Legislature(2023 - 2024)ADAMS 519
04/16/2024 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB307 | |
| HB393 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 393 | TELECONFERENCED | |
| *+ | HB 307 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 16, 2024
1:37 p.m.
1:37:53 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:37 p.m.
MEMBERS PRESENT
Representative Bryce Edgmon, Co-Chair
Representative Neal Foster, Co-Chair
Representative DeLena Johnson, Co-Chair
Representative Julie Coulombe
Representative Mike Cronk*
Representative Alyse Galvin
Representative Sara Hannan
Representative Andy Josephson
Representative Dan Ortiz
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
None
ALSO PRESENT
Julie Sande, Commissioner, Department of Commerce,
Community and Economic Development; Representative Tom
McKay, Sponsor; Trevor Jepsen, Staff, Representative McKay.
PRESENT VIA TELECONFERENCE
Andrew Jensen, Policy Advisor for Energy Security, Office
of the Governor; Robert Doyle, Chair, Regulatory Commission
of Alaska; Dan Stickel, Chief Economist, Department of
Revenue, Tax Division; Derek Nottingham, Director, Division
of Oil and Gas, Department of Natural Resources.
SUMMARY
HB 307 INTEGRATED TRANSMISSION SYSTEMS
HB 307 was HEARD and HELD in committee for
further consideration.
HB 393 COOK INLET/MIDDLE EARTH GAS ROYALTIES
HB 393 was HEARD and HELD in committee for
further consideration.
Co-Chair Foster reviewed the meeting agenda.
HOUSE BILL NO. 307
"An Act relating to the taxation of independent power
producers; and increasing the efficiency of integrated
transmission system charges and use for the benefit of
ratepayers."
1:39:53 PM
JULIE SANDE, COMMISSIONER, DEPARTMENT OF COMMERCE,
COMMUNITY AND ECONOMIC DEVELOPMENT, introduced the
PowerPoint presentation "Integrated Transmission Systems"
dated April 16, 2024 (copy on file). Ms. Sande moved
quickly through slides 2 titled "The Railbelt Electrical
Gridand 3 titled "Railbelt Transmission Systems" that
portrayed maps of Alaskas grid and transmission system.
She elaborated that the Railbelt was the interconnected
electrical grind extending from Homer to Fairbanks that was
approximately 700 miles long and served roughly 75 to 80
percent of Alaska's population. Slide 3 depicted the
transmission line and the colored areas represented who
owned part of the transmission line. The lines were owned
by either the Alaska Energy Authority (AEA) or the Railbelt
utilities. She maintained that the current transmission
system in Alaska was an inefficient system. The system was
connected but not integrated and comprised of separate and
independent utilities that were stand-alone. She noted that
the committee would hear a lot of discussion regarding
"wheeling" and "pancaking" rates. She explained that
wheeling or pancaking rates was the charge per megawatt
hour as the line crossed each section of the grid.
Specifically pancaking meant the rates were "stacked." She
likened the grid and wheeling rates to a toll road versus a
highway. She indicated that the current model lacked
integration and prevented the ability to lower rates for
the rate payer. She furthered that if the bill became law
the Regulatory Commission of Alaska (RCA) would establish a
process to transition from the current system to a new
transmission cost recovery mechanism where transmission
wheeling rates would be eliminated. Wheeling rates hindered
wholesale power transactions and reduced the ability for
Independent Power Producers (IPP) to enter power purchase
agreements with utilities.
1:44:32 PM
Ms. Sande moved to slide 4 titled "Independent Power
Producers." The bill would also amend AS 10.25.540, the
statute related to the taxation of cooperative to extend
its tax relief provisions to IPPs to sell their power to
non-profit electric utilities. Taxes were a large portion
of the overall cost structure for IPPs, which negatively
impact competitiveness. The process of negotiating project
related taxes often delays or kills projects. Extending tax
relief to the IPP's ensured that all sources of power
generators are treated equally.
Ms. Sande continued to slide 5 titled "What Does House Bill
307 Do?:
House Bill 307 aims to:
• Increase competition and efficiency within
Alaska's transmission system.
• Reduce costs to the rate payer.
• Encourage the development of new power projects.
It aims to do this by:
• Requiring the Regulatory Commission of Alaska
(RCA) to change the current mechanism of
transmission cost recovery in the Railbelt.
• Eliminating transmission "wheeling" rates for
inter-utility movement of electricity.
• Extending tax relief provisions enjoyed by
Electric Co-ops to Independent Power Producers
(IPPs).
Co-Chair Foster noted that Co-Chair Edgmon joined the
meeting.
1:46:39 PM
ANDREW JENSEN, POLICY ADVISOR for ENERGY SECURITY, OFFICE
OF THE GOVERNOR, ANCHORAGE (via teleconference), read
through the sectional analysis of HB 307 (copy on file):
Section 1 - Updates the uncodified law of the State of
Alaska by setting forth the purpose of the
legislation: to eliminate pancaked rates and increase
efficiency of integrated transmission systems of the
state.
Section 2 - The bill amends AS 10.25.540(b)related to
the taxation of electric cooperativesto include
independent power producers. Under the bill,
independent power producers would pay a "sales" tax on
the kilowatt hours of electricity in lieu of any state
or local ad valorem, income, or excise tax. The bill
defines an independent power producer as a utility
that only sells wholesale power to cooperative or
municipal utilities.
Section 3 - The bill creates a new article in AS 42.05
relating to integrated transmission system cost
recovery (AS 42.05.900 - 42.05.915).
Proposed AS 42.05.900 states the legislative findings
for increasing the efficiency of providing electricity
service to consumers.
