Legislature(2003 - 2004)

04/14/2003 03:32 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
           SB 151-REGULATION OF NATURAL GAS PIPELINES                                                                       
                                                                                                                                
MS. MARY  JACKSON, staff  to Senator Tom  Wagoner, sponsor  of SB
151, told members this legislation  is a housekeeping measure and                                                               
provided the following background.                                                                                              
                                                                                                                                
     In 2000,  the legislature  amended the  Alaska Pipeline                                                                    
     Act.  In there  we stuck  in this  term, 'North  Slope'                                                                    
     because, at  that time, that  was the only  natural gas                                                                    
     pipeline that  we ever  saw on  the horizon.  We didn't                                                                    
     anticipate another pipeline to  come along. Since then,                                                                    
     another pipeline has come along  and, in fact, it's the                                                                    
     only one that  we have and it's on  the Kenai Peninsula                                                                    
     - it's  the Kenai  Kachemak Pipeline -  we call  it the                                                                    
     KKPL. It  was initially going  to go from  the Kachemak                                                                    
     Bay area  back to Kenai.  What they drilled at  the far                                                                    
     end of the Peninsula didn't  pan out so it actually now                                                                    
     goes  from  Ninilchik up  to  the  Kenai area....  It's                                                                    
     being constructed  right now and that's  why there's an                                                                    
     immediate effective date on the bill.                                                                                      
                                                                                                                                
     What happened  is they went to  the RCA to ask  for the                                                                    
     authority  to   provide  for  their  carriage   in  the                                                                    
     pipeline and  the RCA  said, well,  it just  says North                                                                    
     Slope natural  gas pipeline and we're  not frankly sure                                                                    
     whether or not  we can do that. So this  bill takes out                                                                    
     North Slope and leaves it  natural gas pipeline so it's                                                                    
     throughout the state of Alaska.  And that's why it is a                                                                    
     housekeeping  measure.  There  are people,  I  believe,                                                                    
     online from Marathon  to speak to how  they're going to                                                                    
     go  about doing  it but  it's a  pretty straightforward                                                                    
     bill.                                                                                                                      
                                                                                                                                
Regarding the  fiscal notes, MS.  JACKSON said the  RCA submitted                                                               
two  zero   fiscal  notes.   The  DNR   fiscal  note   amount  is                                                               
indeterminate; the last  line of the analysis  explains why, "For                                                               
the Kenai Kachemak  pipeline these dynamics are  unlikely as only                                                               
63  percent of  the  line's total  capacity  has been  contracted                                                               
for."                                                                                                                           
                                                                                                                                
CHAIR  OGAN said  he  begs  to differ  that  this legislation  is                                                               
merely  a  housekeeping  measure  because the  state  has  common                                                               
carrier pipelines. The legislature made  an exception for the gas                                                               
line  to  the  Lower  48  because the  producers  would  own  the                                                               
pipeline.  He expressed  concern that  if the  legislature shifts                                                               
away from  a policy  of common carrier  pipelines, it  could have                                                               
the   unintended  consequence   of  inhibiting   development.  He                                                               
explained that  pipeline owners would  control who  can transport                                                               
gas  in that  line  and  the open  seasons  based  on when  their                                                               
development is  planned to come  on line, in  effect, eliminating                                                               
other users and stranding gas.                                                                                                  
                                                                                                                                
MS.  JACKSON said  she understands  that concern.  An alternative                                                               
was  discussed and  that was  to  specifically name  KKPL in  the                                                               
legislation so  that it would only  apply to the North  Slope and                                                               
KKPL.  She pointed  out the  length of  the KKPL  pipeline is  30                                                               
miles.                                                                                                                          
                                                                                                                                
TAPE 03-28, SIDE B                                                                                                            
                                                                                                                                
CHAIR OGAN said he has been  told there are shallow gas leases on                                                               
the Kenai  Peninsula. His concern is  that SB 151 could  lock out                                                               
and discourage other development.                                                                                               
                                                                                                                                
MS. JACKSON referred to minutes  from a House Resources Committee                                                               
hearing  in which  Mr. Schoffmann  of Marathon  Oil talked  about                                                               
support  from  Aurora  Gas, Forest  Oil  and  Evergreen,  smaller                                                               
producers.                                                                                                                      
                                                                                                                                
CHAIR OGAN noted he has not heard from the smaller producers.                                                                   
                                                                                                                                
