Legislature(2015 - 2016)CAPITOL 17
03/15/2016 10:15 AM House ENERGY
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| Audio | Topic |
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| Presentation: Alaska Industrial Development and Export Authority, Department of Commerce, Community & Economic Development | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON ENERGY
March 15, 2016
10:17 a.m.
MEMBERS PRESENT
Representative Jim Colver, Co-Chair
Representative Liz Vazquez, Co-Chair
Representative Benjamin Nageak
Representative David Talerico
Representative Cathy Tilton
Representative Matt Claman
Representative Adam Wool
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
PRESENTATION: ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT
AUTHORITY~ DEPARTMENT OF COMMERCE~ COMMUNITY & ECONOMIC
DEVELOPMENT
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
GENE TERRIAULT, Project Lead
Interior Energy Project
Alaska Industrial Development and Export Authority
Department of Commerce, Community & Economic Development
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "IEP Project Update," dated 3/15/16.
BOB SHEFCHIK, Team Lead
Interior Energy Project
Alaska Industrial Development and Export Authority
Department of Commerce, Community & Economic Development
Fairbanks, Alaska
POSITION STATEMENT: Answered questions during the PowerPoint
presentation entitled, "IEP Project Update," dated 3/15/16.
ACTION NARRATIVE
10:17:55 AM
CO-CHAIR JIM COLVER called the House Special Committee on Energy
meeting to order at 10:17 a.m. Representatives Colver, Wool,
Nageak, Talerico, Tilton, and Vazquez were present at the call
to order. Representative Claman arrived as the meeting was in
progress.
^PRESENTATION: ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT
AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY & ECONOMIC
DEVELOPMENT
PRESENTATION: ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT
AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY & ECONOMIC
DEVELOPMENT
10:18:16 AM
CO-CHAIR COLVER announced that the only order of business would
be a review by the Alaska Industrial Development and Export
Authority, Department of Commerce, Community & Economic
Development, on the Interior Energy Project.
10:18:49 AM
GENE THERRIAULT, Project Lead, Interior Energy Project (IEP),
Alaska Industrial Development and Export Authority (AIDEA),
Department of Commerce, Community & Economic Development
(DCCED), provided a PowerPoint presentation entitled, "IEP
Project Update," dated 3/15/16. Mr. Therriault said the
presentation would include an update on how the project has
progressed subsequent to [House Bill 105, passed in the 29th
Alaska State Legislature and signed into law 6/30/15]. In the
committee packet was a memorandum and combined documents
addressed to John Springsteen, executive director, IEP, dated
3/3/16, related to the source of liquefied natural gas (LNG) for
the project. Mr. Therriault said IEP's first goal is to provide
a source of cleaner energy for Interior Alaska for the lowest
cost possible, to as many customers as possible, as soon as
possible. The lowering of the cost of fuel oil in this area -
from about $4 per gallon to approximately $2 per gallon - has
affected the project, although the poor air quality in the
Fairbanks area is a problem not driven by the economics of fuel
oil, but by its use, and the project also seeks to lower fine
particulate matter (PM2.5) in nonattainment areas of the
Interior [slide 2]. The first financing package for the project
was [Senate Bill 23, passed in the 28th Alaska State Legislature
and signed into law 5/29/13] which offered the following suite
of financial tools: source of LNG supply limited to the North
Slope; $125 million in the Sustainable Energy Transmission and
Supply (SETS) account for loans; $57.5 million in a capital
appropriation of direct funds to AIDEA to be used for investment
in infrastructure; and authorization for AIDEA to bond up to
$150 million. Following the determination that the project was
not able to reach its target of $15 per thousand cubic feet of
natural gas (Mcf) delivered to a residential customer in the
Interior from the North Slope, in 2015, HB 105 reinitiated the
project, allowing wider options such as natural gas from the
north or south, a smaller diameter pipeline, and propane as an
energy source. The new options attracted sixteen proposals from
which the Salix Inc., proposal was recommended on 3/3/16 for
final consideration on 3/31/16 [slide 3]. Components of the
chosen project include: gas supply and liquefaction, storage,
transportation by truck and/or railroad, storage,
regasification, and distribution [slide 4].