Proposed AS 42.05.905 requires the Regulatory
Commission of Alaska ("RCA") to establish a
transmission cost recovery mechanism and to provide a
process where the electric utilities will transition
from recovering transmission costs in utility rates to
a transmission cost recovery mechanism. More
specifically, this section requires the RCA to develop
a cost recovery mechanism that achieves the
legislative findings and allocates transmission costs
in a way that recognizes a load-serving entity's local
consumption compared with the total consumption on the
system as a whole. The section further requires the
RCA to establish a process whereby the transmission
owning utilities will gradually transition from the
current cost recovery mechanism, in which transmission
costs are recovered in base rates and wheeling
charges, to the new transmission cost recovery
mechanism.
Proposed AS 42.05.910 provides that the RCA will
require all transmission-owning utilities to form an
association whose only purpose is to have a tariff
setting out how the transmission cost recovery
mechanism is collected and disbursed, and to collect
and disburse the transmission costs through the new
recovery mechanism. The association will be regulated
as a public utility.
Proposed AS 42.05.915 provides definitions for the new
article. The section clarifies what sort of electric
utility assets are deemed to be "transmission assets,"
subject to the cost-recovery mechanism of the new
article. These include AEA's contractual charges for
transmission to the Railbelt utilities but would
exclude radial transmission lines that are built to
connect independent power producers who sell their
power to utilities under wholesale contracts. The cost
of such radial lines will instead continue to be
recovered in the cost of power provided, as is
customary. This ensures that a load-serving entity
that is not buying power from the independent power
producer is not forced to shoulder the cost of
connecting that power to the grid. The section also
provides definitions for the terms "electric
reliability organization" and "load-serving entity."
1:50:24 PM
Mr. Jensen elaborated that section one eliminated the
current system of transmission rates for systems that were
subject to integrative resource planning processes of an
"Electric Reliability Organization" (ERO), which was the
Railbelt Transmission System; the only one in that state.
Representative Josephson pointed to Section 2 and wondered
what the impact of a sales tax on local governments was
versus the current tax structure. Mr. Jensen responded that
it would essentially "level the playing field" for all
types of electrical generation. He explained that most of
the system's electricity was provided by cooperatives and
member owned utilities where under state statute were not
subject to local property tax. However, an IPP was subject
to the tax and created an unfair advantage for power
generation. As long as the provider was selling to a non-
profit cooperative, it removed an unequal barrier towards
increasing power generation in the Railbelt system.
Representative Galvin understood that the provision was
seeking to remove barriers and wondered if it was similar
to what was happening in the lower 48 states, which had
more IPPs. She wondered whether IPPs in other states paid
taxes. Mr. Jensen responded that he was not familiar with
all of the tax structures in the lower 48 states. He was
aware that Alaska cooperatives were different than in other
states because they generated most of their own power
versus merely being buyers and distributors of power.
1:54:21 PM
Representative Ortiz referred to slide 2 he asked if the
administration would be opposed to amending the bill's
title to include "to prevent inadvertent taxation of
utilities that were not within the Railbelt He understood
that the bill was intended to focus solely on the Railbelt.
Ms. Sande replied that she had not addressed the question
with the governor but would follow up.
Representative Coulombe ascertained that the legislation
created one rate for the entire Railbelt with the intention
of reducing the cost to the rate payer, but she was not
sure that was the case for Chugach Electric. She thought
that Chugach was using wheeling rates to keep rate payers'
costs down. She asked if the provision was positive for the
whole Railbelt.
Mr. Jensen first replied to Representative Ortiz's question
that the way Section 1 was structured regarding EROs there
was only one such system in the state, however an ERO could
be formed in any part of the state. Therefore, the bill was
not specific to the Railbelt by intention.
Mr. Jensen proceeded to answer Representative Coulombe's
question. He believed that initially there would be only
minor adjustments in rates. The bill provided for a gradual
unwinding of current revenue structures. He believed that
in the long term it would lead to lower rates and benefit
the entire system. He offered that currently, the cost of
transmission was charged at the point of power generation
or at the point of transaction between utilities. However,
by shifting the system to an end user cost, the cost of
power would not include fixed costs that existed no matter
what. He elaborated that approximately $69 million out of
an overall revenue requirement of about $905 million were
transmission costs or 7.5 percent of the average rate.
Presently, independent power projects were regionally
constrained due to wheeling traffic that crossed multiple
system and could negatively impact the cost of power. He
provided an example of a proposed 100 megawatt wind farm in
the Interior. In order for a large project to share power
that crossed multiple lines wheeling rates and tariffs
would be involved. The legislation, over time, would
benefit the entire system by allowing projects at a much
larger scale that could serve the entire system instead of
smaller regional projects.
1:59:47 PM
Representative Coulombe asked whether it was fair to say
that some rate payers might see an initial increase in
rates. Mr. Jensen responded that it would remain to be
seen The legislation required the utilities to
collaboratively develop a structure that was fair to the
rate payers. He added that the utilities had already begun
discussions and he felt that the result would be fair and
beneficial. He could not guarantee how the rates would end
up regionally. The answer would unfold once the utilities
developed its cost recovery system. Representative Coulombe
wondered whether the attempt to integrate the transmission
line was focused on creating renewable energy. Mr. Jensen
answered in the negative and stated that the bill was not
restricted to renewables and was open to any form of power
generation produced by IPPs. He emphasized that the
governor favored developing the lowest cost power
generation. Representative Coulombe asked Mr. Jensen to
identify a few IPPs. Mr. Jensen identified Renewable IPP
that developed soar farms in Willow and Houston and were
currently developing a large project on the Kenai
Peninsula. In addition, Alaska Renewables was vetting the
development of wind farms in Susitna Valley and in the
Interior. Another IPP, Fire Island Wind was owned by Cook
Inlet Region, Inc. (CIRI). Representative Coulombe remarked
that the examples were all renewable energy. She expressed
concern that renewables were more costly and not consistent
and once the tariffs and pancake rates were changed would
not result in lower costs for the rate payer. Mr. Jensen
explained that currently, when a IPP made a deal with a
utility the rate had to be lower than the current rates for
power generation in order for Regulatory Commission of
Alaska approval. He believed that the bill would diversify
the energy mix for the Railbelt system and potentially for
other parts of the state. He noted that more generation in
the system would reduce demand for natural gas as an added
benefit.