SENATOR ELTON said  his understanding is that  without this bill,                                                               
the only  company allowed to  use the pipeline would  be Marathon                                                               
Oil  because  it  could  not  contract  to  others  for  firm  or                                                               
interruptible service.                                                                                                          
                                                                                                                                
CHAIR OGAN  said his  understanding is  that if  SB 151  does not                                                               
pass, the  pipeline will  be a common  carrier pipeline.  In that                                                               
case, if there  is more gas than the pipeline  can carry, the gas                                                               
will be  prorated. SB 151  would allow companies to  contract for                                                               
space in the pipeline, whether or not that space is used.                                                                       
                                                                                                                                
SENATOR  ELTON asked  if  the  RCA would  regulate  whose gas  is                                                               
carried in the common carrier pipeline.                                                                                         
                                                                                                                                
CHAIR OGAN said that is correct.                                                                                                
                                                                                                                                
MR. BEN  SCHOFFMANN told members  he is employed by  Marathon Oil                                                               
and is  the Vice  President of  KKPL, which  is jointly  owned by                                                               
Marathon  and  Unocal. He  told  members  he provided  background                                                               
information on this bill to  the committee [in writing]. He asked                                                               
to address some of the members' previous questions.                                                                             
                                                                                                                                
He told  members the modifications  proposed to the  pipeline act                                                               
are  to the  common carrier  section of  that act.  SB 151  would                                                               
allow,  under the  common carrier  section, a  pipeline to  offer                                                               
both firm and interruptible service.  However, that full offering                                                               
of service  is still  under the  purview of the  RCA. The  RCA is                                                               
authorized to ensure that the  process of accessing that pipeline                                                               
is fair and  balanced and that no party is  favored. In the event                                                               
the  RCA finds  that companies  are  being excluded,  it has  the                                                               
ability to  direct the pipeline  to expand capacity to  make room                                                               
for others who want to ship gas.                                                                                                
                                                                                                                                
Most pipelines in Alaska have  been built by producer affiliates.                                                               
They have the capital and  incentive to do so. Building pipelines                                                               
spurs investment  activity by majors and  by independents. Aurora                                                               
Gas has  written a  letter in  support of SB  151, part  of which                                                               
says:                                                                                                                           
                                                                                                                                
     Aurora  Gas would  not avoid  exploring and  developing                                                                    
     acreage in  the vicinity  of producer  owner pipelines.                                                                    
     However,  Aurora can  and would  substantially discount                                                                    
     the value  of exploring and developing  acreage with no                                                                    
     infrastructure whatsoever.                                                                                                 
                                                                                                                                
He  said he  believes the  pipeline would  spur investments  and,                                                               
rather than shutting  out smaller independents, they  seem to say                                                               
they   will  look   for  gas   where  there   is  infrastructure.                                                               
Furthermore, the RCA  has the authority to ensure  the process is                                                               
executed fairly.                                                                                                                
                                                                                                                                
SENATOR SEEKINS  said his  understanding is that  the owner  of a                                                               
gas field who knows how much gas  will be produced can get a firm                                                               
commitment to  transfer that gas  through this pipeline.  That is                                                               
considered  to  be non-interruptible  gas.  However,  if the  gas                                                               
field's  potential is  unknown, the  owner could  contract on  an                                                               
interruptible  basis if  there is  capacity within  the pipeline,                                                               
which  would give  him  the opportunity  to  start producing  the                                                               
field.  If, at  a later  time, he  found the  parameters of  that                                                               
field  were  great  enough  to  overcome  the  capacity  of  this                                                               
pipeline, he would  have the option of building  his own pipeline                                                               
or entering  into a non-interruptible  contract. He asked  if his                                                               
understanding is correct.                                                                                                       
                                                                                                                                
SENATOR WAGONER  said that  is correct to  a point.  The carrying                                                               
capacity  of  the  pipeline  can  be  increased  with  additional                                                               
compression.                                                                                                                    
                                                                                                                                
SENATOR SEEKINS  said that at least  allows the owner to  get his                                                               
product  into  the market  on  an  interruptible basis.  However,                                                               
because  the  pipeline does  not  have  infinite capacity,  there                                                               
would come a point where he  would have to build his own pipeline                                                               
if his supply was large enough.                                                                                                 
                                                                                                                                
CHAIR OGAN asked Mr. Strandberg  if Alaska has any regulations on                                                               
open seasons.                                                                                                                   
                                                                                                                                
MR.  STRANDBERG, Regulatory  Commissioner of  Alaska (RCA),  said                                                               
the RCA does  not currently have a regulation that  speaks to the                                                               
open season process.                                                                                                            
                                                                                                                                
