PM
Applying what is known about the current HB 4 and the current
climate at FERC, it appears that FERC would not assert
jurisdiction over this pipeline, Mr. Goering said, but if there
were an export component, the Department of Energy would have to
license that facility to export liquefied natural gas to foreign
markets.
SENATOR MICCICHE clarified that although precedence in the state
doesn't regulate the pipeline as FERC is involved in permitting
design, construction, safety, cryogenic review of the export
facility if they do, in fact, export.
MR. KLEPPIN said in contract carriage pipelines people are
making large financial commitments (investors or the bond
holders to build it) and they need a guaranteed revenue stream
which demonstrates that investment can get paid off. It's these
long term contracts and the guaranteed revenue stream from
credit worthy shippers that establishes the foundation for
financing the pipeline. Under contract carriage the shippers can
only use it if they have contracted for usage. The recent open
season for the Denali and APP pipelines had a minimum term of 20
years all the way out to 35 years; typically one gets better
terms for the longer commitment. With that you get firm
transportation service, which means your product will always be
delivered for that period of time. And like common carrier
pipelines, a contract carriers' gas stream has to meet quality
specs which relate to water, CO2, and btu content, et cetera.
3:55:27 PM
He explained that the nomination process tends to be a bit more
limited and is mainly around operational concerns and dealings
with up and downs of delivery associated with winter peaks or
summer valleys and down times; things like that. Contract
pipelines also allow for interruptible service. If, for example,
a company is contracted to ship 50 units of gas for 25 years and
they say for whatever reason their wells or a field will be down
for 3-6 months, you can notice that short window where service
is available again. However, if no one fills that service, the
original contract holder is required to pay for that capacity
whether he uses it or not. Sometimes you hear "take or pay," but
he refers to it as "pay or pay;" those are the two choices.
Examples of contract carrier pipelines are the recent Denali and
APP pipelines that would both be regulated by the FERC. Other
Lower 48 pipelines that have been in the news in the last four
or five years are Ruby, a 42 inch pipeline that runs 650-700
miles from western Wyoming to Oregon, Rocky's Express, a
contract carrier pipeline that runs 1,600 miles from Colorado
and Wyoming to Ohio. Those pipelines had open season, recourse
tariffs, and negotiated rates very similar to this proposal's.
3:58:03 PM
He explained that typically gas is different than oil in that
gas tends to be an end product. In a lot of cases it was used by
utilities and people that just accepted it as is and used it,
and they wanted certainty in terms of the product delivery, so
they wanted long term contracts. On the flip side, the carrier
wanted the guaranteed long term revenue stream to finance the
pipeline and that's where the marriage was made.
3:58:36 PM
SENATOR FRENCH asked what sort of contracts AGDC would be
looking for when it comes to precedent agreements.
MR. KLEPPIN answered that they are still developing that aspect,
but likely they would have minimum contract terms of 20 years
and maybe much longer. This gets into the issue of the kind of
deal one brokers; one could potentially sign on for a shorter
term and pay a higher rate.
SENATOR FRENCH commented that it's kind of like going to Cost
Co.; if you buy in bulk and buy a lot you get the best price. If
you want to go to the local drug store and buy something there
you are going to pay more.
MR. KLEPPIN added that there is a tier structure typically for
gas pipelines; you may have two or three levels of shippers;
it's a function of volume and the term.
SENATOR FRENCH asked who gets the best deal; the person who
ships the most?
MR. KLEPPIN replied typically yes.
SENATOR FRENCH asked if you take less you're going to pay more.
MR. KLEPPIN replied not necessarily; the other factor is the
term.
SENATOR FRENCH asked him to clarify that they are starting at a
20 year contract, so it's not as if a six-month contract is
possible.
MR. KLEPPIN replied that typically a long term is needed to
finance the investment in the pipeline.
4:00:40 PM
SENATOR MICCICHE said that common carriers have contracts that
are only hours long in peak times and asked how that would work
in a contract carrier pipeline.
MR. KLEPPIN answered that you could have a very short term
contract, but only if capacity was available in the pipeline.
However he didn't know how likely that would be.
SENATOR MICCICHE asked if someone has excess capacity could
someone else purchase a small piece of that in an individual
side contract that may go to a common carrier pipeline.
MR. KLEPPIN replied that could be a possibility.
SENATOR FRENCH said he wasn't sure if the point of this bill was
to just build a piece of pipe from the North Slope to Cook Inlet
and say we have a pipeline or to get low cost gas to residents
of the state. He kept seeing the Nikiski LNG plant as the anchor
tenant getting the best rate and he was curious about how it
would work for a utility whose needs are not stable and vary
from very low amounts in the summer to very high amounts in the
winter and some peaks. That doesn't fit very well with a
contract carrier model when you're looking at a 20-year stable
supply. Enstar doesn't burn the same amount of gas every day; it
burns wildly different volumes based on the time of year.
4:02:33 PM
MR. KLEPPIN replied that a lot of those questions get answered
in the terms and conditions for the tariff.
4:03:06 PM
MR. RICHARDS said the contract carriage language as specified in
the bill is in Chapter 8, Article 1, on page 36.