2:04:45 PM
Representative Stapp favored the bill and thought that it
created equity in the Railbelt and unified the effort to
reduce energy costs, which affected PCE rates as well. He
referenced the governor's Transmittal Letter (copy on file)
that mentioned the burden of wheeling rates that could
derail new types of power generation that were
"geographically dependent." He asked if his assessment was
correct. Mr. Jensen responded in the affirmative. He added
that recovering transmission rates via a surcharge on a
utility bill would remove a large barrier to system wide
larger power projects versus a regional project in order to
avoid transmission charges. Representative Stapp recalled
Mr. Jensen's testimony regarding the elimination of
wheeling rates spurring extra generation making the system
less reliant on natural gas generation prolonging the life
of gas in Cook Inlet. He inquired if his recall was
correct. Mr. Jensen replied in the affirmative and believed
it was a "crucial" element to relieve demand for natural
gas for power generation. He furthered that additional
sources of power generation made it easier to project a
fixed cost into the future versus a variable price for
natural gas due to price volatility. Representative Stapp
asked whether the bill was a crucial first step in tackling
the gas situation in Cook Inlet, especially for Anchorage.
Mr. Jensen responded in the affirmative. He elucidated that
the transition to the new cost recovery would take a few
years, but the bill's fixes would enable project
development to accelerate by creating cost certainty.
2:11:22 PM
Representative Ortiz referenced section 2, page 2, line 1
of the bill: "each electric cooperative and independent
power producer shall pay to the state,?" and page 2 lines 5
to 7: "independent power producer" means a utility that
only sells wholesale power to cooperative or municipal
utilities. He deduced that the provision included IPPS
outside the Railbelt and asked if it was the intent of the
bill was to tax IPPs outside the Railbelt. Mr. Jensen
responded that the bill applied only to utilities within an
ERO. The only way it could apply outside the Railbelt was
if those utilities formed an ERO.
Representative Hannan shared that she had similar concerns
as Representative Ortiz. She explained that the utility in
Juneau was investor owned. She determined that it appeared
the legislation excluded an IPP from getting a tax
advantage for selling to an investor owned utility. She
asked if she was correct. Mr. Jensen responded in the
affirmative. He related that the cooperatives did not pay
local property taxes, which was why the bill stipulated
that if power was only sold to a tax exempt entity, then
the seller would be treated the same from "a local taxation
purpose." An investor owned company was already paying
local property taxes for power generation therefore both
the IPP and investor owned utility would pay property taxes
and be on equal footing. Representative Hannan inquired
whether the legislation required an IPP selling to a
cooperative utility to share its tax advantage with the
consumer. Mr. Jensen deferred part of the answer to the
Regulatory Commission of Alaska. He reported that any power
purchase agreement between an IPP and a cooperative utility
was subject to a review and approval by the RCA. The
commission had a process in place to assure a tax exemption
was part of the rate.
2:16:25 PM
ROBERT DOYLE, CHAIR, REGULATORY COMMISSION OF ALASKA (via
teleconference), affirmed that as part of the approval
process, the commission would ensure the rate payers and
utilities were part of a calculation called avoided
costs. He defined avoided costs as a negotiated rate that
was both just and reasonable for both the rate payers and
the utilities. The IPP bearing any part of a tax exemption
would be a part of the review process. Representative
Hannan ascertained that just and reasonable did not mean
lower. She exemplified a situation where there was
insufficient power generation and the IPP could produce
more power but at a higher cost. She wondered whether that
scenario of increased costs would be just and reasonable.
Mr. Doyle responded in the affirmative and added that there
was no guarantee that just and reasonable was always less;
there were multiple factors that had to be considered. He
countered that if a truly open access system was in
operation that lacked wheeling rates, a point of "economic
dispatch" could exist within a "tight pool." He elaborated
that the concept was that whoever could produce the power
at the lease cost and cover its debt covenant should be the
utility in operation. He would like to encourage a tight
pool and economic dispatch stretching from Homer to
Fairbanks in an open, non-wheeling transmission program
without pancaking costs. It would allow the economic
dispatch to take place and help lower costs. He maintained
that there was no rate guarantees for utilities or IPPs
with an RCA approved return on an investment and there was
no guarantee that rates would increase. He indicated that
for Power Purchase Agreements, long-term contracts included
escalating costs that accounted for inflation, etc.
2:19:35 PM
Representative Hannan directed her comments and question to
Mr. Jensen. She reiterated that the discussion was
exclusively about the Railbelt transmission grid and the
reason that narrowing the scope was unnecessary was because
no other transmission system formed an ERO. She reiterated
that Juneau's investor owned utility was excluded in the
bill. She relayed that there was a long development of an
IPP plan in Juneau that would likely result in an intertie
between Lynn Canal communities and mine power generation.
She deemed that the bill impacted both the generation
rates, regulation, and created a tax disadvantage for the
IPP to operate and collaborate with the existing utility.
She was concerned with the unintended consequences of the
bill. She wanted the bill narrowed to the Railbelt, and
some language changed. She deduced that if the Juneau
utility became part of an ERO in 5 years it would be tied
to other EROs (like Bradley Lake) costs that were
irrelevant. She wondered how HB 307 could be crafted to
help the Railbelt but not have ripple effects for other
utility groups.
Mr. Jensen answered that he appreciated her perspective and
acknowledged that he heard similar concerns from others.
He emphasized that he would be happy to work with her to
address any potential unintended consequences. He
elucidated that the Bradley Lake project was mentioned [in
the bill] because it was state owned, managed differently
than a regulated utility, and had a fairly unique cost
recovery structure. The administration wanted to ensure
that the utility was accounted for in the definitions
included in the bill. He was not suggesting Bradley Lake
rates could stretch into Southeast Alaska and impact rates.