CHAIR OGAN asked if that is  by virtue of the fact that pipelines                                                               
are either utility or common carrier pipelines.                                                                                 
                                                                                                                                
MR. STRANDBERG said that is  correct. Currently two gas pipelines                                                               
are  in operation  in Alaska,  the Beluga  pipeline and  Enstar's                                                               
pipeline. Those are both certificated  under the public utilities                                                               
statute.                                                                                                                        
                                                                                                                                
CHAIR OGAN asked Mr. Strandberg  if the RCA intends to promulgate                                                               
regulations  to regulate  open seasons  if  pipelines offer  firm                                                               
transportation.                                                                                                                 
                                                                                                                                
MR.  STRANDBERG thought  the RCA  has the  ability to  promulgate                                                               
regulations  through its  own motion  or through  a petition.  He                                                               
said  it is  unclear  whether the  state  immediately needs  open                                                               
season regulations  at this time. However,  if pipeline companies                                                               
see a  need for them,  they could petition  the RCA and  it would                                                               
get involved in a regulation project.                                                                                           
                                                                                                                                
CHAIR  OGAN asked  if open  season is  not an  issue now  because                                                               
Alaska does not have any pipelines built that require them.                                                                     
                                                                                                                                
MR. STRANDBERG  said that is  correct and a lot  of it has  to do                                                               
with the  responsibility of the company  conducting offerings. He                                                               
said  he believes  the RCA  considered open  seasons on  the KKPL                                                               
project.                                                                                                                        
                                                                                                                                
CHAIR OGAN  asked if a producer-owned  pipeline company purchased                                                               
all of  the available capacity  on a line  to reserve it  for the                                                               
future,  whether  the  RCA  has the  authority  to  require  that                                                               
capacity to be released to a party that needs it now.                                                                           
                                                                                                                                
MR. STRANDBERG said the RCA  believes it has that authority under                                                               
the  existing  statute. The  RCA  regards  the proposed  contract                                                               
carriage  statute  language to  embed  itself  in the  overriding                                                               
common  carrier language  of  the Alaska  Pipeline  Act. The  RCA                                                               
believes  it has  the flexibility,  even with  these changes,  to                                                               
regulate in the public interest.                                                                                                
                                                                                                                                
CHAIR  OGAN asked  if an  independent shipper  wanted the  RCA to                                                               
order  capacity expansion,  but the  producer-affiliated pipeline                                                               
did not  want to  expand, which  party would  have the  burden of                                                               
proof before the RCA.                                                                                                           
                                                                                                                                
MR. STRANDBERG said that is a  difficult question. The RCA has to                                                               
look at the specific circumstances  to establish where the burden                                                               
of  proof  lies. Some  of  the  considerations  are who  has  the                                                               
information, whether the  party is a utility that  is required to                                                               
prove something is in the public  interest, and who is the moving                                                               
party. He  noted the RCA employs  some rules of thumb  but it has                                                               
to look at each specific case.                                                                                                  
                                                                                                                                
CHAIR OGAN asked if the RCA has a position on the bill.                                                                         
                                                                                                                                
MR. STRANDBERG replied,  "We take no position other  than to note                                                               
that there's  a zero  fiscal note  and we  feel we  can certainly                                                               
accommodate the statute changes within our current statute."                                                                    
                                                                                                                                
SENATOR LINCOLN referred  to the fiscal note  from the Department                                                               
of  Community   and  Economic  Development  and   read  from  the                                                               
analysis:                                                                                                                       
                                                                                                                                
     There are  no fiscal impacts  on RCA for  this bill....                                                                    
     However, it  is expected that where  producers elect to                                                                    
     own  and  operate a  pipeline,  which  is allowed,  the                                                                    
     contract  carriage with  service under  these statutory                                                                    
     terms  will be  proposed to  RCA in  a pipeline  tariff                                                                    
     filing.                                                                                                                    
                                                                                                                                
She asked Mr. Strandberg to elaborate on that statement.                                                                        
                                                                                                                                
MR. STRANDBERG said perhaps the  "however" is slightly misplaced.                                                               
The  RCA does  not foresee  any fiscal  impact from  the bill.  A                                                               
company may petition  the RCA for the contract  carriage but that                                                               
would be considered part of  the RCA's normal course of business.                                                               
The RCA  expects that the cost  would be absorbed in  its current                                                               
budget through the regulatory cost charge.                                                                                      
                                                                                                                                