10:26:06 AM
CO-CHAIR COLVER asked how much has been spent of the capital
funding on the distribution lines that have been installed in
North Pole.
MR. THERRIAULT said that $43 million has been funded from the
capital appropriation, the distribution system has been funded
with loans out of the SETS authorization, and none of the bonds
have been accessed. In further response to Co-Chair Colver, he
said $72 million has been accessed from the SETS authorization,
leaving just under $53 million.
REPRESENTATIVE WOOL observed that one of the final proposals
included gas sourced from the North Slope, which was already
deemed too expensive, and he asked whether there was a major
change in the approach of the proposal.
MR. THERRIAULT said the proposal was "a smaller plant and just a
different way of moving forward." The two finalists under the
new request for proposal (RFP) utilized a different approach.
CO-CHAIR COLVER asked what assets AIDEA has acquired on the
North Slope and their cost.
MR. THERRIAULT answered that the major asset on the North Slope
is a gravel pad that cost about $14 million.
10:29:08 AM
BOB SHEFCHIK, team lead, IEP, AIDEA, DCCED, confirmed that the
main asset is a gravel pad on the North Slope; its asset value
is between $7 million and $10 million, and the other $4 million
was spent to advance the proposed project to a final investment
decision. Further, if the Cook Inlet proposal advances, AIDEA
will seek to lease or sell the North Slope asset.
CO-CHAIR COLVER inquired as to whether any intellectual property
was acquired.
MR. SHEFCHIK was unsure, except that the permitting and the
layout to set up the plant was in place, and if the choice had
been a North Slope contractor, it would have been used by AIDEA;
however, he did not say that there is incremental value to the
plant on the North Slope, if the plant is installed in Cook
Inlet.
CO-CHAIR COLVER asked for the total cost.
MR. SHEFCHIK said the expense of the gravel pad was paid to
subcontractor "TIC," and $3 million to $4 million was paid to
MWH.
MR. THERRIAULT offered to provide more specific information in
that regard. Slide 5 was a map depicting components of the
supply chain from Cook Inlet to Fairbanks: supply from Cook
Inlet; liquefaction; temporary storage; transportation by truck;
storage to fulfil the Regulatory Commission of Alaska's
requirement for at least five days' worth of LNG in storage;
regasification into the distribution system. As depicted, there
are currently two distribution utilities, Fairbanks Natural Gas
(FNG) utility and Interior Gas Utility (IGU), and he described
several possible configurations of distribution systems,
including linking the two systems together.
10:35:27 AM
CO-CHAIR VAZQUEZ asked how many customers are served by IGU.
MR. THERRIAULT said pipe has been installed in the streets but
no customers will be signed up until it is known that they can
be served on a long-term basis.
REPRESENTATIVE WOOL questioned whether the FNG distribution
system currently has a storage tank and regasification
capabilities.
MR. THERRIAULT explained that FNG does receive and store LNG in
south Fairbanks.
REPRESENTATIVE WOOL surmised the proposal will duplicate that
system or incorporate the existing system with the IEP system.
MR. THERRIAULT said a 5.2 million gallon storage tank is
proposed for the bulk storage in Fairbanks. Because of the
expense, the storage investment must be timed right so not to
burden the initial customers needlessly; he advised that
existing storage tanks may be moved to North Pole to minimize
the capital cost of smaller tanks for that community. Mr.
Therriault redirected attention to the revised RFP, which
solicited a wide range of proposals to supply energy for the
Interior. From sixteen proposals, on 3/3/15, the RFP evaluation
committee recommended the Salix, Inc., Cook Inlet proposal.
Salix is a division of Avista Corporation, a utility in the
Pacific Northwest, which also owns Alaska Electric Light and
Power (AEL&P) in Juneau, and seeks to bring LNG to Juneau and
Southeast Alaska. At this time, there are ongoing negotiations
with Salix to finalize the commercial terms, which are on target
for consideration at the 3/31/16 board meeting [slide 6].