MR. KLEPPIN said that was a good point. The whole point of why
contract carriage is needed, and hence the new regulatory
section in AS 42.08, is because to this point Alaska has not had
to deal with it. A common misconception about contract carriers
is that small companies' users cannot access them and that is
just not true. There is the whole process around open seasons
and going out and soliciting the market whenever you have
opportunities for interruptible service or expansion.
Another misconception is that oil pipelines can be expanded and
gas pipelines can't, but they can be; both can be expanded. The
language in the bill allows for expansion of the pipeline in an
open season and refiling of recourse tariffs that cover the
expansion. The caveat is that expansions would only be
acceptable if the AGIA statute was no longer in force (no
licensee), and also, if you had potentially gas volumes south of
the 68th parallel (since AGIA limits gas volumes to 500 bcf off
the North Slope which is defined as north of the 68th parallel).
For example, if you had a gas discovery in the Nenana Basin,
they could access the pipeline through an expansion. It is
specifically addressed in the language.
4:05:36 PM
CHAIR GIESSEL asked how often they would have open seasons. Is
it a scheduled event or a one-time occurrence?
MR. KLEPPIN replied that open season could occur multiple times;
it will occur at the beginning when the pipeline, but if a
pipeline has unfilled capacity, be it interruptible or a
contracted shipper is unable to fill his volume for whatever
reason, you would have an open season. You could also have one
if people come to you with proposals that are within the AGIA
constraints to expand the pipeline. The requirements for open
season are defined in the bill at different points.
4:05:54 PM
SENATOR DYSON joined the committee.
CHAIR GIESSEL asked if the pipeline's capacity could be
increased by using compression south of the 68th parallel.
MR. KLEPPIN answered yes.
SENATOR DYSON asked if increasing the pressure wouldn't get into
the problem of phase change with the product being carried.
MR. KLEPPIN answered that he was not a pipeline engineer, but he
thought that was correct.
MR. RICHARDS replied yes.
4:07:22 PM
MR. KLEPPIN said the shippers, in particular utilities, need to
know that their volumes and costs are guaranteed, because having
the supply is important. As investors, the bond holders need to
have certainty around the revenue stream to make these large
investments.
4:08:23 PM
CHAIR GIESSEL asked if he had had discussions with any of the
increasing mining opportunities in the Interior (Livengood and
Donlin Creek), which would use more natural gas than the City of
Fairbanks.
MR. KLEPPIN responded that they had talked to potential users of
the gas system, including mines in the Interior, and had
addressed it in their initial report. Those users do have large
energy demands and gas would be one way to fill them.
CHAIR GIESSEL said there is a gas storage facility now on the
Kenai which isn't full to capacity yet, but that would be
another way of addressing the peaks and valleys that would
affect a utility purchasing from the pipeline as well.
MR. KLEPPIN agreed that was correct.
CHAIR GIESSEL said the focus of this committee and the Special
Committee on Energy was getting the natural gas to Alaskans
first and creating more industry in the state. Agrium, for
instance, could be brought back on line with more than 300 jobs.
4:10:26 PM
MR. RICHARDS said another topic they were asked to talk about
was the issue of confidentiality and how that benefits the
project moving forward through commercial terms and how it
impacts the project in working with other entities that have
crucial or vital information that would not require the state
through AGDC to duplicate efforts.
4:10:58 PM
He said one of the biggest challenges they have had is the
inability to hold certain information confidential, and certain
parties that have done work have indicated that if he had the
ability to hold it confidential they would likely provide that
to them. This is one of their key aspects, because the
legislature instructed them in HB 369 to use the money wisely,
not duplicate efforts, and not overspend. This year they are
looking at the alignment south of Livengood in hopes of gaining
confidentiality provisions under HB 4, which would allow them to
go out to those that have done the work ahead of them along the
Dalton Highway from Livengood north to Prudhoe Bay where
thousands of bore holes have been punched by previous entities
that have very valuable information.
4:12:51 PM
MR. KLEPPIN said on the commercial side, business discussions
can't occur with other entities if they have to share
confidential information (line up volumes, timing, and price)
before submitting a contract to the RCA.
SENATOR DYSON said that is a very important point.
4:13:48 PM
CHAIR GIESSEL asked if there were any additional questions, and
finding none announced that the committee would take up
amendments.
4:14:48 PM
At ease from 4:14 to 4:16 p.m.
4:16:48 PM
CHAIR GIESSEL called the meeting back to order and said a quorum
was present as follows: Senators McGuire, Dyson, French and
herself; Senator Micciche had stepped out briefly.
SENATOR FRENCH moved Amendment 1.
28-LS0021\I.24
Bullock
AMENDMENT 1
OFFERED IN THE SENATE BY SENATOR FRENCH
TO: CSSSHB 4(FIN)
Page 54, line 15, following "14":
Insert a new paragraph to read:
"(1) "affiliated interest" has the meaning
given in AS 42.06.630;"
Renumber the following paragraphs accordingly.
SENATOR DYSON objected for discussion purposes.
SENATOR FRENCH explained that Amendment 1 provides a definition
of "affiliated interest" by reference to existing law. He
recalled that the attorneys listening to the meeting had a
concern that this chapter is seeking to have the instate gas
pipeline regulated by its terms and its terms alone, and yet it
doesn't have a definition. The RCA might be "groping" or
"stretching" to find a definition outside of it and it seems
safer to put a definition that is already on the books in the
chapter for them to find when the time comes.