2:23:01 PM
Representative Galvin noted the discussion around creating
the opportunity for IPPs and concerns around "pancaking."
She inquired whether there was a way to include a provision
that protected rate payers during the transition period
against rate increases. Mr. Jensen replied that the bill
was not overly prescriptive and provided for a gradual
process due to the time it would take utilities to develop
a cost recovery system. He offered that the unfolding
transition process allowed for mitigation through the new
tariffs, RCA rate approval, and a gradual implementation of
the changes to ensure minimal if any impact on rate payers.
He emphasized that it was a small percentage of costs of
the overall system and believed that the bill had
protective measures as he described. Representative Galvin
appreciated the intention of the bill and wondered if there
were any additional measures that could be built-in to keep
the rates low or whether the RCA had the ability to
maintain lower rates. Mr. Jensen commented that there was a
robust public process for tariff setting. He noted that
well-established protections were already in practice that
applied to the provisions in the bill.
2:26:43 PM
Representative Coulombe believed that the legislation would
not reduce costs to the rate payer. She was "pushing back"
on the claim that integration would reduce costs but
understood the need for the bill. However, she determined
that the bill was not a cost saving measure. She asked for
more information on the commission and wondered who was
overseeing the initiative and thought there was a different
governing body. Mr. Jensen responded that he whole
heartedly agreed that the measure alone was not a rate
reduction tool. However, he believed that with greater
energy generation over time, in the long run, it would
result in lower rates, especially when compared to the
specter of importing liquefied natural gas (LNG). He
believed that ultimately it would reduce rates because the
bill allowed for greater competition, greater diversity of
energy supply, and less reliance on natural gas where a
great deal of price volatility was anticipated in the
future. He explained that a coalition of utilities would be
required to work cooperatively to bring a proposed
transmission cost recovery tariff to the RCA for review,
modification, and approval. Ultimately, it would be
established by the RCA.
HB 307 was HEARD and HELD in committee for further
consideration.
2:29:58 PM
HOUSE BILL NO. 393
"An Act relating to oil and gas leases and royalty
shares; and providing for an effective date."
2:30:26 PM
REPRESENTATIVE TOM MCKAY, SPONSOR, explained that the bill
related to Cook Inlet and Middle Earth gas royalties. He
mentioned recent discussions regarding gas storage. He
related that he had introduced a package of energy bills
that roughly formed an energy plan. He reminded the
committee that Cook Inlet was an isolated and mature basin
with a "hybrid closed market and a limited amount of
consumption at 70 Billion Cubic Feet (BCF) per year." Any
amount higher than 70 bcf needed to be stored. He added
that importing LNG was not anticipated until 2030, and it
would need storage as well. He believed that gas that was
not developed did not benefit anyone and HB 393 was meant
to incentivize more gas production. He read the sponsor
statement (copy on file):
In the coming years, Southcentral Alaska faces a
critical challenge: a projected shortage and ever-
increasing decline in Cook Inlet gas production. This
looming shortage poses a significant threat to the
energy security of our state, with the potential to
lead to drastic increases in energy prices for the
residents and businesses of Southcentral Alaska. The
prospect of diminishing in-state gas supplies and a
reliance on liquefied natural gas (LNG) imports not
only threatens our economic stability but also our way
of life.
Due to the nature of this issue, bold and decisive
action is required. HB 393 makes a significant change
to the Cook Inlet royalty structure based on the idea
that the Inlet is not attracting enough investment
dollars and activity for development and exploration
drilling. At this critical juncture, royalties on Cook
Inlet gas which decrease drilling activity, increase
the cost of gas, or lead to costly LNG imports
represent a tax on southcentral ratepayers in addition
to jeopardizing the energy security of our state.
This legislation seeks to address the anticipated gas
production shortfall by decreasing royalty rates on
new wells for gas used by Alaskans to 0%, with the
goal of fostering an environment which will lead to
increased drilling and exploration activities in the
Cook Inlet region. This bill also reduces the base
royalty on wells currently producing to 5%, which will
extend the life of those wells leading to more gas
production. HB 393 extends incentives to "middle
earth" and allows drilling and development costs to be
deducted against royalty burdens. The rationale behind
HB 393 is straightforward: by enhancing project
economics, we can attract more investment into natural
gas exploration and production. This increased
investment will not only mitigate the risk of a gas
shortage but also has the potential to stabilize
energy prices for Southcentral Alaskans.
HB 393 is an acknowledgment of the critical role that
affordable and reliable energy plays in our lives and
a recognition of the need for immediate action to
secure our energy future. I urge my colleagues in the
rd
33 Alaska State Legislature to join me in supporting
HB 393.
2:36:33 PM
TREVOR JEPSEN, STAFF, REPRESENTATIVE MCKAY, introduced the
PowerPoint presentation HB 393 Cook Inlet/Middle Earth Gas
Royalties" dated April 16, 2024 (copy on file). He began on
slide 1 titled "Cook Inlet Production Shortage
• State is facing a looming and increasing shortage of
Cook Inlet natural gas production.
• Legislature has tools at its disposal via legislation
to address Cook Inlet gas production.
• No "silver-bullet" solution.
The slide also contained a bar graph depicting proved
developed and proved undeveloped Cook Inlet Gas through
2041. Mr. Jepsen elaborated that declining Cook Inlet gas
production was expected to lead to a supply shortage from
the 70 bcf standard necessary for Southcentral Alaska. He
pointed out that the blue section of bar graph represented
proven reserves and the orange portion was expected proved
undeveloped reserves. The shortage was anticipated to begin
in 2027. However, the shortage would develop over a period
of 15 to 20 years. The impacts of importing LNG would
significantly increase energy costs affecting the cost of
living beyond Southcentral Alaska and possibly increase
outmigration from the state. He believed that current
decreasing worker retention rates would be exacerbated, and
state and municipal government budgets would increase due
to increased fuel costs. He voiced that royalty relief was
the "most immediate and impactful tool at the legislature's
disposal and passage of the bill was "crucial."