10:40:04 AM
CO-CHAIR COLVER asked Mr. Therriault to provide an outline of
the terms and conditions of the proposal, such as the price and
amount of gas, its distribution cost, and other parameters.
MR. THERRIAULT said these issues would be addressed later in the
presentation. He informed the committee that last year the
AIDEA board of directors decided to acquire Pentex Alaska
Natural Gas Company (Pentex) assets, including its existing LNG
plant in Cook Inlet, and the existing FNG distribution system;
AIDEA intends to be a "short-term owner" and plans a resale to a
utility company. Through a purchase or long-term lease, the
utility company would utilize the existing infrastructure and
the expanded facility, operated as one unit in order to keep
operating costs down. He characterized AIDEA's purchase as a
key component to meet the $15 per Mcf target.
CO-CHAIR COLVER asked whether AIDEA has tax-free status as the
owner of the distribution lines in Fairbanks.
MR. THERRIAULT expressed his belief that AIDEA is exempt from
taxation, and if ownership is combined with IGU, it would retain
said status.
CO-CHAIR COLVER further inquired as to provisions in the
legislation authorizing the project for tax-exempt status for a
future private owner.
MR. THERRIAULT opined that if the project goes into private
ownership, it would be subject to local taxes.
MR. SHEFCHIK confirmed Mr. Therriault's statement on taxation,
adding that two factors affect whether municipal property taxes
apply: ownership and control. Thus, if the project is leased,
operated, or controlled by a private entity, such as Salix,
property taxes would apply. However, as envisioned at this
time, property taxes would not apply to a plant in Fairbanks,
but would apply to a plant in Cook Inlet as proposed.
CO-CHAIR VAZQUEZ asked for the price AIDEA paid to acquire
Pentex.
10:45:22 AM
MR. SHEFCHIK said $52.5 million.
CO-CHAIR VAZQUEZ then asked how many utility customers are
affected.
MR. THERRIAULT answered 1,100 residential and commercial
customers. He added that the existing distribution system can
support many more customers with a larger supply of gas.
CO-CHAIR COLVER pointed out the equity issue related to
providing energy throughout the state.
MR. THERRIAULT returned to investments in the distribution
system in the last year [slide 7]: FNG expanded its existing
system by 30 miles; IGU installed 73 miles of new pipeline in
North Pole; financed with SETS; prepared the community for a new
source of LNG. As directed by House Bill 105, two quarterly
reports on the project have been submitted to the legislature
and a third is due at the end of March, 2016. The reports are
available on the IEP web site [slide 8]. Slide 9 was a graph
which illustrated IEP project milestones from 10/30/15 through
6/23/16. Mr. Therriault advised if the AIDEA board of directors
is unable to finalize authorization of the project on 3/31/16,
authorization would be scheduled for the next board meeting in
April.
MR. THERRIAULT turned attention to a memorandum and combined
documents found in the committee packet addressed to John
Springsteen, executive director, AIDEA, dated 3/3/16.
10:48:59 AM
CO-CHAIR COLVER asked whether the SETS loans would be repaid by
the consumer base through a rate approved by RCA.
MR. THERRIAULT said yes. He pointed out that the entity is not
governed by RCA jurisdiction because it is government-owned. As
of 1/1/16, there was a reduction in rates.
CO-CHAIR COLVER asked for the SETS loan repayment schedule.
MR. SHEFCHIK responded that the current financing structure for
the IGU and FNG loans is: fixed 1.0 percent interest rate; 30-
year term; 5-year deferral on payment. The goal is to maintain
pricing at the $15 target, and make payments based on the
ability to pay.
10:51:26 AM
MR. THERRIAULT returned attention to the memorandum and attached
documents, noting that the cover letter includes details of how
the RFP Evaluation Committee met. He pointed out that the
evaluation committee met on 2/4/16, and the date on the reports
on the two finalists by Arcadis U.S., Inc., is 2/26/16. The
reason for this is that the Arcadis reports originally submitted
to the evaluation committee contained some confidential
information, therefore, redacted reports dated 2/26/16 were made
available for release to the public. Also attached was a report
from the evaluation committee which detailed important issues
related to the evaluation, such as the annual revenue
requirement. He further explained that after their review, all
of the members of the evaluation committee discussed their
views; ultimately there was a unanimous decision to recommend a
supply of natural gas out of Cook Inlet as proposed by Salix.