CHAIR OGAN asked  why Alaska disallowed contract  carriage in the                                                               
past.                                                                                                                           
                                                                                                                                
MR.  STRANDBERG said  that is  a good  question. He  said he  has                                                               
learned  from some  of the  corporate memory  within the  RCA the                                                               
Pipeline Act  and Right-of-Way Leasing  Act were  passed together                                                               
in 1972.  The Legislature wanted  to establish a policy  of equal                                                               
and unfettered  access to oil  and gas  in Alaska. At  that time,                                                               
the common carrier mechanism appeared  to be an excellent vehicle                                                               
to use to avoid any discrimination.  He pointed out that act pre-                                                               
dates  the TransAlaska  Pipeline  Act. He  said  he believes,  in                                                               
terms  of  the specific  circumstances  surrounding  the need  to                                                               
assure delivery, a contract carriage  approach does not establish                                                               
that discrimination  will occur. He believes  offering the choice                                                               
of  either vehicle  that  a pipeline  company  can approach  this                                                               
under is  effective. It is  important that the RCA  consider each                                                               
application  or  proposal for  contract  carriage  in the  public                                                               
interest.                                                                                                                       
                                                                                                                                
SENATOR ELTON commented that he  finds it bothersome that the RCA                                                               
does not have a preference and  takes no position on the bill. He                                                               
said it almost  sounds as though Mr. Strandberg's  argument is an                                                               
argument for  the common  carrier approach.  He remarked  that SB
151 addresses a fairly significant public policy issue.                                                                         
                                                                                                                                
MR. STRANDBERG said  he was attempting to give  the committee the                                                               
best factual  information about possible  outcomes. He  said when                                                               
pressed, he  would say  the RCA  does have  a position.  It feels                                                               
these statute  changes will  still allow the  RCA to  protect the                                                               
public interest  and to  accommodate and  work with  the pipeline                                                               
companies  to  certificate  and bring  pipelines  into  operation                                                               
under either contract or common carriage.                                                                                       
                                                                                                                                
SENATOR  SEEKINS  asked  Mr.  Strandberg  if  the  RCA  sees  any                                                               
downside  to the  proposed  legislation in  terms  of the  public                                                               
interest.                                                                                                                       
                                                                                                                                
4:45 p.m.                                                                                                                     
                                                                                                                                
MR. STRANDBERG said he sees  no downside to this legislation with                                                               
the  caveat   that  the  RCA   can  continue  to   discharge  its                                                               
responsibility  to  look at  each  application  and its  specific                                                               
circumstances  and  determine  how  that  particular  application                                                               
works within its statute.                                                                                                       
                                                                                                                                
SENATOR  SEEKINS asked  if SB  151 will  help the  state get  its                                                               
resources to market  sooner and more efficiently.  He then asked,                                                               
if no downside  exists in terms of the public  interest, what the                                                               
upside is.                                                                                                                      
                                                                                                                                
MR. STRANDBERG told members the  RCA's mission is to regulate for                                                               
the public  interest. Implicit  in that  mission is  providing an                                                               
environment to  make the investment  climate as good  as possible                                                               
and to  protect ratepayer  interests. He said  the dynamics  of a                                                               
gas pipeline  under the  common carrier portion  of the  act does                                                               
not allow a  definite commitment for the conveyance of  gas. As a                                                               
commodity, gas is time-sensitive. He  said he spoke earlier about                                                               
the  need  for  having  the   ability  to  fulfill  a  production                                                               
contract. He believes  the upside of this legislation  is that it                                                               
will increase surety for investors  in a pipeline. They will know                                                               
that a pipeline company will be  able to comply with the terms of                                                               
the contract it signs for the delivery of gas.                                                                                  
                                                                                                                                
SENATOR SEEKINS  commented that the upside  to SB 151 is  that it                                                               
encourages development and increases surety  for those who put up                                                               
the  capital  to build  the  line  and  there is  no  foreseeable                                                               
downside.                                                                                                                       
                                                                                                                                
CHAIR OGAN asked Mr. Schoffmann to give his presentation.                                                                       
                                                                                                                                
MR.  BEN SCHOFFMANN,  Vice-President of  KKPL, gave  a PowerPoint                                                               
presentation and offered the following highlights.                                                                              
                                                                                                                                