CHAIR GIESSEL recalled Mr. Goering from the Department of Law
mentioning that it could be a possibility and asked the sponsor
to comment.
4:18:49 PM
RENA DELBRIDGE, staff to Representative Hawker, sponsor of HB 4,
Alaska State Legislature, Juneau, Alaska, explained that the
sponsor had consulted with the attorneys and realized that
language on page 39, lines 1-4, gives the RCA the ability to
write regulations as necessary to carry out the administration
of this chapter and they believe that also applies to
definitions that are new or unusual to the RCA. They have
confidence that the RCA will have the ability and sense to look
to those for the definitions. They appreciate the intention, but
believe that the amendment is not necessary.
CHAIR GIESSEL said the definition does exist elsewhere in law.
MS. DELBRIDGE agreed and said that the RCA has definitions for
"affiliated interest" in AS 42.05, Public Utility Regulation,
and AS 42.06, the State Pipeline Act. They believe that
"affiliated interest" is well enough understood that the RCA can
write the regulations required to define that term under this
new regulatory chapter.
4:20:00 PM
SENATOR MICCICHE asked her to repeat the location of the
definition.
MS. DELBRIDGE noted that language at the top of page 39 says the
RCA can adopt regulations necessary and proper to the
performance of the duties of the commission under this chapter.
SENATOR FRENCH asked for the department's opinion.
4:20:43 PM
MR. GOERING said it is true that the RCA has authority to adopt
regulations and that is one method of dealing with the
definition (as long as that definition would not be inconsistent
with AS 42.08), but the only disadvantage is that the regulation
process will take up to two years. The Administrative Procedures
Act imposes minimum times and if time is of the essence, leaving
extensive regulations to the RCA isn't consistent with
timeliness.
CHAIR GIESSEL asked if it was not appropriate for the RCA to
refer to the definition that is already in statute.
MR. GOERING replied that the definitions, which are already in
statute, are limited to the chapter they are in (AS 42.06.630
and AS 42.05.990). In both cases the definitions are limited to
those particular chapters and the commission in this situation
were there not a definition in AS 42.08 would very likely look
to other jurisdictional statutes for a definition they could
apply by analogy. He emphasized they would do that by analogy
and not because the definitions directly apply to the situation
in hand.
SENATOR FRENCH pointed out that on page 36, section 21 put into
effect a new chapter and lines 24-25 say "this chapter applies
to the regulation of instate natural gas pipelines". He thought
this chapter should be as complete as possible. They have heard
there might be a two-year delay in promulgating regulations and
this is a definition that is on the books already and poses no
threat to anyone.
4:23:38 PM
CHAIR GIESSEL asked Senator Dyson if he removed his objection.
He maintained his objection.
At ease from 4:23 to 4:24 p.m.
4:24:14 PM
CHAIR GIESSEL asked for a roll call vote. Senator French voted
yea; Senators Dyson, Micciche, McGuire, and Giessel voted nay;
therefore Amendment 1 failed.
4:25:47 PM
SENATOR FRENCH moved Amendment 2.
28-LS0021\I.22
Bullock
AMENDMENT 2
OFFERED IN THE SENATE BY SENATOR FRENCH
TO: CSSSHB 4(FIN)
Page 4, line 26:
Delete "or is no longer receiving the inducements
in AS 43.90.110(a)"
Insert "under AS 43.90.240 or has commenced
commercial operations"
Page 10, lines 11 - 12:
Delete "or is no longer receiving the inducements
in AS 43.90.110(a)"
Insert "under AS 43.90.240 or has commenced
commercial operations"
Page 31, line 29:
Delete "or is no longer receiving the inducements
in AS 43.90.110(a)"
Insert "under AS 43.90.240 or has commenced
commercial operations"
Page 41, lines 25 - 26:
Delete "or is no longer receiving the inducements
in AS 43.90.110(a)"
Insert "under AS 43.90.240 or has commenced
commercial operations"
Page 49, line 13:
Delete "or is no longer receiving the inducements
in AS 43.90.110(a)"
Insert "under AS 43.90.240 or has commenced
commercial operations"
SENATOR DYSON and SENATOR MCGUIRE objected for discussion
purposes.
SENATOR FRENCH explained that it had been stated several times
to not bump this project up against the legal requirements of
AGIA and Amendment 2 effectuates that intention more powerfully.
He pointed out that AS 43.90.440 (a) provides that the state
grant licensee assurances that the licensee has exclusive
enjoyment of inducements provided under this chapter for the
commencement of commercial operations. He said one
interpretation of this phrase is that if the licensee is no
longer receiving the inducements, then there is no longer a need
for exclusive enjoyment. In other words, the exclusivity granted
by AS 43.90.440 is only available for the period in which the
inducements are being received. However, in order make this
argument with a straight face, you have to ignore the fact that
the legislature has used the phrase "before commencement of
commercial operations" twice in AS 43.99.440 (a). In addition to
that phrase, the next sentence in subsection (a) states:
If, before commencement of commercial operations the
state extends to another person...a grant of state
money for the purpose of facilitating the construction
of a competing natural gas pipeline project, the
licensee is entitled to payment equal to three times
the total amount of the expenditures incurred.