Page 6 was an outline of the evaluation committee's 2/4/16
agenda; pages 7 through 22 were the reports by Arcadis. On page
8, there was a description of the methodology applied to both of
the final proposals. In response to Co-Chair Colver, he said
the 2/4/16 meeting of the evaluation committee was held in
executive session.
10:55:22 AM
CO-CHAIR VAZQUEZ questioned why Golden Valley Electrical
Association (GVEA) declined to participate in the project.
MR. THERRIAULT said GVEA has indicated interest in participating
as a seasonal customer. With the declining price of oil, GVEA
was able to secure a source of fuel oil delivered sooner, and at
a lower cost. Although negotiations with GVEA will continue, a
seasonal demand from GVEA is beneficial to the project.
MR. THERRIAULT provided a summary of the Arcadis report on the
Salix proposal:
· [Page 1 of the report, page 8 of the combined documents]
refers to methodology
· [Page 2 of the report, page 9 of the combined documents]
evaluates Salix, its financial strength, and the proposed
gas supply, gas treatment, LNG liquefaction plant and
onsite storage
· [Page 3 of the report, page 10 of the combined documents]
relates to the power source of the LNG plant
CO-CHAIR COLVER returned attention to the gas supply [page 6 of
the combined documents] and read:
: the NG received for liquefaction would be purchased
by the utilities participating in the IEP.
CO-CHAIR COLVER surmised that the Fairbanks utilities would be
responsible for buying the gas supply and not Salix.
10:59:22 AM
MR. THERRIAULT said yes. It is incumbent on the utilities to
sign the gas supply contracts, on behalf of their customers, in
order to transport the gas to the Salix LNG plant for
liquefaction.
CO-CHAIR COLVER inquired as to how to contain costs if Salix
does not have the burden of procuring sales contracts and
delivering the gas for the targeted price.
MR. THERRIAULT advised that as directed by House Bill 105, a gas
supply for the duration of the contract at a price that meets
the goals must be verified by the AIDEA board of directors.
CO-CHAIR COLVER concluded that Salix is not involved in
production, buying assets in Cook Inlet, or developing gas
resources.
MR. THERRIAULT said yes. He added that AIDEA has identified
potential sources of gas and is researching prices and volume;
however, it is up to the utilities to negotiate gas supply
contracts. In further response to Co-Chair Colver, he said
AIDEA issued a request for information to gauge interest from
suppliers.
CO-CHAIR COLVER cautioned that the gas supply is a variable that
would affect the target price.
11:02:55 AM
MR. THERRIAULT noted that later in his presentation the
evaluation reports discuss the potential costs of liquefaction
using "a $6 per Mcf price for our evaluation ...."
REPRESENTATIVE TALERICO asked whether the model suggests
"contracting with the producers on a potential tariff rate in
the ENSTAR line." If this is a direct purchase from producers,
a utility/producer contract could be for a long term.
11:03:56 AM
MR. THERRIAULT stated that a contract from a producer would not
get the gas to the plant, and there would be a tariff to
transport gas through the ENSTAR system; ENSTAR also could
propose to sell gas including transportation. He acknowledged
that all of the aforementioned are "in the mix in the
negotiations with the potential gas supply."
CO-CHAIR COLVER returned attention to [page 2 of the report,
page 9 of the combined documents], noting that the proposal does
not include a supply contract. He asked how the aforementioned
$6 per Mcf estimate compared.
MR. SHEFCHIK said there are ongoing negotiations with multiple
suppliers; he expressed his belief that the estimate is in the
range in order for the project to advance. He explained that if
the cost of gas rises above the estimate, transportation or
liquefaction costs must come down. In response to Co-Chair
Colver's earlier question, he said that of the seventeen
proposals, two proposals bundled gas and liquefaction.