SB  151  will provide  an  additional  option  to offer  firm  or                                                               
interruptible  service.  It  allows other  pipelines  to  operate                                                               
under  the same  methods provided  to  the North  Slope gas  line                                                               
during the  2000 legislative session.  SB 151 is  consistent with                                                               
policy elsewhere in  the United States, where  the Federal Energy                                                               
Regulatory Commission  (FERC), since deregulation, has  been very                                                               
accustomed to  granting firm and interruptible  transportation or                                                               
contract carriage.  This issue has  not arisen in  Alaska because                                                               
there has not been pipeline construction here.                                                                                  
                                                                                                                                
The  difference  between firm  and  interruptible  service is  as                                                               
follows. For  firm service, the  shipper agrees to pay  a monthly                                                               
reservation charge for a set level  of capacity, which is due and                                                               
payable whether  or not that  capacity is used. The  pipeline, in                                                               
turn, agrees  to make that  capacity available. The  shipper only                                                               
pays interruptible service  if and when the service  is used, and                                                               
the pipeline makes best efforts to provide capacity.                                                                            
                                                                                                                                
MR. SCHOFFMANN  told members SB  151 has two  important benefits.                                                               
It  will  give pipeline  investors  the  opportunity to  see  the                                                               
demand  for the  services,  thereby reducing  the  risk. It  also                                                               
helps to establish a minimum level  of what people are willing to                                                               
pay.                                                                                                                            
                                                                                                                                
Prospective  shippers will  be able  to  choose the  type of  gas                                                               
transportation service  which best aligns their  gas supplies and                                                               
customer  contracts. Gas  contracts  are  typically entered  into                                                               
between  producers  and end  users  on  a firm  or  interruptible                                                               
basis. Those with firm gas sales  contracts may be more likely to                                                               
want  firm  transportation  and  be   willing  to  pay  for  that                                                               
transportation. Those  with interruptible supply  contracts would                                                               
be  more  likely  to be  biased  toward  selecting  interruptible                                                               
transportation services. The  key word associated with  SB 151 is                                                               
"alignment."  It allows  companies  to align  gas contracts  with                                                               
transportation services.                                                                                                        
                                                                                                                                
SB 151 does not change the  open access status of pipelines under                                                               
the  Pipeline Act.  He agreed  with Mr.  Strandberg that  the RCA                                                               
will  still  act  in  the  public  interest  to  make  sure  that                                                               
suppliers have  access to the  system either through  open season                                                               
or  forced expansion.  SB 151  will  not have  an adverse  fiscal                                                               
impact on the state or  on smaller shippers. The smaller shippers                                                               
like the idea of building  pipelines because they will be assured                                                               
that if  their exploration efforts  are successful, they  will be                                                               
able to  transport that gas.  He told  members he is  speaking on                                                               
behalf of Aurora  Gas and Forest Oil. He added  that the RCA will                                                               
be  looking at  individual situations  to make  sure the  smaller                                                               
producers  do  not  get  locked  out.  Maximizing  throughput  is                                                               
advantageous  to smaller  companies.  There is  no incentive  for                                                               
them  to   artificially  constrain  throughput.  He   said  other                                                               
agencies  do   not  seem   to  have   a  concern   with  producer                                                               
affiliation. FERC has not prohibited  that sort of situation, nor                                                               
did  the 2000  amendments to  AS 42.06.  Two entities  have built                                                               
pipelines  in  Alaska:  the public  utilities  (Enstar)  and  the                                                               
producers.  Those  entities  have   the  capital,  resources  and                                                               
incentives.  He believes  SB 151  will accelerate  investments by                                                               
allowing firm and interruptible transportation services.                                                                        
                                                                                                                                
KKPL's contention  is that  pipelines are  good for  business. It                                                               
believes  SB  151  will  spur activity.  It  will  give  pipeline                                                               
investors  more   assurance  that   their  investments   will  be                                                               
efficiently utilized  and in demand.  It will give  the producers                                                               
and gas suppliers  the assurance that if they have  firm gas sale                                                               
commitments, they can transport that  gas to market to meet their                                                               
contracts. KKPL has two tentative  contracts for firm shipment of                                                               
gas. It  would like to  offer that  service as the  pipeline goes                                                               
into operation later  this year. This is a timely  issue for KKPL                                                               
but it  believes SB 151  will also encourage  pipeline investment                                                               
and development activities.                                                                                                     
                                                                                                                                
CHAIR OGAN asked Mr. Schoffmann  why KKPL needs contract carriage                                                               
if it is already a producer and  owns the gas it wants to ship on                                                               
the pipeline.                                                                                                                   
                                                                                                                                
