Legislature(1999 - 2000)
02/10/2000 10:08 AM House O&G
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 10, 2000
10:08 a.m.
MEMBERS PRESENT
Representative Jim Whitaker, Chairman
Representative Fred Dyson
Representative Gail Phillips
Representative Joe Green
Representative John Harris
Representative Brian Porter
Representative Allen Kemplen
Representative Tom Brice
Representative Hal Smalley
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 290
"An Act relating to stranded gas pipeline carriers and to the
intrastate regulation by the Regulatory Commission of
Alaska of pipelines and pipeline facilities of stranded gas
pipeline carriers."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 290
SHORT TITLE: STRANDED GAS PIPELINE CARRIERS
Jrn-Date Jrn-Page Action
1/14/00 1924 (H) READ THE FIRST TIME - REFERRALS
1/14/00 1924 (H) O&G, RES, FIN
1/27/00 (H) O&G AT 10:00 AM HOUSE FINANCE 519
1/27/00 (H) Heard & Held
2/01/00 (H) O&G AT 10:00 AM CAPITOL 17
2/01/00 (H) Heard & Held
2/01/00 (H) MINUTE(O&G)
2/10/00 (H) O&G AT 10:00 AM CAPITOL 17
WITNESS REGISTER
ROGER MARKS, Petroleum Economist
Department of Revenue
550 West Seventh Street
Anchorage, Alaska 99501-3555
POSITION STATEMENT: Testified on HB 290.
NAN THOMPSON, Commissioner/Chair
Regulatory Commission of Alaska
Department of Community and Economic Development
1016 West Sixth Avenue
Anchorage, Alaska 99501-1963
POSITION STATEMENT: Testified on HB 290.
DANIEL DIECKGRAEFF, Vice President of Finance and Rates
ENSTAR Natural Gas Company
P.O. Box 190288
Anchorage, Alaska, 99519
POSITION STATEMENT: Testified on HB 290; provided information on
ENSTAR Natural Gas Company.
BARRETT HATCHES, President
ENSTAR Natural Gas Company
P.O. Box 190288
Anchorage, Alaska, 99519
POSITION STATEMENT: Testified on HB 290; provided information on
SENCO Energy, Inc.
ACTION NARRATIVE
TAPE 00-11, SIDE A
Number 0001
CHAIRMAN JIM WHITAKER called the House Special Committee on Oil
and Gas meeting to order at 10:08 a.m. Members present at the
call to order were Representatives Whitaker, Dyson, Phillips,
Harris, Porter, Kemplen, Brice and Smalley. Representative Green
arrived as the meeting was in progress.
HB 290-STRANDED GAS PIPELINE CARRIERS
Number 0025
CHAIRMAN WHITAKER announced that the committee would hear HOUSE
BILL NO. 290, "An Act relating to stranded gas pipeline carriers
and to the intrastate regulation by the Regulatory Commission of
Alaska of pipelines and pipeline facilities of stranded gas
pipeline carriers."
CHAIRMAN WHITAKER said his intent is for the committee to vote on
the bill on February 17, dealing with concerns or amendments by
then. He introduced those scheduled to testify and called on the
first witness.
Number 0201
ROGER MARKS, Petroleum Economist, Department of Revenue,
testified by teleconference from Anchorage. In a prepared
statement, he expressed the Administration's concerns about HB
290 as the legislation is now drafted. He began by repeating
four concerns he had expressed on behalf of the Administration
the previous week: 1) the problem of pre-committing to secure
pipeline capacity without knowing the cost; 2) the allocation of
capacity between in-state and export use in the event of
shortages or excesses of capacity; 3) the exclusion of the marine
terminal from the Right-of-Way Leasing Act; and 4) the
jurisdictional issue of whether the pipeline should be regulated
under the Public Utilities Act or the Pipeline Act.
MR. MARKS said that while the Administration continues to support
the intent of the bill, and while the Administration's concerns
about the first three issues have not abated, the
Administration's thinking over the past week has focused on the
last issue, since it is difficult to deal with the other three
issues with their jurisdictional context undefined.
MR. MARKS explained that the bill puts the pipeline under the
jurisdiction of AS 42.06, the Pipeline Act. Regarding that
jurisdiction, the Administration has the following concerns.
First, the Pipeline Act may only have applicability to common
carrier pipelines. However, as the Administration understand the
bill, the pipeline may not be operating as a common carrier.