So, he thought this use of an explicit statement twice in the
same subsection would override any implied intent that could be
deduced from the rest of the subsection. Senator French
explained that he was trying to keep the state from having to
pay treble damages. He said the legislature spent an enormous
amount of time - maybe two weeks in the Senate Judiciary
Committee - where they talked a lot about treble damages and all
the different ways of running afoul of AGIA in the hopes of
someday stimulating a small diameter pipeline while waiting for
the big one to happen. His view was that the language in this
amendment effectuates that purpose better. He wanted to hear
from the Department of Law on this issue and reminded them that
TransCanada will vigorously defend the rights Alaska had granted
them and why not stay out of court if possible?
CHAIR GIESSEL said that amendment was certainly well intended,
but she pointed out that the goal of AGDC is to ultimately merge
with that TransCanada pipeline. She asked Ms. Harris from the
Department of Law to respond.
4:28:48 PM
BONNIE HARRIS, Assistant Attorney General, Department of Law
(DOL), Anchorage, Alaska, asked for the question to be restated.
SENATOR FRENCH said if the purpose is to avoid bumping into the
treble damages aspect of AGIA, the language as it exists in the
bill with respect to no longer receiving inducements opens up a
large loophole under which the proponents of this line could say
AGIA didn't get the capital funds they requested this year for
their reimbursements. If the Finance Committee didn't fund their
requests and they were no longer receiving inducements,
therefore AGDC could start building a bigger pipeline, because
the funds were cut off. He didn't think TransCanada would see it
that way based on the AGIA statute that says it's all about the
commencement of commercial operations.
MS. HARRIS responded that Senator French was correct that the
AGIA provision in AS 43.90.440 referred to the treble damages or
project assurances and there is no provision in that statute
that allows for a pipeline to not be competing just because
payments are no longer being made to the licensee under AGIA.
She explained that AGIA has the definition for "competing
pipeline," and the time period for a competing pipeline project
to occur is before commencement of commercial operations of the
AGIA project. She didn't know what the AGIA licensee might make
of this, but the language in the sponsors' original bill just
referred to AGIA .440 and that was adequate for the DOL's
review. She could not recommend the additional clause "or is no
longer receiving".
SENATOR FRENCH asked if she just said the phrase "or is no
longer receiving the inducements in AS 43.90.110(a)" should not
be in the bill.
MS. HARRIS responded that she had no comment on whether it
should be in the bill, but she didn't recommend it, because it
is not consistent with AGIA.
MS. DELBRIDGE said this language had been worked on between
AGDC's attorney and the DOL and now she was a little bit
confused.
4:33:03 PM
SENATOR FAIRCLOUGH joined the committee.
4:33:09 PM
MS. HARRIS said the DOL did not draft this language, but they
are willing to work with the sponsors on it.
4:33:33 PM
CORI MILLS, Legislative Liaison, Department of Law (DOL),
Juneau, Alaska, said it had been the department's view that this
bill does not violate AGIA, but having the current language may
not be the most artful way to have drafted it. Violating AGIA
would take an action on the part of AGDC once this bill is
implemented. It might be possible to state that (not to compete
with AGIA) more concisely.
CHAIR GIESSEL remarked that language on page 4, line 25, of HB 4
says: "...unless the project for which a license is issued under
AS 43.90 has been abandoned or is no longer receiving
inducements..." and that seemed to be a very inclusive pairing
of two phrases, part of which Senator French proposes to put in
in his first reference in Amendment 2.
4:35:28 PM
At ease from 4:35 to 4:36 p.m.
4:36:11 PM
CHAIR GIESSEL called the meeting back to order and invited Mr.
Vassar to comment.
KEN VASSAR, General Counsel, Alaska Gasline Development
Corporation (AGDC), Anchorage, Alaska, explained that the
language they are talking about has to do with the contract
rights of the AGIA licensee. Those rights were established when
the AGIA licensee received its license and in that sense, those
contract rights are protected by the contract clause of the
United State Constitution. So, regardless of what this
legislation says, those contract rights will remain in place and
nothing in it can terminate or abridge them without violating
the U.S. Constitution.
The language they are talking about is an effort to assure that
if AGIA is no longer in place and the licensee under it no
longer has those rights that AGDC would be free to develop a
larger pipeline. But in the meantime this particular language is
not mandatory; it's permissive. It only allows them to consider
a larger pipeline under those circumstances where AGIA isn't an
issue any longer. AGDC will not take an action that would cause
them to violate AGIA. That is the intent of this language and
that is the way they would interpret it.
CHAIR GIESSEL said it seems pretty clear that as she looks at
page 10, lines 9-12, the corporation may not develop or
construct a natural gas pipeline that is competing with AS
43.90.440 or the whole chapter that is referred to AS 43.90.
MS. DELBRIDGE said she believed that the language was sufficient
backstop to allow AGDC to proceed once there is no longer a
valid license in effect under AGIA. Two state commissioners will
be appointed by the governor to the board of AGDC, which is an
additional backstop that protects the state from any AGDC
action.
SENATOR MICCICHE said he had been through every one of the items
in Amendment 2 and clearly the intent of AGDC is to wait for the
project to be abandoned.
CHAIR GIESSEL asked Senator Dyson if he maintained his
objection.
SENATOR DYSON answered yes.
CHAIR GIESSEL asked Senator French for his closing remarks.