Mr. Jepsen continued on slide 2 titled "Poll Results: What
Do Alaskans Want:"
• High level of support (59%) for state incentives to
private companies and utilities to identify and pursue
projects to ensure energy deliverability.
• Same support (59%) for creating financial incentives
for oil and gas companies to find and produce more
Cook Inlet gas.
• Significant opposition to importing natural gas (72%)
with 44% having "strong" opposition.
Most common reason for opposition: "there is
plenty of gas, we're a resources state, we just
need to get the gas." (46%)
"Importing gas is more expensive" only cited by
18% of respondents.
• If residents were convinced imports are the cheapest
option could be a sizeable shift in support, up to
60%.
• 87% of residents support the construction of a natural
gas pipeline for in-state use and export ; evenly
divided on the idea of reducing the PFD to help fund a
gas line (40 percent support/49 percent oppose.
Mr. Jepsen expounded that HB 393 responded to the "high
level of support for financial incentives regarding Cook
Inlet gas production." He indicated that the bill was
predicated on the idea that gas produced in Cook Inlet was
used by Alaskans and high royalties acting as a
disincentive or leaving gas undeveloped leading to
importing LNG acted as a "tax on Alaskans." Mr. Jepsen
continued on slide 3 titled "Market Dynamics" that
contained a graphic depicting a hypothetical scenario that
did not represent exact volumes and prices. He explained
that proven developed reserves were the least expensive gas
to produce and the least costly to the consumer. Moving
right on the graphic to discovered but undeveloped gas was
more costly and drove up gas prices. He moved further to
the right that depicted undiscovered reserves where
production was significantly more expensive due to
exploration and development costs. He shared that according
to the Department of Natural Resources (DNR) there were
hundreds of bcf of discovered and undiscovered gas in Cook
Inlet. He offered that changes to royalties lowered net
costs to the producers and pass through costs to the
consumers and increased project economics. However, the
royalty relief must be sufficient to produce desired
results.
2:42:26 PM
Representative Hannan inquired about the poll on slide 2.
She asked for the date the poll was conducted, the poll
size, and poll geography; statewide or Railbelt only.
Mr. Jepsen responded that the number of participants was
402 resulting in a 95 percent confidence interval of 5
percent plus or minus a margin of error. The population
size was representative of the share of the population in
Southcentral. He offered to provide the exact geographic
distribution of poll respondents. The poll was taken the
prior summer. Representative Hannan remarked that the poll
seemed broader She asked who paid for the poll. Mr.
Jepsen affirmed that the poll was broad based. He added
that it was conducted by Dittman Research and paid for by
Enstar.
Representative Stapp cited Mr. Jepsen's statement that the
royalty represented a tax on all Alaskans. He asked what
the current royalty on North Slope gas was. Mr. Jepsen
replied that it was 12.5 percent. Representative Stapp
asked who paid for the royalty on North Slope gas. Mr.
Jepsen was uncertain. Representative Stapp explained that
the Interior Gas Utility (IGU), in Fairbanks had a contract
with Hilcorp through a Hilcorp subsidiary called "Harvest"
to truck Liquefied Natural Gas (LNG) to the Interior
beginning in October [2024]. He noted that it was full
royalty gas. He asked if Mr. Jepsen considered that "a tax
on all Alaskans paying for royalty on gas for domestic
use." Mr. Jepsen answered that he considered it a tax on
Fairbanks residents and "probably should not be assessed
either." He shared that Rep. McKay was of the opinion that
royalty on gas used by Alaskans represented a tax.
Representative Stapp asked for Mr. Jepsen to elaborate on
the following bullet point from slide 2, "If residents were
convinced imports are the cheapest option could be a
sizeable shift in support, up to 60 percent." Mr. Jepsen
responded that it was related to the question of support
for importing natural gas that had 72 percent opposition
unless it was the cheapest option.
2:46:02 PM
Representative Josephson understood that one way to
incentive production was to reduce royalties. He cited the
statement that royalties were "a tax on the consumer by
implication." He deduced that it [royalties] was a
contributor to costs but was "the ownership share." He
asked if he was correct. Mr. Jepsen replied in the
affirmative. Representative Josephson stated that it
[royalties] was "linked to the Permanent Fund (PF) corpus."
He recalled that during "the oil tax debates over the
previous decade" the slogan "it's our oil" was displayed by
some who wanted "a more progressive tax" structure with
greater benefits to state treasury. He countered that the
only part that remained the state's share was the 12.5
percent royalty and believed that it was "effectively our
remaining mineral right." He asked whether his assessment
was correct. Mr. Jepsen answered in the affirmative.
Representative McKay interjected that "only if the
hydrocarbon gets produced." He added that it contributed
nothing to the PF if it was never produced. Representative
Josephson offered that in a range of options as a solution
it [royalty relief] "would be on the list." However, it was
not a guarantee. He asked if the governor's version [HB
276-Reduce Royalty on Cook Inlet Oil and Gas] was
comparable. Representative McKay responded that nothing was
guaranteed. He offered that the provision acted as an
incentive for the private sector to produce. He had
multiple discussions with the private sector partners and
concluded that HB 393 would result in increased gas
production in Cook Inlet. He believed that when oil taxes
increased projects were cancelled, and industry jobs were
cut. He intuited that the opposite effect would happen if
taxes were lowered. Representative Josephson was troubled
by contradictory statements regarding the importance of the
state's "mineral interests and that it was the people
money" who were entitled to it versus viewing royalties as
an imposition on the people and a penalty on them" and was
viewed negatively. He could not reconcile the two
arguments.