Second, a common carrier pipeline must carry gas that is tendered
to it by all prospective gas shippers. If the tendered shipments
exceed the available capacity of a common carrier line, then the
common carrier must pro-rate on an equal basis the tendered gas.
This could potentially mean that in-state utilities that have
committed to use a certain amount of capacity on the gas line
could have some of their gas pro-rated or "bumped off" the line
when a new shipper comes on.
MR. MARKS continued with the Administration's concerns. Third, a
common carrier requirement is ill-suited for gas pipelines
because utilities, especially home heating utilities, must have
assurance that their gas supply will not be diminished to allow
pipeline access to a new gas shipper. Moreover, unlike crude
oil, natural gas is very difficult to store, so it is very
difficult for utilities to react to a sudden pro-ration of gas
shipments. Therefore, gas pipelines are typically contract
carriers that can assure utilities of a certain amount of the
pipeline's capacity.
MR. MARKS continued. Fourth, as HB 290 is structured - where the
pipeline may function as a common carrier insofar as the pre-
construction commitment is concerned - the expansion provisions
may be troublesome. As the Administration understands HB 290, if
a party wants additional capacity after the pipeline is
operational, but none is available, it could only procure the
capacity after requesting construction of additional capacity and
waiting for the time consuming process of the construction.
Number 0398
MR. MARKS gave an example in which Fairbanks and Valdez pre-
commit for 10 and 5 cubic feet of gas, respectively, for a total
of 15 cubic feet of the pipeline's capacity. Supposing that
after the pipeline is operational, Anchorage wants 85 cubic feet
of gas, for a total of 100 cubic feet, when there is only 15 feet
of capacity for in-state use. If the pipeline were truly a
common carrier, Anchorage would get 85 percent of the 15 cubic
feet, and Fairbanks and Valdez would be drastically scaled down.
However, under the bill, Anchorage would have to request and
await construction of additional capacity for its needs. While
the Administration believes this would make sense, it also
believes that this may not constitute a "common carrier" as the
term has been used in case law. This could create ambiguities,
which would reduce certainty rather than enhancing it.
MR. MARKS reiterated that the Administration continues to support
the basic intent of the bill. However, he said, this pipeline is
very different from anything previously seen in the state, and
the existing body of law has not addressed anything like it. It
is difficult to know how laws that were written for something
else will apply to it. He drew the analogy of deciding to play
the game of baseball with a football, saying one has a choice of
leaving the rules alone, modifying them, or creating a whole new
set of rules for a new sport. Mr. Marks concluded by saying that
the Administration will continue to analyze the bill.
Number 0583
REPRESENTATIVE DYSON asked Mr. Marks if he could propose any
solutions to the dilemmas he had raised.
MR. MARKS said one could modify the Pipeline Act, put this
pipeline into the jurisdiction of the Public Utilities Act, or
draft a whole new Act that addresses the idiosyncracies of this
pipeline. He noted that the latter would be a time-consuming
process.
Number 0646
REPRESENTATIVE GREEN asked Mr. Marks if the thrust of his concern
was using the term "common carrier," which has a particular
connotation in case law.
MR. MARKS said the Administration believes the entire Pipeline
Act is directed at common carrier pipelines. Because this
pipeline is not being treated as a common carrier in the strict
sense, the question is whether it really belongs under the
Pipeline Act.
REPRESENTATIVE GREEN observed that the wording seems to be the
biggest hangup. He said he agrees that what is being created is
a hybrid. He asked Mr. Marks if the Administration could suggest
an appropriate jurisdiction.
MR. MARKS replied that the Administration has not yet determined
the most appropriate jurisdiction.
REPRESENTATIVE PORTER said he could not resist commenting with
another baseball analogy, that the American League has a
designated hitter and the National League does not, yet they
manage to play a World Series.
REPRESENTATIVE PHILLIPS advocated looking into modifying the
Pipeline Act before the committee passes the bill.
Number 0834
NAN THOMPSON, Commissioner/Chair, Regulatory Commission of
Alaska,
Department of Community and Economic Development, observed that
Mr. Marks' analogy was a good one. She said she had been working
with the Alaska North Slope Gas Commercialization Sponsor Group,
talking about language, and is pleased with the progress being
made. However, she has one remaining concern regarding the
methodology that the regulatory agency is to use to design the
tariff. There is a fundamental difference between the way that
is done for common carrier pipelines and for utilities. Ms.
Thompson suggested that the utility approach would be more
appropriate in this case.
