Legislature(2009 - 2010)BUTROVICH 205

02/11/2010 03:30 PM Senate RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
<Bill Hearing Postponed to 2/15/10>
Scheduled But Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 20(FIN) Out of Committee
Heard & Held
            SB 203-COOK INLET GAS STORAGE FACILITIES                                                                        
3:39:49 PM                                                                                                                    
CO-CHAIR   WIELECHOWSKI   announced  SB   203   to   be  up   for                                                               
SENATOR FRENCH,  sponsor of SB  203, said the bill  addresses the                                                               
need  to make  sure some  gas  is on  hand in  times of  shortage                                                               
during winter. He said all those  involved in the energy issue in                                                               
South  Central Alaska,  from Mayor  Sullivan,  to the  Regulatory                                                               
Commission of Alaska  (RCA), to ENSTAR, to  utilities, agree that                                                               
gas  storage is  needed. He  said  SB 203  is a  targeted way  to                                                               
create some incentives, such as  tax credits for investments, for                                                               
private industry  to invest  the $100  to $200  million necessary                                                               
for building  a well.  He  mentioned the well would  be under the                                                               
jurisdiction of the RCA to prevent price gouging.                                                                               
SENATOR WAGONER  asked how  many different  geological structures                                                               
are being looked at for gas storage and by how many companies.                                                                  
SENATOR  FRENCH said  he  did  not know.  He  said  from July  to                                                               
October of 2009,  when SB 203 was being put  together, Cook Inlet                                                               
Natural Gas  Storage (CINGS) appeared  and is negotiating  a deal                                                               
with ENSTAR.  He believed  ENSTAR would  be reluctant  to comment                                                               
while in the process of negotiating that deal.                                                                                  
SENATOR  WAGONER  said  he  has   heard  up  to  three  different                                                               
companies  are  looking  at  doing  storage,  two  already  doing                                                               
business  in  Cook  Inlet  and  TransCanada.  He  said  if  other                                                               
companies also  do storage,  taxes on up  to three  storage units                                                               
would be forgiven.                                                                                                              
SENATOR HUGGINS asked if storage of CO would be applicable.                                                                     
3:44:00 PM                                                                                                                    
SENATOR  FRENCH said  he felt  natural  gas should  be the  focus                                                               
because it can be burned to keep warm in winter.                                                                                
SENATOR  FRENCH  referred to  a  letter  from the  Department  of                                                               
Natural Resources (DNR) stating  their concern about allowing tax                                                               
payers  to obtain  credits simply  by  transferring assets  among                                                               
themselves. He  asked Mr. Bullock  if he thinks SB  203 addresses                                                               
that issue.                                                                                                                     
SENATOR STEVENS joined the meeting.                                                                                             
DONALD  BULLOCK, Attorney,  Legislative Legal  Services, referred                                                               
to page  3, line 30 through  page 4, line 9,  particularly page 4                                                               
line 2  which says how  [the tax  payer] forfeits the  portion of                                                               
the  credit accrued  in  previous years.  He  explained that  any                                                               
credit left is  lost if the tax payer disposes  of the investment                                                               
or facility, takes the investment out  of service or fails to use                                                               
the storage  facility primarily for  the storage of gas  for sale                                                               
and  delivery in  the  state.  He pointed  out  the limited  time                                                               
period, through  2013, within which  all transactions  would have                                                               
to happen.  He  said it is a policy question:  whether or not you                                                               
want  to encourage  the person  that buys  the facility  from the                                                               
first person.   The  first person  loses the  tax credit  and the                                                               
second person  is basically still  doing the thing that  you want                                                               
done: putting  a gas storage  facility into  service. Limitations                                                               
could be  applied by  saying that the  credit is  only applicable                                                               
for one  facility the  first time  it is  acquired, by  setting a                                                               
dollar amount or by setting other parameters.                                                                                   
3:47:24 PM                                                                                                                    
SENATOR  FRENCH  said  DNR  presented  several  concerns  but  he                                                               
thought most of them had been addressed by SB 203.                                                                              
MR. BULLOCK said  Section 1 of SB 203 gives  the RCA jurisdiction                                                               
over gas storage  facilities; however, as it is  written, it only                                                               
applies for gas  storage for the purposes of  a distributer, such                                                               
as  ENSTAR.  He  said  the  committee may  want  to  broaden  the                                                               
language  to  also   apply  to  storage,  for   example,  for  an                                                               
electrical  utility  storing and  using  gas.  He mentioned  that                                                               
electricity is addressed on page 1, line 12 of SB 203.                                                                          
SENATOR  FRENCH  asked if  that  would  cover the  regulation  of                                                               
possible new  entrants into the  market, as mentioned  by Senator                                                               
MR. BULLOCK  answered considering  any existing  facilities might                                                               
also  be necessary.  Only regulating  new gas  storage facilities                                                               
would create a discrepancy between  existing gas utilities, which                                                               
