Legislature(2007 - 2008)BARNES 124
04/14/2007 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB177 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 177 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 14, 2007
1:03 p.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Vic Kohring
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Bob Buch
COMMITTEE CALENDAR
HOUSE BILL NO. 177
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline Inducement
Act coordinator; making conforming amendments; and providing for
an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 177
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (H) READ THE FIRST TIME - REFERRALS
03/05/07 (H) O&G, RES, FIN
03/06/07 (H) O&G AT 3:00 PM BARNES 124
03/06/07 (H) -- MEETING CANCELED --
03/08/07 (H) O&G AT 3:00 PM BARNES 124
03/08/07 (H) -- MEETING CANCELED --
03/13/07 (H) O&G AT 3:30 PM HOUSE FINANCE 519
03/13/07 (H) Heard & Held
03/13/07 (H) MINUTE(O&G)
03/15/07 (H) O&G AT 3:00 PM BARNES 124
03/15/07 (H) Heard & Held
03/15/07 (H) MINUTE(O&G)
03/19/07 (H) O&G AT 8:30 AM CAPITOL 106
03/19/07 (H) Heard & Held
03/19/07 (H) MINUTE(O&G)
03/20/07 (H) O&G AT 3:00 PM BARNES 124
03/20/07 (H) Heard & Held
03/20/07 (H) MINUTE(O&G)
03/21/07 (H) O&G AT 5:30 PM SENATE FINANCE 532
03/21/07 (H) Heard & Held
03/21/07 (H) MINUTE(O&G)
03/22/07 (H) O&G AT 3:00 PM BARNES 124
03/22/07 (H) Heard & Held
03/22/07 (H) MINUTE(O&G)
03/23/07 (H) O&G AT 8:30 AM CAPITOL 106
03/23/07 (H) Heard & Held
03/23/07 (H) MINUTE(O&G)
03/24/07 (H) O&G AT 1:00 PM SENATE FINANCE 532
03/24/07 (H) -- Public Testimony --
03/26/07 (H) O&G AT 8:30 AM CAPITOL 106
03/26/07 (H) Heard & Held
03/26/07 (H) MINUTE(O&G)
03/27/07 (H) O&G AT 3:00 PM BARNES 124
03/28/07 (H) O&G AT 7:30 AM CAPITOL 106
03/28/07 (H) Heard & Held
03/28/07 (H) MINUTE(O&G)
03/28/07 (H) O&G AT 8:30 AM CAPITOL 106
03/28/07 (H) Heard & Held
03/28/07 (H) MINUTE(O&G)
03/29/07 (H) O&G AT 3:00 PM BARNES 124
03/29/07 (H) Heard & Held
03/29/07 (H) MINUTE(O&G)
03/30/07 (H) O&G AT 8:30 AM CAPITOL 106
03/30/07 (H) Heard & Held
03/30/07 (H) MINUTE(O&G)
03/31/07 (H) O&G AT 1:00 PM BARNES 124
03/31/07 (H) -- MEETING CANCELED --
04/02/07 (H) O&G AT 8:30 AM CAPITOL 106
04/02/07 (H) Heard & Held
04/02/07 (H) MINUTE(O&G)
04/03/07 (H) O&G AT 3:00 PM BARNES 124
04/03/07 (H) Moved CSHB 177(O&G) Out of Committee
04/03/07 (H) MINUTE(O&G)
04/04/07 (H) O&G RPT CS(O&G) NT 3DP 2NR 2AM
04/04/07 (H) DP: RAMRAS, DOOGAN, OLSON
04/04/07 (H) NR: SAMUELS, KAWASAKI
04/04/07 (H) AM: DAHLSTROM, KOHRING
04/04/07 (H) O&G AT 8:30 AM CAPITOL 106
04/04/07 (H) -- MEETING CANCELED --
04/05/07 (H) O&G AT 3:00 PM BARNES 124
04/05/07 (H) -- MEETING CANCELED --
04/10/07 (H) RES AT 1:00 PM BARNES 124
04/10/07 (H) Heard & Held
04/10/07 (H) MINUTE(RES)
04/11/07 (H) RES AT 1:00 PM BARNES 124
04/11/07 (H) Heard & Held
04/11/07 (H) MINUTE(RES)
04/12/07 (H) RES AT 1:00 PM BARNES 124
04/12/07 (H) Heard & Held
04/12/07 (H) MINUTE(RES)
04/13/07 (H) RES AT 1:00 PM BARNES 124
04/13/07 (H) Bills Previously Heard/Scheduled
04/14/07 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
MARK HANLEY, Manager, Public Affairs
Anadarko Petroleum Corporation (Anadarko)
Anchorage, Alaska
POSITION STATEMENT: Testified in favor of HB 177 and answered
questions.