SENATOR FRENCH said they had heard a variety of legal opinions
and crafting something like this more carefully, particularly
with having two pipelines side by side, is the better approach.
Clearly no longer receiving the inducements injects some
uncertainty, so why do it? What is the upside?
CHAIR GIESSEL asked for a roll call vote. Senator French voted
yea; Senators Fairclough, McGuire, Dyson, Micciche, Giessel
voted nay; therefore Amendment 2 failed. [Senator Micciche
clarified that he voted nay.]
4:41:30 PM
SENATOR FRENCH moved Amendment 3.
28-LS0021\I.20
Bullock
AMENDMENT 3
OFFERED IN THE SENATE BY SENATOR FRENCH
TO: CSSSHB 4(FIN)
Page 36, line 5:
Delete "AS 42.08.320(b) - (d)"
Insert "AS 42.08.320(b) and (c)"
Page 43, lines 2 - 6:
Delete "(1) conclude that a precedent agreement
or related contract negotiated at arm's length between
the parties is just and reasonable unless the
commission finds that unlawful market activity
affected the rate or unfair dealing, such as fraud or
duress, affected the formation of the contract;
(2)"
Page 43, lines 14 - 25:
Delete all material.
Reletter the following subsection accordingly.
Page 43, line 26:
Delete "If a precedent agreement or related
contract is not arm's length, the"
Insert "The"
Page 43, lines 28 - 31:
Delete "normally applied under AS 42.06.140. If
the commission is reviewing a precedent agreement
under (c)(2) of this section, the commission may
consider the in-state natural gas pipeline carrier's
approved recourse tariff, including the cost data
underlying that tariff"
Insert "applied under AS 42.06.140"
SENATOR FAIRCLOUGH objected for discussion purposes.
SENATOR FRENCH explained that the gist of Amendment 3 was to
return the provisions for RCA review to the just and reasonable
standard that has been used in analyzing utility rates in Alaska
for the entirety of its existence of more than 30-years and has
been tested through a huge body of decisions and litigation. He
saw no reason offered by the sponsors to change that standard;
it really boils down to a monopoly pipeline having some
oversight by a regulatory body to ensure that the Alaskans that
are getting gas from this pipeline are getting it at the lowest
price possible.
He said the most thorough standard and the most commonly used
standard is just and reasonable; it's not overbearing. The best
example, which he focused on yesterday, was at the top of page
43 that commands the RCA to find that precedent agreements are
just and reasonable unless it finds that unlawful market
activity or unfair dealings such as fraud or duress - what he
would call criminal conduct - affected the rate. So, frankly,
anything short of criminal conduct is commanded to be allowed by
the commission and he didn't see why that would be necessary if
this is about protecting Alaskans and making sure they get a
fair deal on gas coming off the North Slope.
MS. DELBRIDGE responded that this amendment addresses the review
of precedent agreements, which are the negotiated contracts.
This legislation builds in that precursor, the initial recourse
tariff. In that initial recourse tariff the RCA determines a
cost based rate that has a reasonable rate of return, a
reasonable depreciation method, and a reasonable capital
structure built into it. So, the RCA will have determined a cost
based rate for this pipeline that anyone is able to get service
on without negotiating. Ninety nine percent of people that
negotiate with this pipeline will be negotiating a lower rate
than that.
MS. DELBRIDGE said the FERC, in regulating contract carrier
pipelines, allows for negotiated rates. They have allowed for
negotiated rates since 1996. When it looks at a contract the
FERC doesn't look at the rate in that negotiated contract; they
make sure that that contract was made fairly and that nobody
negotiated terms one is not allowed to negotiate (because they
have to be uniform to all shippers). They approach it as a rate
negotiated by two parties on relatively equal footing who are
freely entering into the contract and have decided that this is
a fair price for a fair service; they need to stand by that
contract and it is, therefore, reasonable. This will be
reasonable, but it still has had that initial recourse tariff
that is RCA cost-based and approved.
4:45:55 PM
MS. DELBRIDGE said they understand that in traditional utility
regulation the RCA uses a just and reasonable standard and that
has worked for a long time. However, this is not a public
utility pipeline; the RCA has never had a contract carrier
natural gas pipeline before it. The reality is that as you bring
something new into the state's paradigm it is very appropriate
to bring in a means of regulating the pipeline.
The sponsors believe that the just and reasonable standard as
evidenced at arm's length is quite reasonable and honors the
ability of people to freely enter into contracts, absent fraud,
market duress or unfair dealing. And if these parties are
affiliated, again, there is a much heightened level of scrutiny
by the RCA to make sure that Alaskans are not getting gamed.
SENATOR DYSON remembered from earlier discussions that a utility
in the classic sense is likely to be one of several
organizations that are shipping through this pipe.
MS. DELBRIDGE added that public utilities might be customers,
but it's unlikely that there will be sufficient demand without
other customers beyond public utilities. That has yet to be
determined.
SENATOR MCGUIRE pointed out that subsection (2) on page 43,
lines 6-13, is an additional consumer rights protection. It says
the RCA has power to review and conduct an investigation and
hearing to determine whether the contract is just and
reasonable. She also wanted to remind people that this just and
reasonable standard has not always worked for consumers. It
failed in Cook Inlet with RCA's review of contracts between
Enstar and ConocoPhillips, for example, where another rate would
have been used, like the Tokyo gas rate, as opposed to the rate
that would have been very favorable ($8/mcf for 20 years about 4
years ago). So, she wanted it on the record that the sponsors of
this bill have struck a good balance, but it's important that
the possible (not always the perfect) goes forward for
consumers, as well. Sometimes that's the most important thing.