REPRESENTATIVE KEMPLEN asked Ms. Thompson if she meant that the
project should be regulated under the Public Utilities Act.
MS. THOMPSON clarified that the she was advocating following the
public utility formula for setting tariffs. One way to achieve
that might be to put the whole project under the Public Utilities
Act. Another solution might be to keep the project under the
Pipeline Act but to specify that the tariff be set according to
the methodology of the Public Utilities Act.
CHAIRMAN WHITAKER asked Ms. Thompson to explain the differences
between the two tariff-setting methodologies.
MS. THOMPSON said that utility rate making is quite
straightforward in considering revenue requirements, capital and
operating expenses, and a reasonable rate of return through the
setting of rates. The approach provides certainty for the
utility that it is going to recover on its investment. Utility
pipeline tariff-setting structure is tighter than that for common
carriers. Regulators require a higher degree of proof and some
certainty that a utility actually is going to incur costs; they
allow fewer estimates. In response to a question from Chairman
Whitaker, Ms. Thompson confirmed that both methodologies provide
for return on investment.
CHAIRMAN WHITAKER turned attention to testimony by
representatives of ENSTAR Natural Gas Company, a division of
SEMCO Energy, Inc.
Number 1173
DANIEL DIECKGRAEFF, Vice President of Finance and Rates, ENSTAR
Natural Gas Company, began by explaining that ENSTAR is a natural
gas utility company serving more than 102,000 customers in
Southcentral Alaska. ENSTAR understands the purpose of HB 290
and does not object to the overall concept. ENSTAR supports
bringing North Slope natural gas to Interior Alaska. Natural gas
reserves in Cook Inlet are declining, and utilities need to look
to other sources to meet future needs.
MR. DIECKGRAEFF informed members that ENSTAR has some concerns
regarding HB 290, as currently drafted. He did not anticipate
significant utility use of North Slope Gas because, as the bill
is now written, buyers will need to commit to purchase gas
farther in advance than is practical. ENSTAR and other utilities
that now rely on gas from Cook Inlet cannot convert from that
source overnight, but will need a blend-in, changeover time that
would be problematic under the type of contracting now mandated
by the bill. He expects that total in-state use would amount to
only about 10 percent of the total pipeline throughput, and he
recommended that the bill be revised to give in-state users
better access.
MR. DIECKGRAEFF explained that ENSTAR sees three uses for North
Slope gas: (1) export, probably in the form of liquefied
natural gas (LNG); (2) in-state industrial projects such as an
iron ore reduction plant, a smelter or a chemical plant; and (3)
in-state utility use. Bill provisions appropriately address the
two larger uses, but not the utility use. As now drafted, the
bill lumps in-state utilities and large in-state projects
together, when in reality they are very dissimilar. He suggested
that the bill be revised to allow open access for local utility
gas. Because that is unlikely to amount to more than 5 to 10
percent of pipeline capacity, he would not expect that to cause
problems for pipeline sponsors.
Number 1540
REPRESENTATIVE DYSON asked Mr. Dieckgraeff to comment on what
ENSTAR foresees as its expanding market, its future need for
natural gas, and its projected date for when more supply will be
needed.
MR. DIECKGRAEFF said ENSTAR has contracts in place for all of the
natural gas it will need through 2001. Those contracts include a
step down in the amount of gas supplied beginning in 2002, and
ENSTAR now is negotiating with suppliers to fill that shortfall.
Regarding the amount of gas remaining in Cook Inlet, he said
experts estimate between 2.4 and 4.5 trillion cubic feet of
remaining reserves, enough to continue to meet buyers' need for
10-20 more years. Consequently, all utilities now using gas from
Cook Inlet will gradually need to find other supplies.
MR. DIECKGRAEFF pointed out that major industrial users will not
locate in Alaska unless they are certain of gas supply to meet
their needs. He emphasized that public utility companies like
ENSTAR can deliver gas to those who need it so long as they have
an adequate supply. ENSTAR expects to see the demand for gas for
utility use to continue increasing at the rate of one and a half
to two percent each year.
Number 1742
REPRESENTATIVE GREEN inquired whether ENSTAR now has take-or-pay
contracts with suppliers or if the utility's purchases can
fluctuate in response to demand.