would have  to come to  the RCA with an  independently negotiated                                                               
price  to figure  into the  rate, and  new facilities,  which are                                                               
subject to RCA jurisdiction with  fixed rates and RCA controlling                                                               
both storage cost and the rate the utility would charge.                                                                        
3:50:12 PM                                                                                                                    
SENATOR HUGGINS said  in Gulf Coast nearly 4  trillion cubic feet                                                               
of gas  are in storage.  He recalled  that some companies  have a                                                               
Liquid Natural  Gas (LNG)  re-export permit  because the  LNG was                                                               
imported. He  asked if someone  brought gas up Cook  Inlet, under                                                               
this provision,  could they pump  it into ground to  be available                                                               
for us  or anyone else  or for re-export  it when the  market was                                                               
MR. BULLOCK  looked at SB  203 to see if  the gas must  be Alaska                                                               
3:51:21 PM                                                                                                                    
SENATOR  WAGONER  read a  written  memo  from the  Department  of                                                               
Revenue  related  to his  earlier  question  about the  tax:  "As                                                               
currently written SB 203 would  have no impact on Kenai Peninsula                                                               
Borough's property tax revenues."                                                                                               
MR.  BULLOCK  answered  Senator  Huggins'  previous  question  by                                                               
referring  to page  4, line  11 which  defines a  Cook Inlet  gas                                                               
storage facility  as a  storage facility for  the storage  of gas                                                               
that  is  produced from  the  Cook  Inlet sedimentary  basin  and                                                               
designated for  sale and delivery  in the  state. If the  gas was                                                               
trans-shipped or produced somewhere else  and brought in, then it                                                               
would not be subject to the tax credit.                                                                                         
CHAIR  WIELECHOWSKI opened  it up  for committee  members to  ask                                                               
questions  to the  Department of  Revenue.  He said  he does  not                                                               
intend to  move SB 203  today, as discussed with  Senator French,                                                               
but to work on it further.                                                                                                      
3:53:05 PM                                                                                                                    
SENATOR  FRENCH  referred to  an  email  from the  Department  of                                                               
Revenue dated  January 4, 2010,  and asked  for a summary  of the                                                               
JOHANNA  BALES,  Deputy  Director, Tax  Division,  Department  of                                                               
Revenue asked  for clarification  of which version  of SB  203 is                                                               
currently being heard.                                                                                                          
3:54:02 PM                                                                                                                    
SENATOR FRENCH  moved to adopt the  proposed committee substitute                                                               
to  SB 203,  labeled CS  SB  203 (),  Version P,  as the  working                                                               
document of the committee.   There being no objection, the motion                                                               
MS. BALES clarified  that the Department of  Revenue's memo, read                                                               
by Senator Wagoner, does pertain to SB 203, Version P.                                                                          
ROBYNN   WILSON,  Audit   Income  Tax   Manager,  Tax   Division,                                                               
Department of Revenue, asked if  Senator French would like her to                                                               
go over each point in the January 4th email or to summarize.                                                                    
SENATOR FRENCH  suggested she  begin by  summarizing so  that the                                                               
concerns are on the record.                                                                                                     
MS. WILSON said interpretation of  SB 203 in several places could                                                               
lead  to two  credits being  claimed for  one expenditure  or one                                                               
facility. For  example, SB 203 allows  a credit for the  owner of                                                               
the  facility and  for  the  leasing of  the  facility; both  the                                                               
lessor and  the lessee  could conceivably take  a credit  for the                                                               
same  facility. She  referred next  to an  allowance for  capital                                                               
investment with reference  to cash expenditure or  a payment due.                                                               
She said one could conceivably  read that as allowing two credits                                                               
for the same  expenditure if a payable was accrued  in one period                                                               
and then paid with cash in the next period.                                                                                     
3:56:41 PM                                                                                                                    
SENATOR  FRENCH  asked  if  cash expenditure  or  a  payment  due                                                               
implies  a  choice  of  one  or the  other  to  get  the  capitol                                                               
MS. WILSON  said it may  be clear that a  person has to  pick one                                                               
but some people interpret statutes  more broadly than others. She                                                               
said if a person  was sitting on the other side  of the table and                                                               
wanted to be aggressive, that person could read it [as both.]                                                                   
SENATOR  FRENCH  asked for  her  suggestion  in clearing  up  the                                                               
MS.  WILSON  said  the  language   could  be  an  expense  or  an                                                               
expenditure by itself or some language that implies just one.                                                                   
MS. BALES  said using  "the expense" would  be best  because that                                                               
wording has  an accounting terminology association  as to whether                                                               
or not it  is an accrued expense or something  that has been paid                                                               
in a  given year.   An expense is  generally just a  single item.                                                               