You can sit back and say you'd like to have an energy rate to be
the ideal amount, but it's better to have energy and this was
the colossal failure in the Cook Inlet. She said she supported
the consumer protection that is embedded in this bill and
opposed the amendment.
4:49:20 PM
CHAIR GIESSEL said she appreciated her alluding to the Marathon
contract with Enstar and since that misstep occurred, the RCA
legislation was passed requiring the RCA to take the cost to
consumers into account. She asked Ms. Delbridge if she recalled
that correctly.
MS. DELBRIDGE answered that when the legislature passed HB 280
in 2010 (the Cook Inlet Recovery Act) it gave the RCA permission
to consider the costs of failure to approve a contract.
Sometimes it's about the supply and there can be factors that
outweigh the lowest possible cost.
CHAIR GIESSEL commented that was important to bear in mind. She
asked Senator Fairclough if she maintained her objection.
SENATOR FAIRCLOUGH answered yes.
CHAIR GIESSEL asked Senator French for closing remarks.
SENATOR FRENCH said that Senator McGuire made a good point, but
he didn't get the logical follow through to lowering a high
standard if it did not protect consumers. You raise it and this
bill has clearly a less rigorous standard than just and
reasonable and one that is more industry friendly.
4:51:25 PM
SENATOR MCGUIRE said she didn't think it was necessarily a lower
standard; it's a different standard. The state is going into
uncharted waters and that requires a lot of thought about how
they are going about that. It requires reflection on past
standards and how those may have failed in certain areas. It is
a different standard that is embedded with consumer rights.
CHAIR GIESSEL asked for a roll call vote. Senator French voted
yea; Senators McGuire, Fairclough, Dyson, Micciche and Giessel
voted nay; therefore Amendment 3 failed.
4:53:02 PM
SENATOR FRENCH moved Amendment 4.
28-LS0021\I.21
Bullock
AMENDMENT 4
OFFERED IN THE SENATE BY SENATOR FRENCH
TO: CSSSHB 4(FIN)
Page 1, line 10:
Delete "that is a contract carrier"
Page 1, line 12, through page 2, line 5:
Delete "relating to the review by the Regulatory
Commission of Alaska of natural gas transportation
contracts; relating to the regulation by the
Regulatory Commission of Alaska of an in-state natural
gas pipeline project developed by the Alaska Gasline
Development Corporation; relating to the regulation by
the Regulatory Commission of Alaska of an in-state
natural gas pipeline that provides transportation by
contract carriage;"
Page 8, lines 22 - 23:
Delete all material.
Renumber the following paragraphs accordingly.
Page 11, lines 26 - 29:
Delete all material.
Insert "AS 38.35.120."
Page 25, line 27, through page 26, line 6:
Delete all material.
Renumber the following bill sections accordingly.
Page 26, line 13, through page 32, line 2:
Delete all material.
Renumber the following bill sections accordingly.
Page 35, line 13, through page 55, line 6:
Delete all material.
Renumber the following bill sections accordingly.
Page 55, lines 27 - 29:
Delete "AS 38.35.100(d), as amended by sec. 8 of
this Act, AS 38.35.120(a), as amended by sec. 9 of
this Act, AS 38.35.120(b), as amended by sec. 10 of
this Act, and AS 38.35.121, enacted by sec. 11 of this
Act,"
Page 55, line 30:
Delete "dates of secs. 3 and 8 - 11"
Insert "date of sec. 3"
Page 55, line 31:
Delete "dates of secs. 3 and 8 - 11"
Insert "date of sec. 3"
Page 56, lines 1 - 4:
Delete ", AS 38.35.100(d), as amended by sec. 8
of this Act, AS 38.35.120(a), as amended by sec. 9 of
this Act, AS 38.35.120(b), as amended by sec. 10 of
this Act, and AS 38.35.121, enacted by sec. 11 of this
Act"
Page 57, lines 12 - 16:
Delete "lines of
(1) AS 38.35.120 from "Covenants required
to be included in lease" to "Covenants required to be
included in lease to a pipeline that is not a natural
gas pipeline contract carrier"; and
(2)"
Insert "line of"
SENATOR DYSON and SENATOR FAIRCLOUGH objected.
SENATOR FRENCH explained that this amendment splits the bill in
two and lets half the bill go forward and holds the other half
back. The half it holds back is the part they had been talking
about today: the contract carrier provisions and all the new law
that really begins about the middle of the bill and goes
forward. He believed that those provisions had not been
thoroughly vetted, and given the timing of the open season, they
could be perfected over the summer. For example, he thought this
bill should get a hearing in front of the RCA and get revised
next year in time for the open season that will take place at
the end of the year.
He said there isn't a huge rush and this is a new body of law.
It's fairly clear that this is a one-of-a-kind pipeline, and
given the state's sketchy history with mega projects, spending
more time on these novel legal provisions was a good idea.
MS. DELBRIDGE said the sponsors would oppose this amendment,
adding that these are uncharted waters to some degree for
Alaska, but others have been here before. They had talked about
FERC's experience both with contract carriage natural gas
pipelines and in particular with the negotiated rate concept.