CO-CHAIR COLVER asked about the envisioned terms of the gas
supply contracts.
MR. SHEFCHIK said IEP seeks: (1) duration longer than usual,
ten year contracts or five year with an extension; (2) bulk,
fixed [prices], with escalators, that are not tied to Henry Hub
natural gas spot price.
11:07:55 AM
MR. THERRIAULT directed attention to [page 3 of the report, page
10 of the combined documents] that related to power to run the
liquefaction plant, the balance of plant design and capital
expenditures (CAPEX), and detailed project costs. [Page 4 of
the report, page 11 of the combined documents] related to
commercial terms and project financing, financing tools and
their effect on costs, and risk identification and allocation.
[Page 5 of the report, page 12 of the combined documents]
related to the proposal's ability to meet IEP goals of $15 gas
delivered to residential customers, including transportation,
storage, regasification, and delivery to the outside meter of a
residential dwelling. Also under IEP goals, Arcadis evaluated
the Salix proposal to deliver at a cost of $15.74, which is
close to the target goal and compares to $2 fuel oil. Mr.
Therriault advised the project is competitive, with the Salix
liquefaction fee at $3.24 per Mcf, and the estimated cost of gas
at $6 per Mcf.
REPRESENTATIVE WOOL asked whether a reduction in the estimated
cost of gas to $5 per Mcf, would put the delivered cost at
$14.74.
11:11:05 AM
MR. THERRIAULT said correct. He read from [paragraph 5, page 5
of the report, page 12 of the combined documents] as follows [in
part]:
; however, current market conditions for Cook Inlet
gas supply suggest that there is a downward potential
for the pricing of this feed [stock] gas.
MR. THERRIAULT expressed IEP's hope to bring the cost component
down, and he described the effect of the savings on operational
cost (OPEX).
There followed further descriptions of various savings,
including transportation by rail.
CO-CHAIR COLVER asked whether there is a rail siding at FNG's
current storage location.
MR. SHEFCHIK said no. However, there is rail access to the
current site.
CO-CHAIR COLVER suggested that using the existing plant would
require the use of [shipping containers made to International
Shipping Organization standards (ISO containers)] transported by
truck and rail. He then asked whether it was difficult for the
unsuccessful proposals to meet price goals and secure sources of
gas.
11:14:23 AM
MR. SHEFCHIK addressed the five finalists: two proposed
sourcing gas from the North Slope, and three proposed sourcing
gas from Cook Inlet. Challenges to sourcing natural gas from
the North Slope were capital expense and high fixed operating
costs, and in low-demand scenarios, significant negative cash
flows were anticipated for the early years. In Cook Inlet,
although there was gas either out of the inlet or imported, the
challenges were: to determine the most effective use of
investment money long-term; there were difficulties reaching the
target price; there were risks associated with importing gas to
future facilities; and capital required for out-of-state
investment. From his perspective, the evaluation committee felt
the risks of financing a plant on the North Slope in a low fuel
oil price environment and with low cash flow for the first five
years, were significantly higher than the risks of
transportation and construction on Cook Inlet, in the current
economic environment.
CO-CHAIR VAZQUEZ noted that the major consumers of energy in the
Fairbanks area are GVEA, the University of Alaska Fairbanks
(UAF), and the military bases. She asked whether joint action
with one of these entities - to bring down the cost of the
project - was studied.
MR. SHEFCHIK said yes. Since prior to 2014, GVEA has been
involved in the project; in fact, GVEA was offered an
opportunity to participate as an anchor tenant. The decision by
GVEA to participate as a summer customer affected the monthly
demand for energy from the project, and weakened the viability
of a North Slope plant proposal. At UAF, the decision to
participate was deferred until 2013, when UAF chose to build a
solid fuel plant. At the military bases, Fort Wainwright has
infrastructure issues, and Eielson Air Force Base has recently
renovated its boiler systems for solid fuel. Although Fort
Wainwright is the more likely of the two options, he cautioned
against overbuilding the project prior to its actual demand for
gas.