Mr. Jepsen interjected that he viewed the issue as
significantly different than the oil on the North Slope,
which he characterized as a "global commodity" that was not
typically utilized in the state. Conversely, Cook Inlet gas
was used solely by Alaskans. He was not advocating for a
royalty reduction of North Slope oil. Representative
Josephson asked how the bill differed from the governor's
version. Mr. Jepsen responded that the governor's bill was
rolled into HB 223-Oil/Gas Royalty Rates; Cook Inlet
Develop, sponsored by Representatives Rauscher as a
compromise between the two bills royalty package. The
legislation confined the royalty reduction to "new pools"
that were either never produced or had stopped production.
House Bill 393 made no distinction but offered a zero
royalty rate for all new gas pools drilled.
2:51:16 PM
Representative Josephson deduced that the governor's
proposal was less "generous" as to previous developments.
He asked for affirmation. Representative McKay responded in
the affirmative and added that his legislation was easier
to administer. He believed that it would be difficult to
measure old gas and new gas and apply different royalties.
His legislation applied a zero royalty to all gas produced.
Representative Josephson understood that DNR assessed
different royalty rates on different fields all the time on
the North Slope. Representative McKay agreed but would need
to defer to the Department of Revenue (DNR) for an exact
answer.
2:53:02 PM
DAN STICKEL, CHIEF ECONOMIST, DEPARTMENT OF REVENUE, TAX
DIVISION (via teleconference), confirmed that the question
pertained to royalty and how DNR accounted for varying
royalties on the North Slope. He acknowledged that there
were different leases with different royalties within an
existing field. He reported that DNR had a robust
methodology on how it was calculated. He explained that DOR
applied the tax to the oil and gas that was left over after
accounting for the royalties. The department's role was
simpler than DNR's process. He disclosed that some areas of
the tax code distinguished between old and new oil and
those provisions were on a field specific basis.
Representative Josephson surmised that DNR had the capacity
to make the differentiation.
Representative Galvin wondered why the bill would propose a
royalty give away if gas was already being produced.
Representative McKay answered that he did not like the word
"give away" and believed that it implied a "sinister
motive." He reiterated that the bill was an attempt to
incentives all gas production in Cook Inlet from new and
existing wells. He characterized HB 393 as aggressive and
said that all gas production would be incentivized.
Mr. Jepsen added that the reason for the royalty reduction
for producing wells was that the cost of operating the well
exceeded the cost of production and was "shut in" at some
point in time. He indicated that some Cook Inlet wells were
shut in too early because the royalty rate was too high.
Representative Galvin understood the economic justification
and thought it "made sense." She relayed from a prior
committee hearing on the importance of incentivizing
heavier on the early years of production as companies
drilled new oil or gas fields. She asked how many years
royalty would be dropped. Mr. Jepsen responded that there
was no sunset provision. Representative Galvin asked why
there would not be a sunset clause if the goal was to
incentivize new gas development.
2:58:40 PM
Representative McKay responded that he would be open to a
sunset. He explained that gas wells often declined more
rapidly than oil wells and most gas wells would need more
economic help within 10 years. He determined that a future
legislature could revisit a sunset date if it was added. He
relayed that he had been asked why the problem reappeared
after a solution was implemented 10 years prior. He
discerned from his experience that it would not be unusual
to reevaluate and adjust as necessary every ten years as
the life of a gas field changed over time. Representative
Galvin inquired as to who evaluated the wells.
Representative McKay explained what stripper wells were
(wells making 5 barrels a day for 20 years or more or wells
with significantly reduced production but were still in
operation) as an analogy to Cook Inlet. He believed that as
long as the economics of Cook Inlet gas fields was
monitored, Cook Inlet gas could keep producing for "a very
long time." Representative Galvin understood that royalty
was a contractual term in the lease and could not be
changed by future legislators. She asked whether she was
correct. Representative McKay responded in the negative and
commented that a future legislature could take any action
regarding royalties. He reiterated that his goal was to
extend the life of Cook Inlet.
3:03:25 PM
Representative Josephson believed that it was prohibited to
increase a royalty rate and that it could only be adjusted
downward temporarily. He referred to Mr. Jepsen's comment
that Cook Inlet wells were shut in because the royalty rate
was too high. He countered that there were many reasons why
shut ins occurred and the royalty rate being too high was
only one reason. Representative McKay responded that the
situation was referred to as a "lifting cost." He explained
that lifting costs was the cost it took to pump the oil and
gas out of the ground and get it to market. He hypothesized
that if gas prices collapsed reducing the profit margin, it
could eventually cause shut in wells due to economic
conditions. In addition, any scenario where labor costs
increased or shipping tariffs increased, etc. added to
lifting costs. He acknowledged that there were many cost
factors that affected lifting costs and when lifting costs
exceeded the price the wells could be shut in.
Representative Josephson inquired whether the producers
could request royalty relief under existing law. Mr. Jepsen
answered in the affirmative. Representative Josephson asked
whether any Cook Inlet producers asked for a royalty
reduction. He recalled that Cook Inlet provided the state
$40 million annually in royalties. He asked how the state
would deal with the foregone revenue and provide agreed
upon services with less revenue.
Representative McKay replied that there would be an impact
on the General Fund (GF) and the PF. He noted that the
[revenue] impact on the budget and PF from Cook Inlet was
"minimal" compared to the North Slope. He relayed that he
received an analysis about what would happen to consumer
energy rates based on increases in natural gas prices,
which had a "significant impact" on consumer energy costs.
He asked Mr. Jepsen to relay the data.
Mr. Jepsen maintained that the impact on the rate payer was
significantly higher than the $40 million in lost revenue
to the state.
Co-Chair Foster interjected that the discussion touched on
many different policy areas, and he wanted to finish the
presentation before further policy debate.
3:09:02 PM
Mr. Jepsen continued on slide 4 titled "Considerations for
Energy Policy:"
• Short Term vs. Long Term.
• Risk vs. Cost State needs to decide what level of
risk is acceptable.
• Higher-Cost energy = Lower Risk Options.
• Lower-Cost Energy = Higher Risk Options.