MR. DIECKGRAEFF said ENSTAR now has what are essentially
"requirements contracts." One of those, with producers on the
Beluga field, is, in a technical sense, a take-or-pay contract
that requires ENSTAR to take a certain amount. That amount is
reduced by "market out" provisions, which means that if ENSTAR
loses contracts with its customers and needs less gas as a
consequence, the utility can reduce what it is taking from
suppliers accordingly. The current contract (originally with
Shell Oil Company) for gas from the Beluga gas field now provides
about 20 percent of ENSTAR's total supply.
MR. DIECKGRAEFF said the utility also has a contract with
Marathon Oil Company that is a requirements contract. ENSTAR
takes what it is obligated to take under the Beluga contract and
Marathon supplies the remainder, meeting about 75-80 percent of
ENSTAR's need for the coming year. The result is that ENSTAR
does not need to buy any more gas than its market requires.
Take-or-pay contracts that did not include provision for
reductions recently caused some utility bankruptcies in the Lower
48, he noted, and ENSTAR watched and learned from that.
MR. DIECKGRAEFF responded to a question from Representative
Green, saying ENSTAR's contract with Beluga gas field suppliers
expires in 2009, and the contract with Marathon is volume-related
and expected to last until 2015-16.
REPRESENTATIVE GREEN asked: If ENSTAR were to find a significant
new source, could the utility commit to a take-or-pay contract
from the new source and rely on the Marathon contract to
accommodate fluctuation?
MR. DIECKGRAEFF explained that the existing Marathon contract
would have to be restructured to accommodate that, since it is
based on a set amount in 2002, thereby becoming a take-or-pay
contract. In response to questions from Representative Phillips,
Mr. Dieckgraeff said ENSTAR supports HB 290 and that the Alaska
North Slope Gas Commercialization Sponsor Group has discussed
amendments with ENSTAR that alleviate the utility's concerns.
[Discussion followed concerning a set of suggested amendments
that committee members had received in their packets. Chairman
Whitaker said those amendments address ENSTAR's concerns in part;
Mr. Dieckgraeff concurred.]
REPRESENTATIVE PHILLIPS requested that the committee be certain
that an adequate amount of gas is assured to utility customers.
Number 2088
REPRESENTATIVE SMALLEY wondered if potential industrial expansion
on the Kenai Peninsula would generate more demand than can be met
with the amount of gas now provided by HB 290.
MR. DIECKGRAEFF explained that ENSTAR does not supply gas to
industrial customers. However, ENSTAR hauls gas that those large
consumers have purchased, and their consumption is significant.
REPRESENTATIVES KEMPLEN AND PHILLIPS expressed concern about
assuring adequate supplies to military power plants that use gas
to produce steam and electricity.
CHAIRMAN WHITAKER said that as the committee deals with initial
access to North Slope gas, it will be important to provide for
future utility and industrial growth. But in the process of
doing so, the committee needs to make sure it does not kill a
pipeline project.
Number 2255
MR. DIECKGRAEFF began ENSTAR's broader presentation by
distributing a graph and three maps. He said the presentatio
would include an overview of ENSTAR, its new parent company, and
the overall Cook Inlet gas situation.
MR. DIECKGRAEFF explained that the company now known as ENSTAR
was established as a new company and began service in 1961. Its
service area now reaches more than half of the state's
population, serving 102,000 customers in Southcentral Alaska,
from the Kenai Peninsula to to the Elmendorf Air Force Base.
ENSTAR's residential rates are less than half the cost of fuel
oil. He referred to ENSTAR system maps showing the original
pipeline and subsequent growth.
TAPE 00-11, SIDE B
Number 2440
MR. DIECKGRAEFF continued describing the history of system
expansion, saying that ENSTAR now is adding 30-40 more miles of
main lines each year. He explained that ENSTAR consists of two
separate legal entities. ENSTAR Natural Gas Company is the
distribution company and Alaska Pipeline Company is the
transmission arm. The divisions are regulated and operated as a
single entity. The reason for the distinction is something known
only to tax accountants and public utility lawyers, he observed.
MR. DIECKGRAEFF reported that the total length of ENSTAR's high-
pressure pipeline is about 370 miles. The original line has been
looped to increase its capacity. Adding a line to the Beluga
field doubled ENSTAR's pipeline capacity and extended the service
area to Palmer and Wasilla in the Matanuska-Susitna Valley.
ENSTAR lines also tie in with producer-owned pipelines, creating
a system that encircles Cook Inlet and connects the inlet's east
and west sides. ENSTAR purchased 24.9 billion cubic feet of gas
from the producers in 1999. Ihe utility also transported an
additional 22.8 billion cubic feet of gas for power plant
customers.