11:21:50 AM
MR. THERRIAULT returned attention to [page 5 of the report and
page 12 of the combined documents] related to the overall
reasonableness and completeness of the development plan, wherein
Arcadis compared Spectrum LNG and Salix proposals' to the
worldwide cost of LNG. The Salix proposal was rated at 105
percent of the mean cost of construction of LNG plants
worldwide, which was deemed "on-target." In addition, Salix
budgeted +/-30 percent of capital cost. Although Spectrum also
budgeted +/-30 percent of capital cost, its proposal was rated
at 48 percent of worldwide costs, suggesting a higher risk for
capital overruns. [Pages 15-22 of the combined report] are the
Arcadis report on the Spectrum proposal, and page 24 of the
combined documents illustrates IEP project milestones.
11:24:15 AM
REPRESENTATIVE CLAMAN asked whether +/-30 percent budget is
normal for the natural gas industry, as that is a broad range.
MR. THERRIAULT explained that given the present expected level
of project engineering and design, +/- 30 percent is reasonable;
as the project moves to final and detailed engineering, the
percentage will narrow down to 10 percent or less. In further
response to Representative Claman, he said this is fairly
normal, and added that all of the parties are motivated because
the community target price is at parity with that of competing
fuel.
CO-CHAIR VAZQUEZ asked why the project proposals were compared
to a worldwide ratio versus a nationwide ratio.
MR. THERRIAULT opined that in some regions of Alaska, building a
project is more comparable to construction projects in remote
areas of world due to limited infrastructure; in addition, in
some areas of the Lower 48, capital construction costs are much
lower than in Cook Inlet.
11:28:21 AM
REPRESENTATIVE WOOL recalled earlier testimony that the price of
heating oil has dropped from $4 per gallon to $2 per gallon. He
asked how the price of Cook Inlet gas has changed within the
same timeframe, related to the project target price and the cost
of gas.
MR. THERRIAULT estimated that the cost of ENSTAR gas increased
to $8 or $9 per Mcf, and is dropping back down. The project
estimates that gas will cost $6 per Mcf, and market conditions
suggest that for gas from Cook Inlet "we might be able to
improve on that" with favorable volumes and terms.
REPRESENTATIVE WOOL asked for the current price for coal,
compared to $2 for diesel oil being equivalent to the project
target price of $15 per Mcf of natural gas.
MR. THERRIAULT advised that comparable British thermal units
(Btus) of heat off of coal is around $5, which is significantly
lower than natural gas. He added that UAF and the military
bases have cogeneration systems that generate electricity and
also utilize waste heat for heating facilities.
CO-CHAIR COLVER observed that the AIDEA board of directors will
make a final investment decision on 6/23/16.
MR. THERRIAULT advised 6/23/16 is the target, although there are
many details, and the date could be a few weeks later.
CO-CHAIR COLVER asked for the construction schedule.
MR. THERRIAULT expected the surface work to begin summer and
fall, [2016], and construction the next year. Potentially,
first gas out of the plant would be in late 2017, and to
residential customers in the spring of 2018.
11:33:36 AM
CO-CHAIR VAZQUEZ inquired as to the estimated price to convert a
residence to gas.
MR. THERRIAULT responded that the cost is dependent upon the age
of the existing heating system; for a boiler less than 10 years
old, a conversion may cost less than $2,000 to $3,000. For
maximum efficiency, a new gas-fired appliance would cost $10,000
to $12,000. The conversion expense to the customer is a factor,
and IEP is looking for mechanisms to assist with conversions,
such as access to long-term, low-interest loans, and federal
funds which may have zero-interest rates.
11:36:26 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Energy meeting was adjourned at 11:36 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 3 15 16 H-Energy Com IEP update.pdf |
HENE 3/15/2016 10:15:00 AM |
|
| IEP supply RFP Memo and Board Packet for 03 03 16 meeting.pdf |
HENE 3/15/2016 10:15:00 AM |
Memo IEP Supply RFP Evaluation March 3, 2016 |