• How policies interact.
Mr. Jepsen elaborated that risk to the state referred to
revenues to the state via royalties. A higher cost of
energy via importing LNG was a lower risk option because
the state was not losing royalties. In addition, the state
had the capability to store LNG in Cook Inlet. It was
highly likely the state would be ready to import and store
LNG before a gas shortfall. The higher risk option to the
state in terms of foregoing royalties was focused on lower
cost energy for residents and increasing the supply of Cook
Inlet gas. Increased imports of LNG meant higher energy
prices for residents for years to come. He suggested
considering how policies interacted with one another and
whether policies were complimentary. He concluded that HB
393 represented a high risk option which resulted in an
immediate decrease in royalty revenues to the state but
with the goal of increasing production and the supply of
low cost energy to residents that works in conjunction with
other legislation incentivizing Cook Inlet investment.
Mr. Jepsen continued to slide 5 (untitled):
The Case for Aggressive Royalty Reduction
•Cook Inlet represents a small share of the
state's oil and gas revenues.
•Energy prices likely to double or triple in the
next 15 years if mass LNG imports are the
solution.
•An increase of this magnitude would result in
rate payers paying 100's of millions to billions
more in energy costs every year.
Mr. Jepsen reported that the slide also included a table of
oil and gas revenue by type and geographic area, FY 2020 to
FY 2023. Mr. Jepsen explained that the slide represented a
rough fiscal impact on the state from royalty relief. He
elucidated that the chart illustrated that the state made
billions from the North Slope compared to tens of millions
from Cook Inlet in a given fiscal year. The state would
lose approximately $45 to $60 million per year. He noted
that if the state did nothing Cook Inlet royalties would
decrease over two decades as production dropped.
Southcentral utilities made roughly over $1 billion in the
prior year with $250 million of Enstar's profits derived
from gas sales while 70 to 80 percent of other utilities
profits came from gas power electricity. He surmised that
the risk from lost state revenue was worth the reward. The
impact on the rate payer was not capped like royalties of
$45 million to $60 million per year on Cook Inlet gas,
which carried the specter of very large rate increases.
3:13:10 PM
Mr. Jepsen continued on slide 6 titled "Royalty Structure
Modifications
Market has spoken: Cook Inlet under current royalty
structure is not ideal for investment
Time Value of Money
What does the state want to incentivize?
Royalty and tax decreases on producing wells
• Extend the life of existing wells.
Royalty and tax decreases on new wells
• Increase the number of wells drilled.
Mr. Jepsen voiced that the rates of return on gas was
"significantly" lower than oil." He summarized that by
greatly reducing royalties, it boosted the rates of return
for producers that made projects more viable. He disclosed
that an additional policy included in the bill was not
accessing royalties until payout, which was the
recuperation of costs for oil and gas development, both in
Cook Inlet and Middle Earth, defined as south of 68 degrees
latitude (excludes the North Slope). He expounded that
allowing investors or companies to recoup its costs more
quickly was another way to quickly recover its initial
investment costs.
Mr. Jepsen continued to slide 7 titled "HB 393 Overview
• Changes royalty structure for Cook Inlet:
0% for gas produced from new wells drilled
starting in FY 25.
5% for oil produced from new wells drilled
starting FY 25.
5% on oil and gas produced from wells drilled
prior to FY 25.
• Capital expenditures associated with development of
oil or gas can be deducted from royalty burden;
Excludes North Slope.
• Requires commissioner to enter into lease negotiations
to comply with these terms.
3:16:21 PM
Representative Stapp pointed to the second bullet point and
asked whether it included Cook Inlet and Middle Earth. Mr.
Jepsen responded in the affirmative. Representative Stapp
asked if the royalty is zero and the production tax was
near zero, what was being deducted from taxes. Mr. Jepsen
responded that there would nothing to be deducted and it
could not be deducted below zero. Representative Stapp
asked what capital lease expenditures were being deducted
against since essentially royalties and taxes were not
being paid. Mr. Jepsen replied if there was zero royalty
and no tax burden there would be nothing to deduct.
Representative Stapp asked whether new wells would be
drilled in Cook Inlet in FY 25 regardless of passage of the
bill. Mr. Jepsen responded in the affirmative.
Representative Stapp asked if it was a fair assessment that
zeroing out the royalties on new wells that would be
drilled regardless of the bill and applying that across the
board would incentivize new production. Mr. Jepsen answered
in the affirmative. He restated that it was not possible to
target wells individually that were being drilled
regardless of the bill's passage. He voiced that by
decreasing royalties to zero for all wells the sponsor
hoped to attract new players to the Inlet. He expounded
that there were only 3 producers in Cook Inlet, with one
producing the vast majority of gas.
Representative Stapp wondered whether there would be an
influx of new producers if royalty rates were reduced to
zero. Representative McKay would not make the promise, but
anything over zero was good. Representative Stapp explained
that few people had been able to convince him that the
policy was needed to pursue new development. He reasoned
that the bill implied that producers did not have the
margin in the market space to recoup its profits. The
natural inclination was to assume that Cook Inlet gas
producers sell its gas to consumers at increased rates to
make up the lack of revenue. He wondered why it was not a
market demand problem.
3:20:45 PM
Representative McKay deemed that Representative Stapp
wanted the state to do nothing and allow the price of gas
to increase, which spurred more production as would happen
in a free market. He reported that he had consulted with an
economist regarding that scenario. However, the problem was
that economists did not have constituents and it was
important that Cook Inlet and the Railbelt had affordable
and reliable energy. He agreed that the legislature could
do nothing and let costs increase, however, if they were
wrong, the problem would get worse. He believed that by
acting there would be some degree of confidence the problem
would be solved.
Representative Stapp inquired what the current oil royalty
was for Cook Inlet gas. Mr. Jepsen responded that it varied
but was mostly 12.5 percent. Representative Stapp
understood the gas concept but was unsure what happened
with Cook Inlet oil. Mr. Jepsen responded that the majority
went to the Marathon Oil refinery.