Number 2089
BARRETT HATCHES, President, ENSTAR Natural Gas Company, said
ENSTAR's new parent company, SEMCO Energy, Inc., brings to Alaska
a leadership team than understands the utility business; SEMCO is
the third utility business in which the key leaders have worked
together. He said, "One thing we do better than anything else is
to operate a utility business. We are staying in the energy
business, staying in our niche, staying with what we know, where
we have expertise."
MR. HATCHES explained why a company in Michigan would want to
acquire a company in Alaska. Michigan has gone through three
unseasonably warm winters, and SEMCO considers Alaska one of the
best places in the United States for operating a utility
business. SEMCO operates in the Upper Peninsula of Michigan,
which has a climate similar to that of Alaska's Interior. From
the company's Port Huron, Michigan, headquarters, it takes 12
hours to drive to the Upper Peninsula. One can get on a plane in
Detroit and get to Juneau in 6.5 hours, so distance does not
concern those involved. SEMCO's goal is to continue expanding
the business, including developing unregulated enterprises that
are utility and energy related. He emphasized that they have no
intention of coming to Alaska and raising rates.
Number 1865
MR. HATCHES said SEMCO, like ENSTAR, is committed to being a very
good corporate citizen, with employees involved in the
communities served. SEMCO has a reputation for being supportive
of nonprofit organizations and for encouraging its employees to
be involved in the political process to the extent that they want
to be. He said he does not envision trying to make ENSTAR into a
SEMCO, but thinks some of the things that have worked in Michigan
might be worth trying in Alaska. In Michigan, SEMCO has taken a
small utility company and developed it into the third largest in
the state.
Mr. DIECKGRAEFF noted that SEMCO moved in January from the NASDAQ
to the New York Stock Exchange.
CHAIRMAN WHITAKER invited questions.
Number 1580
REPRESENTATIVE DYSON complimented Mr. Hatches on an enthusiastic
sales presentation and expressed pleasure that SEMCO wants to
invest in Alaska.
MR. HATCHES, when asked if he is now living in Alaska, said that
he is, and that his family will be joining him at the end of the
school year.
REPRESENTATIVE DYSON explained that Alaskans tend to be sensitive
about people from Outside who come to this state and take profits
somewhere else. He also cautioned about making sure that Alaskan
jobs do not migrate out of state and that construction takes
advantage of Alaskan firms and Alaska's workforce.
Number 1463
MR. DIECKGRAEFF then turned to the presentation on Cook Inlet,
saying the only other major player that he had not mentioned
earlier was Phillips Petroleum Company. Phillips and Marathon
jointly own the LNG export facility at Nikiski. ENSTAR is
interconnected with Phillips, but does not take Phillips' gas
except in an emergency.
MR. DIECKGRAEFF said Cook Inlet produces 200 to 225 billion cubic
feet of gas per year. There have been no new major gas
discoveries there since 1979, and natural gas utilities all are
drawing from the large fields discovered while looking for oil.
Total reserves in Cook Inlet are declining, and new gas sources
will be needed. Before that time, he predicted, expect to see a
growing need for storage to meet the seasonal peak demand for
Cook Inlet gas. He explained that utilities have been using in-
field storage to accommodate the winter demand. Alaskans use
much more gas in the winter than in the summer because, unlike
communities in Lower 48, Alaska does not make extensive summer
use of air conditioning, so there is not a seasonal peak in the
summer to offset the winter load. Consequently, gas producers
need storage, either back in the fields or in the form of LNG.
MR. DIECKGRAEFF used maps to illustrate the interconnection of
lines in ENSTAR's gas distribution system. He said the utility
has looked into adding a route to Fairbanks and a spur line to
Valdez. ENSTAR could carry gas in two directions, taking North
Slope gas down its line to Nikiski industrial users and allowing
for additional industrial development on Cook Inlet. In
addition, ENSTAR already has pipe access to Whittier and has
considered a spur line to Seward. North Slope gas could be
gradually phased in to offset ENSTAR's declining supply from Cook
Inlet. He said North Slope use gas could be a realistic solution
to ENSTAR's needs and those of Alaskan industries. Therefore,
the utility supports HB 290 in concept and wishes to emphasize
the importance of natural gas to Alaska's future.
[HB 290 was held over.]
ADJOURNMENT
Number 1104
CHAIRMAN WHITAKER, hearing no further questions, adjourned the
House Special Committee on Oil & Gas meeting at 11:20 a.m.
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