MR. SCHOFFMANN  said Marathon and  Unocal have formed  a separate                                                               
pipeline  entity,  Kenai  Kachemak Pipeline  (KKPC),  whose  sole                                                               
business is  to own and operate  this pipeline so it  is a stand-                                                               
alone  business venture  that will  be regulated  by the  RCA. He                                                               
stated:                                                                                                                         
                                                                                                                                
     It is in  our interest to make sure  that that pipeline                                                                    
     company  we created  is not  a  loser of  money but  is                                                                    
     financially  viable  in  its own  right.  So,  we  have                                                                    
     attempted to  conduct the  open season  and set  up the                                                                    
     pipeline  tariffs treating  everyone equally,  inviting                                                                    
     other people to nominate gas  or book for services, but                                                                    
     the real issue is, because  of a variety of reasons, it                                                                    
     made  the most  business  sense to  set  up a  separate                                                                    
     company for this aspect and  that company would like to                                                                    
     be - have some financial underpinning to it.                                                                               
                                                                                                                                
CHAIR OGAN  commented that is  a moot point  if KKPL had  an open                                                               
season and invited participation but no one else had gas.                                                                       
                                                                                                                                
MR. SCHOFFMANN said KKPL anticipated  that others might have gas.                                                               
Others with  leases had  the opportunity  to express  interest or                                                               
make commitments. The  open season at least  helped KKPL identify                                                               
the minimum size  line. KKPL wants to be  financially stable but,                                                               
in   addition,  the   producers,   Marathon   and  Unocal,   have                                                               
commitments to  ship firm gas  to various supply  contracts. They                                                               
want  to be  assured  they have  the  ability to  do  so and  are                                                               
willing to pay for it.                                                                                                          
                                                                                                                                
CHAIR OGAN  commented that one  cannot nominate gas if  there are                                                               
no "bookable" reserves.                                                                                                         
                                                                                                                                
MR. SCHOFFMANN said in this  instance, other investments are tied                                                               
to the  old development  program -  the Ninilchik  gas discovery.                                                               
Millions of  dollars are  being spent. It  is incumbent  upon the                                                               
suppliers  to  ensure  that  money spent  will  result  in  their                                                               
ability to ship  the gas they believe they are  in the process of                                                               
proving up and deliver as early as the end of this year.                                                                        
                                                                                                                                
CHAIR  OGAN asked  if the  KKPL  pipeline is  contracted for  100                                                               
percent capacity at this point.                                                                                                 
                                                                                                                                
MR. SCHOFFMANN  said it is  not. He  explained the gas  line will                                                               
not come on  stream at full capacity. The gas  supplies will ramp                                                               
up to  a certain  level and  then begin to  decline. At  its peak                                                               
rate, the anticipated  throughput that has been  contracted is 90                                                               
million cubic  feet. Under a reasonable  operating scenario, that                                                               
being the  inlet pressure  of about 1,050  pounds and  the outlet                                                               
pressure of about  750 pounds, the gas line capacity  would be in                                                               
the neighborhood  of 120 to  130 million  cubic feet per  day. On                                                               
that basis,  at the peak, there  will be about 25  percent excess                                                               
capacity that is  not contracted for. The line  could be expanded                                                               
if other supplies are proved up and firm commitments are made.                                                                  
                                                                                                                                
CHAIR  OGAN   asked  if  the   pipeline  would  be   expanded  by                                                               
compression or looping.                                                                                                         
                                                                                                                                
MR.  SCHOFFMANN  said it  would  be  expanded by  compression  or                                                               
changing the  inlet or outlet  conditions. The  compression could                                                               
be put  at the  beginning, middle  or end.  Looping would  be the                                                               
last resort but it is possible.                                                                                                 
                                                                                                                                
5:03 p.m.                                                                                                                     
                                                                                                                                
SENATOR SEEKINS noted  that Mr. Schoffmann said this  is a common                                                               
scenario in other states and asked how common.                                                                                  
                                                                                                                                
MR. SCHOFFMANN  clarified that he  said this is commonly  used by                                                               
FERC in  the Lower  48 states.  KKPL did look  at what  other gas                                                               
producing  states, notably  Oklahoma, Texas,  and Louisiana,  are                                                               
doing. They  each have slightly  different statutory  schemes but                                                               
they  all   permit  gas   to  be  transported   on  a   firm  and                                                               
interruptible basis.                                                                                                            
                                                                                                                                
SENATOR SEEKINS asked  if KKPL is building  some flexibility into                                                               
its pipeline to  allow other producers a  structured rate process                                                               
that may help them get their product on line.                                                                                   
                                                                                                                                