3:23:59 PM
DEREK NOTTINGHAM, DIRECTOR, DIVISION OF OIL AND GAS (via
teleconference), responded that the majority of oil went to
the Marathon refinery and believed the volume of Cook Inlet
oil exported was very low.
Representative Stapp relayed a prior a dispute in Fairbanks
where the refinery there was refining the state's royalty
share of the oil. He referred to Representative Josephson's
statement that royalty oil was the state's share of the
oil. He wondered what would happen if the state was taking
our oil royalty share and giving it to Marathon for
domestic refining and consumption of gas. He asked "what
does that actually do if we cut the royalty on our own
state oil." Mr. Jepsen answered that gas wells produced an
associated amount of oil. The bill was focused on gas, but
if the royalty rate was decreased on the associated oil the
project economics rate of return was further increased.
Representative McKay interjected that some oil wells only
produced oil and some gas wells that only produced gas and
some that produced both. Representative Stapp understood
that gas producers had contracts with companies and when
they sell the gas to power producers some of the existing
contracts had state royalty provisions inside contracts in
general. He asked how many contracts for Cook Inlet oil and
gas there were and if they included royalty provisions. He
inquired whether change in the royalty structure would
change the existing contract terms of the contract. Mr.
Jepsen deferred the answer to Mr. Nottingham.
Mr. Nottingham replied that he was not aware of any
provision in the contracts regarding royalties. He expanded
that there were statutes that allowed DNR to account for
the royalty value to be at the contracted price.
Therefore, the contracted price that the gas was sold at to
the utilities was what the royalty value was based on
opposed to market value indicators that was normally used
for North Slope royalties.
3:28:27 PM
Representative Stapp asked how many wells or if exploration
on state land was taking place in Middle Earth.
Representative McKay responded that he was unsure of how
many wells but knew of two developments. Representative
Stapp reported that the fiscal note stated that currently
there was no Middle earth exploration or developments on
state lands or even expected soon.
3:29:27 PM
Representative Hannan referred to Section 2 of the bill and
deduced that no royalties would be assessed in perpetuity
on any oil or gas developments anywhere in the state other
than on the North Slope. She asked if she was reading the
provision correctly. Mr. Jepsen answered that the zero
royalty on gas was for Cook Inlet and the capital
expenditure portion of the bill was for Middle Earth. In
addition, the royalty for oil was 5 percent and not zero.
Representative Hannan ascertained that the royalties were
still charged but just the lease expenditures were
deductible as an offset. Representative McKay affirmed and
clarified that it applied to Middle Earth. Representative
Hannan emphasized that the bill specified it applied
anywhere south of the North Slope and not only Cook Inlet
or Middle Earth. She inquired that if oil was discovered in
Juneau in 20 years no oil or gas royalty would be
applicable. Representative McKay responded that he was
trying to help Fairbanks develop its own natural gas field.
Mr. Jepsen interjected that the oil royalty would be 5
percent and the gas rate would be zero for Cook Inlet.
Representative Hannan was confused because it was not clear
in the bill, but she would accept Mr. Jepsen's
interpretation.
3:32:00 PM
Representative Josephson referenced two prior major oil and
gas bills. He noted that HB 247 (Tax; Credits; Interest;
Refunds; O & G - Chapter 4 4SSLA 16 - 06/28/2016) ended
Cook Inlet credits and HB 111 (Oil & Gas Production Tax;
Payments; Credits Chapter - 3 SSSLA 17 - 07/27/2017), which
ended credits and limited carry forward lease expenditures.
He remarked that HB 393's royalty reduction went in
perpetuity and asked if there was a failure to produce,
could the producers draw down capital costs way out into
the future. He asked what would incentivize production if
capital cost credits could be earned at any time.
Representative McKay answered that almost all bills he
proposed in the current session would not require cash out
of the treasury like the previous cash credit programs in
the past. The legislation attempted to front load
proposals
Mr. Jepsen replied that it did not make sense that a
producer would make an investment and not try to recoup the
investment. However, he saw a scenario of price decreases
as a possible scenario where producers would not want to
sell and wait to produce. He offered that Representative
McKay was open to a sunset but noted that a ten year sunset
would not be long enough.
Representative McKay exemplified that the Pika oil
development took 13 years from discovery to first oil. He
emphasized that the clock starts when the legislation was
passed.
Representative Josephson asked if the legislature and the
administration had done a thorough enough analysis on rates
of return and project economics and whether or not current
leaseholders were merely refusing to produce even though
their projects were economic. Representative McKay
responded that he had many conversations with DNR and
directly asked whether Hilcorp was meeting its lease
obligations and drilling its required number of wells per
year. He reported that the answer to the question was in
the affirmative. He added that it was widely understood
that the rate of return on projects in Cook Inlet was much
less than on the North Slope.
3:37:53 PM
Co-Chair Foster asked for closing comments.
Representative McKay thanked the committee and offered to
answer all the committee members questions in order to
thoroughly vet the bill.
HB 393 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster reviewed the agenda for the following day's
meeting.
ADJOURNMENT
3:39:23 PM
The meeting was adjourned at 3:39 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB393 Presentation ver. R 4.12.24.pdf |
HFIN 4/16/2024 1:30:00 PM |
HB 393 |
| HB393 Sponsor Statement ver. R 4.12.24.pdf |
HFIN 4/16/2024 1:30:00 PM |
HB 393 |
| HB393 Sectional Analysis ver. R 4.12.24.pdf |
HFIN 4/16/2024 1:30:00 PM |
HB 393 |
| HB 307 Public Testimony Rec'd by 041524.pdf |
HFIN 4/16/2024 1:30:00 PM |
HB 307 |
| HB307 PowerPoint Presentation to HFIN 4.16.24.pdf |
HFIN 4/16/2024 1:30:00 PM |
HB 307 |