The sponsors have built additional provisions into that
regulatory framework working very closely over the past year and
half with the administration, DOL, AGDC and regulatory expertise
to make sure that some of Alaska's unique interests are
protected, particularly as it doesn't have the competitive field
like the Lower 48 does. Therefore, the bill has the open season
requirement and an RCA approved initial recourse tariff in
advance of shipping agreements, rules FERC doesn't have.
The sponsors believe that one of the reasons big projects in
Alaska can have problems at times is because of the risk and
political uncertainty. AGDC needs to know how it is going to be
regulated. It needs to be able to tell shippers how they will be
regulated and under what kind of a timeline and standards.
MS. DELBRIDGE said having that unknown hanging out there could
be devastating going into an open season. It is important for
them to have that certainty up front, particularly the ability
to actually be a contract carrier. When AGDC takes bonds for
this project to the raters they actually will mark off on a
sheet of paper whether or not this is a common carrier or a
contract carrier pipeline. That needs to be known. The financial
markets also want to have that regulatory certainty.
4:56:29 PM
SENATOR MCGUIRE said she also opposed this amendment and that
the sponsors had done a good job of putting in the certainty
that a contract carrier status would give. She supported common
carrier in the past, but she thought in a smaller market when
you look at bond rating and the need for certainty of supply,
the fact that in a common carrier situation you can put supply
in or not leads to production fluctuation, which they see in the
state's budget right now, and that also leads to uncertainty.
So, Senator McGuire said, to make something like this a go,
certainty is needed. The fact that the sponsors have gone above
and beyond, given the monopolistic concerns out there, to put in
the initial recourse tariff and incorporate common carrier
principles into contract carrier status could be unique in the
world. One possible failing of the TAPS is that it had not had
enough competition as one might like, and moving forward, they
want to be sure those out there who are looking for new areas to
discover gas have an opportunity to get in via an open season.
The RCA will be watching and so will the legislature.
4:58:54 PM
MS. DELBRIDGE said at the request of the House Resource co-
chairs they took HB 4 after some significant improvements to the
regulatory section before the RCA in Anchorage in an hour and 45
minute public meeting. They fielded questions from the RCA that
immediately had four suggestions on clarifying improvements. One
was a timeline change where they felt it was inadequate. All of
those concerns were addressed in the House Finance Committee.
She was not attempting to give the RCA's endorsement to the
bill, but they had a chance and took advantage of it to add some
commentary, and the sponsors had been responsive to it.
SENATOR FRENCH said he appreciated that there was one hearing in
front of the RCA, but he thought if they were to receive a
letter from the chair asking them to have a full-blown hearing,
they would welcome that. It would be a hearing of more than an
hour and 45 minutes and deeper thought would be given to some of
the inner workings of this bill.
CHAIR GIESSEL asked Senator Fairclough if she maintained her
objection.
SENATOR FAIRCLOUGH said she did.
CHAIR GIESSEL asked Senator Dyson if he maintained his
objection.
SENATOR DYSON said he did.
5:01:00 PM
CHAIR GIESSEL asked for a roll call vote: Senator French voted
yea; Senators McGuire, Micciche, Dyson, Fairclough and Giessel
voted nay; therefore Amendment 4 failed.
SENATOR DYSON moved to pass HB 4 [version 28-LS0021\I] from
committee to the next committee of referral with attached fiscal
notes and individual recommendations.
SENATOR FRENCH objected. He said this bill arrived in committee
barely 48 hours ago. In the two-minute opening statement given
by the bill's sponsor he warned them four times that it was a
complex bill. This bill envisions a $7 billion project, a mega
project, and he was deeply concerned that this committee had not
done its job vetting it. They hadn't heard a single word from
the commissioner or a deputy commissioner of the Department of
Revenue or the commissioner or a deputy commissioner of the
Department of Natural Resources; they hadn't once tested the
idea that whether or not it's possible to buy $2 gas on the
North Slope as envisioned by the bill's sponsor and he just
didn't know if that could be done. He thought they were passing
this bill out on a paucity of information: not hearing from Cook
Inlet explorers, North Slope explorers, utility companies, or
regulators.
CHAIR GIESSEL noted that Senator French was absent when the
commissioner and deputy commissioner of the DNR were before the
committee.
5:03:19 PM
SENATOR DYSON commented that he was never in a committee in the
last three or four years when these kinds of things were being
considered. He started out with a significant amount of
skepticism that 17 or 19 tcf/gas in Cook Inlet produce, like
Senator French. Two of the Anchorage power producers are men
that he had worked with for a long time and have credibility
with him; they want to believe it, too. But the rate at which
gas is being discovered and the number of wells that are
drilling doesn't make it look like it will happen. That
uncertainty is compelling for getting into a pair of suspenders
while hoping the belt holds scenario.
He worried about wasting a lot of money and effort if the big
Cook Inlet pipe comes into play. Over this session he had
learned that pretty reasonable efforts had made to eliminate or
minimize the amount of duplication of effort and getting access
to geo technical data, which impressed him as well as the open
season. If the really smart guys that know about markets and
supply and demand show up and put their money on the table, they
will know this is a viable project. That comforts him. Every one
of his concerns had been addressed better than he could have
done, which also impressed him.