MR. SCHOFFMANN said  that is essentially correct  with the caveat                                                               
that under the  common carrier regulations, the  RCA is concerned                                                               
about two  things: making sure  the pipeline has  enough capacity                                                               
to  let  others in  while  making  sure it  is  not  too big.  He                                                               
explained  the nature  of pipeline  design  being what  it is,  a                                                               
change in  pipeline size  creates a  large amount  of incremental                                                               
capacity.  He noted  that an  increase of  one diameter  size can                                                               
create an  increase in  capacity of 50  to 100  percent. Pipeline                                                               
capacity is the function of a  lot of factors, but an increase in                                                               
diameter from 8 inches to 12 inches almost doubles the capacity.                                                                
                                                                                                                                
SENATOR SEEKINS asked Mr. Schoffmann  if anything in the proposed                                                               
rate structure  in SB 151  would put a potential  competitor with                                                               
either Marathon or Unocal at a disadvantage.                                                                                    
                                                                                                                                
MR.  SCHOFFMANN said  he  does  not see  how  that would  result.                                                               
Everyone  has  been  offered  the   same  two  options,  firm  or                                                               
interruptible  transportation.  The  RCA  will  be  ruling  on  a                                                               
tariff,  assuming SB  151 passes,  that sets  the rates  for each                                                               
form of transportation.  Everyone will know what  those rates are                                                               
in  advance. The  rates will  not discriminate  between producers                                                               
and  independents. Therefore,  Marathon and  Unocal will  have to                                                               
contract with KKPL under the same exact terms as others.                                                                        
                                                                                                                                
CHAIR OGAN said that is assuming  no one finds more quantities of                                                               
gas than they can ship through the excess capacity.                                                                             
                                                                                                                                
MR. SCHOFFMANN said at the  point extra capacity is needed, there                                                               
would be  a new  RCA rate  case to determine  the cost,  how that                                                               
capacity will be provided, and who will pay for it.                                                                             
                                                                                                                                
CHAIR OGAN  said he hopes that  happens. He then asked  Mr. Myers                                                               
to testify.                                                                                                                     
                                                                                                                                
MR. MARK  MYERS, Director of  the Division  of Oil and  Gas, DNR,                                                               
told members  that Kevin  Banks and Anthony  Scott were  with him                                                               
and available to answer questions.                                                                                              
                                                                                                                                
SENATOR ELTON asked  Mr. Myers if DNR has taken  a position on SB
151.                                                                                                                            
                                                                                                                                
MR. MYERS said DNR has taken no position on SB 151.                                                                             
                                                                                                                                
SENATOR  SEEKINS asked  Mr. Myers  his view  of the  downside and                                                               
upside of SB 151.                                                                                                               
                                                                                                                                
MR. MYERS  said he  believes contract  carriage can  provide more                                                               
certainty, which  helps with financing.  The downside is  that an                                                               
affiliated  pipeline may  not  have the  same  motivations as  an                                                               
independent pipeline.  An independent  pipeline will  always want                                                               
to expand.  An affiliated pipeline  owner could find itself  in a                                                               
competitive situation  for the gas  market with a company  with a                                                               
new discovery. He  said affiliation can be an issue  but, in this                                                               
case,  the RCA  can compel  expansion, help  allocate production,                                                               
work out clear rule making  and put together rules for conducting                                                               
open seasons. The RCA has more  authority than FERC. He said some                                                               
contract  carriage pipelines  might be  built that  would not  be                                                               
built under common  carrier so the infrastructure  will be there.                                                               
However, one's ability  to get into that  infrastructure will not                                                               
be as  clear as it  would be  in an non-affiliated  pipeline that                                                               
might  want to  expand. He  is not  saying that  anti-competitive                                                               
behavior will  happen, but there  is concern that those  who make                                                               
the  initial investment  have priority  in the  market place.  He                                                               
repeated Alaska has more protection  with the RCA. On the federal                                                               
side, the Minerals Management Service  has had some problems with                                                               
access to  offshore pipelines. They  are more akin to  the Alaska                                                               
situation  than Oklahoma  or  Texas,  where there  are  a lot  of                                                               
competing pipelines.                                                                                                            
                                                                                                                                
SENATOR SEEKINS asked,  "If this was not  an affiliated pipeline,                                                               
if this was  simply a common contract carrier, do  you think they                                                               
would  be looking  for the  same  kind of  flexibility that  this                                                               
pipeline is?"                                                                                                                   
                                                                                                                                