She said  she really wanted  the hearing minutes to  reflect that                                                               
the intent  of the language is  not to allow double-dipping  of a                                                               
singular accrued or paid expense.                                                                                               
SENATOR  FRENCH clarified  that his  intent is  "you only  get to                                                               
count it  once." He said  he would be happy  to work to  clear it                                                               
up. He asked  if the administration supports or  opposes the idea                                                               
of tax credits for gas storage in Cook Inlet.                                                                                   
3:59:45 PM                                                                                                                    
MS.  BALES  said  she  does   not  have  any  position  from  the                                                               
Administration  but  her office  has  been  tasked to  work  with                                                               
Senator French  and the  Senate Resources  Committee to  make the                                                               
best possible product.                                                                                                          
CHAIR WIELECHOWSKI  asked if the administration  perceived a need                                                               
for an incentive  bill for Cook Inlet storage.  He said something                                                               
that  would  be done  without  incentives  does  not need  to  be                                                               
MS. BALES  said it might  be a better  question for DNR  and that                                                               
she would  work on trying to  get a position from  the Governor's                                                               
KEVIN  BANKS,  Director,  Division  of  Oil  and  Gas,  said  the                                                               
evaluation, looking at the cost-structure,  of these projects has                                                               
not been  done. He said  another unknown  is what price  could be                                                               
charged for the  storage facility itself as a  service to another                                                               
CHAIR WIELECHOWSKI said some analysis  would be helpful. He asked                                                               
Mr. Banks if he foresees the ability to do some analysis.                                                                       
MR. BANKS  said, "We  could take  a stab  at it."  He said  he is                                                               
afraid that information  about these kinds of costs  will be hard                                                               
to find.                                                                                                                        
CHAIR WIELECHOWSKI asked for an assessment within ten days.                                                                     
MR.  BANKS added  that the  three storage  facilities already  in                                                               
existence, one of  which is on federal land and  two are on state                                                               
land, are owned by producers.  Gas stored in these facilities are                                                               
mingled  with produced  gas from  other places  and delivered  to                                                               
customers  without  a separate  charge  made  for storage.  Those                                                               
three  storage facilities  and  arrangements  are very  different                                                               
from  the proposed  third party  storage facility  with unbundled                                                               
4:03:20 PM                                                                                                                    
SENATOR  WAGONER asked  Mr. Banks  to talk  about the  geological                                                               
structure of the  different types of storage. He  said he thought                                                               
Senator Huggins was  talking about mainly salt  cavities or domes                                                               
which Alaska  does not have.  He said structures in  Alaska don't                                                               
retain all of the gas like the salt domes.                                                                                      
SENATOR STEDMAN joined the meeting.                                                                                             
MR. BANKS said  large storage facilities, salt  dome caverns, are                                                               
in the  Gulf of Mexico.  In the Cook  Inlet, storage would  be in                                                               
some  gas-bearing  sand  within, potentially,  a  producing  unit                                                               
where  the native  gas is  nearly exhausted.  A horizon  would be                                                               
selected and gas pumped in both to  serve as a cushion to get the                                                               
pressures up  in the  structure and then  to have  non-native gas                                                               
stored. He explained  storage gas, as opposed to  cushion gas, is                                                               
the gas that is coming in  and out. He said all potential storage                                                               
in Cook Inlet  is old and existing gas fields  that have produced                                                               
for many years.                                                                                                                 
SENATOR HUGGINS  asked if producers  who divert gas  are eligible                                                               
for the tax credit.                                                                                                             
MR. BANKS  replied that  the three  current facilities  would not                                                               
get the tax credit and that  a storage facility, as defined in SB
203,  must be  regulated  by  the RCA  to  get  the credits.  The                                                               
existing storage  units are  not regulated in  the sense  that SB
203  is  implying.  Instead  a contract  has  been  entered  into                                                               
between a  producer and  customer, such as  ENSTAR or  Chugach, a                                                               
price  index is  set up,  perhaps with  different prices  for gas                                                               
delivered at  different times of  the year. Gas that  is supplied                                                               
to  that  contract comes  from  all  over the  producing  assets,                                                               
including storage.  The distinction of  where gas is  coming from                                                               
is not seen, nor the cost of storage imbedded in that price.                                                                    
4:07:20 PM                                                                                                                    
MR.  BANKS  said  he  thinks  SB 203  is  trying  to  provide  an                                                               
incentive  for a  third party  storage where  the sponsor  of the                                                               
project  is  really  a  warehouse  and  letting  others  use  its                                                               
facility to store their gas.                                                                                                    
CHAIR WIELECHOWSKI said SB 203 would be held in committee.                                                                      

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