SENATOR DYSON said that like Senator Micciche, he was worried
that this progress here would negatively affect Cook Inlet
exploration, but he talked to the producers there. They say no.
He says why? They say they can beat the price. If that's true in
one or four years from now, they are even more confident based
on what their exploration shows them that people won't show up
for the open season.
5:07:22 PM
Another thing they all have to watch out for is something
Eisenhower said: there is a third component to this project -
the timeline. Every day they delay makes it further away from
doing things at the opportune time, which Alaska has a good
record of doing. He wished they knew everything they needed to
know to make these critical decisions, but they don't. But based
on what they know, this is a reasonable way to go forward and he
had come to that conclusion reluctantly.
5:08:52 PM
SENATOR MCGUIRE said she appreciated Senator Dyson's comments
and that they had all struggled with the magnitude of their
decisions around this bill. This concept had been on the table
for three years starting with setting up the Alaska Gasline
Development Authority and empowered them with decision-making.
They come back to the legislature with a report and the timeline
for the series of the next steps and requests for new funding.
People were nervous about that decision and studied it over the
Interim. Now they have arrived at that decision making point
where Alaskans are ready for legislators to stop studying and
start making decisions.
She urged them to act now for the future of Alaskans. People in
rural Alaska are struggling; people in Fairbanks are going
bankrupt over their energy costs and now Anchorage is suffering,
too. The sponsors did an excellent job of putting sideboards up:
the RCA, consumer rights and the great team with Dan Fauske and
his crew to look at how to get this project to market - along
with the private sector. She concluded by thanking the Speaker,
Representative Hawker, and Rena Delbridge for their work.
5:11:34 PM
SENATOR MICCICHE said as the price of Lower 48 gas was crashing
they were signing AGIA into law and they had been at the mercy
of the bill ever since. It's important for the public to
understand that they weren't designing a $7 billion project;
they were designing a legal framework that allows a state to
have a role in oversight over moving a project forward.
He said this bill had been on the table all session and they had
had a lot of time to observe its effects; it had been through
several other committees. Stalling is an option, but he had been
hearing about the state's need for natural gas from the North
Slope when he still had pimples and now he is 51; Alaskans are
ready to get something moving.
This bill is responsible and well-done, he said. It provides
some leverage for all the other options and opportunities
available to Alaskans starving for energy all the way along the
pipeline right-of-way plus helping coastal Alaskans with
liquefied natural gas when this project becomes a reality.
Hopefully, those other projects come together and result in an
incredible project. He also said he appreciated the efforts of
the sponsors.
5:13:52 PM
CHAIR GIESSEL concluded by saying that this committee opened at
the beginning of this session with the topic of energy, the very
same topic that this committee opened with in 2007. There was a
crisis at the time and a need for more natural gas in the state.
They are now ready to make a decision; AGDC has said that the
price tag goes up $200 million a year for each year of delay.
She knows Alaska families - mothers, young people - want these
steps to be taken to bring natural gas down from the North
Slope. She invited the bill sponsors to make closing remarks.
5:15:00 PM
REPRESENTATIVE HAWKER, Joint Prime Sponsor of HB 4, Alaska State
Legislature, Juneau, Alaska, said all the closing remarks were
heartening, because they showed the committee's diligence in
understanding this challenge and this bill. This is an
opportunity and an obligation to provide access and the
opportunity for this state to develop its natural gas resources.
He said they have a 90-day session and the public expects them
to work efficiently and effectively; and clearly they have. He
thanked the whole committee for its diligence.
5:17:17 PM
REPRESENTATIVE CHENAULT, Joint Prime Sponsor of HB 4, Alaska
State Legislature, Juneau, Alaska, thanked the committee for its
work saying this project had been around for a while. Is it
moving too fast? And then said, "If not now, when?" His father
used to say if you don't ever start you will never finish a
project. He said letters in their packets from Cook Inlet
producers indicated that they didn't have any concerns about a
gas pipeline coming down. One fact was brought out: that they
were there and if they can't produce it cheaper, they shouldn't
be in business. They'll also tell you if there is a pipeline
that comes down another component will use that gas and an
export facility would give them options to be able sell their
gas if they don't have market for it. He also said he
appreciated the work and the questions the committee had asked.
He stated that he would make the bill better if that were
possible and this bill is the best opportunity to bring gas to
Alaskans.
5:20:42 PM
CHAIR GIESSEL asked Senator French if he maintained his
objection. He said yes.
CHAIR GIESSEL asked for a roll call vote; Senators Fairclough,
Micciche, Dyson, McGuire and Giessel voted yea; Senator French
voted nay; therefore HB 4 moved from committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 4 Amendment I.24.pdf |
SRES 4/4/2013 3:30:00 PM |
HB 4 |
| HB 4 Amendment I.22.pdf |
SRES 4/4/2013 3:30:00 PM |
HB 4 |
| HB 4 Amendment I.20.pdf |
SRES 4/4/2013 3:30:00 PM |
HB 4 |
| HB 4 Amendemt I.21.pdf |
SRES 4/4/2013 3:30:00 PM |
HB 4 |
| HB 4 Opp Written Testimony Valdez-5 2013.04.04.pdf |
SRES 4/4/2013 3:30:00 PM |
HB 4 |