MR. MYERS  said he  does. He  added that  contract carriage  is a                                                               
"take or  pay" contract. He  explained in an  affiliated producer                                                               
built pipeline,  the producer has  a good  idea of the  amount of                                                               
gas  going into  the line  and  understands the  market, and  the                                                               
pipeline is self  financed. However, in the case  of someone else                                                               
going  to the  market  to try  to get  financing,  the fact  that                                                               
contracts  are locked  in  for a  long period  of  time would  be                                                               
helpful.                                                                                                                        
                                                                                                                                
SENATOR SEEKINS  asked if it  is a good flexibility  component in                                                               
general  so, by  looking at  it  as an  affiliated pipeline,  the                                                               
legislature may be reading more into  it than just seeing this as                                                               
a common procedure  used in other places and a  better way to get                                                               
gas to market.                                                                                                                  
                                                                                                                                
TAPE 03-29, SIDE A                                                                                                            
                                                                                                                                
MR. MYERS  said that is  basically correct.  He  said affiliation                                                               
could create a problem when there  are no alternatives, but he is                                                               
not saying that is  the case with KKPL.  He said  when there is a                                                               
single pipeline coming  out of a basin and no  one knows how much                                                               
gas  is in  that basin,  there could  potentially be  more demand                                                               
than that  pipeline can  deliver and  it will  require expansion.                                                               
Regarding the point of expansion,  if the burden of demonstrating                                                               
the need  not to expand is  on the pipeline company,  that is one                                                               
thing.  If the  burden  to show  the  need to  expand  is on  the                                                               
explorer, that  places more risk on  the explorer. He said  a lot                                                               
depends on  how the RCA weighs  the evidence as far  as mandating                                                               
expansion.                                                                                                                      
                                                                                                                                
CHAIR OGAN asked Mr. Myers if  he would suggest clarifying in the                                                               
statutes where the burden of proof should fall.                                                                                 
                                                                                                                                
MR. MYERS said he is not  qualified to say whether that should be                                                               
in the  RCA rule  making or  in statute.  He deferred  to Anthony                                                               
Scott for an answer.                                                                                                            
                                                                                                                                
MR. ANTHONY  SCOTT, Division  of Oil and  Gas, DNR,  told members                                                               
that  Commissioner  Strandberg  mentioned  if  the  RCA  had  the                                                               
authority  to weigh  these matters  on a  case-by-case basis,  it                                                               
would be able  to protect the public interest. He  said he thinks                                                               
rule making could potentially be quite useful.                                                                                  
                                                                                                                                
CHAIR   OGAN    referred   to   DNR's   fiscal    note   analysis                                                               
and quoted the following sentence:                                                                                              
                                                                                                                                
     Meanwhile, contract carriage on  a pipeline owned by an                                                                    
     affiliated  producer  could   potentially  be  used  to                                                                    
     impede  pipeline access  for non-affiliated  producers.                                                                    
     This   could  hinder   natural   gas  exploration   and                                                                    
     development and ultimately result  in a negative fiscal                                                                    
     impact for the State.  For the Kenai-Kachemak pipeline,                                                                    
     however,  these  dynamics  are  unlikely,  as  only  63                                                                    
         percent of the line's total capacity has been                                                                          
     contracted for.                                                                                                            
                                                                                                                                
He said  he is trying to  reconcile that with Mr.  Myers' earlier                                                               
comment that  there could be  more supply than  capacity sometime                                                               
in the future.  He then asked if the  legislature should consider                                                               
narrowing this legislation to this specific pipeline.                                                                           
                                                                                                                                
MR. MYERS said that is a policy  call. He said if the RCA has the                                                               
ability to mandate expansion and the  burden of proof lies on the                                                               
pipeline  company,  he  thinks  it's okay.  He  said  since  this                                                               
applies to  all pipelines, there  is the potential  for pipelines                                                               
to  be built  for a  specific project  with a  limited amount  of                                                               
capacity.  The RCA  could mandate  expansion but  explorers would                                                               
have to go to  the RCA and take the risk they  would or would not                                                               
succeed.  In that  case, there  is additional  risk but  there is                                                               
still a  remedy. He said affiliation  is not a huge  issue in his                                                               
mind but  he had to bring  the committee's attention to  the fact                                                               
that affiliation could change pipeline behaviors.                                                                               
                                                                                                                                
CHAIR OGAN  announced he would  hold the bill in  committee until                                                               
Wednesday. He then announced a brief at-ease.                                                                                   

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