TONY PALMER, Vice-President, Alaska Development
TransCanada Corporation, Inc. (TransCanada)
Calgary, Alberta
POSITION STATEMENT: Described TransCanada's interest in
Alaska's pipeline project, expressed general agreement with HB
177, and answered questions.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 1:03:40 PM. Representatives
Gatto, Johnson, Kawasaki, Edgmon, Guttenberg, Seaton, Wilson,
and Kohring were present at the call to order. Representative
Roses arrived as the meeting was in progress. Representative
Buch was also in attendance.
HB 177-NATURAL GAS PIPELINE PROJECT
1:04:04 PM
CO-CHAIR GATTO announced that the only order of business would
be HOUSE BILL NO. 177, "An Act relating to the Alaska Gasline
Inducement Act; establishing the Alaska Gasline Inducement Act
contribution fund; providing for an Alaska Gasline Inducement
Act coordinator; making conforming amendments; and providing for
an effective date." [Before the committee was CSHB 177(O&G).]
1:06:43 PM
MARK HANLEY, Manager, Public Affairs, Anadarko Petroleum
Corporation (Anadarko) informed the committee that Anadarko
independently explores for oil and gas, and partners with other
companies in some situations. It currently has an interest in,
or contributes to, operations on approximately 5.4 million gross
acres in Alaska. Its net acreage is about 1.8 million acres on
the North Slope. He opined that the Foothills area is somewhat
more "gas prone." He offered that Anadarko is continuing
exploration activities in order to keep its leases with the
state.
1:09:21 PM
CO-CHAIR GATTO asked how a lessee could lose its leases with the
state.
MR. HANLEY replied that a lessee could turn a lease in at the
end of the lease term. One of the ways to keep a lease is to
drill a well and discover a "commercial quantity" of oil or gas.
He noted that sometimes a lessee chooses to relinquish a lease
if the exploration activities do not indicate good prospects for
discovery. He explained that it can take a while to do research
and exploration necessary to identify the most likely prospects
for further exploration. He said it takes a few test wells to
determine how much resource may be available. He indicated that
Anadarko's exploration activities may speed up if it looks like
the pipeline project is progressing. He said that under the
current timeline set forth in the Alaska Gasline Inducement Act
(AGIA) we "probably are not likely to be in the initial open
season" if the possible timeline of 2011 holds true. He said
that Anadarko could be offering an expansion for the gas
pipeline two years after the initial open season, which would be
"well before" construction will have started.
1:14:02 PM
REPRESENTATIVE WILSON asked how long it takes to provide gas to
an existing pipeline.
MR. HANLEY replied that it depends on the situation, but it
could be anywhere from five to ten years after discovery. He
said that if Anadarko makes a discovery, it will proceed as
quickly as possible to be ready to provide gas for a pipeline
project. He noted Anadarko has already done quite a bit of
exploration.
1:17:50 PM
REPRESENTATIVE GUTTENBERG noted that Anadarko explores about 200
miles south of Prudhoe Bay and asked whether there should be
some type of in-put point in the Gates of the Arctic area.
MR. HANLEY replied yes. He suggested that there may be
conversations with other companies so that they are aware of
where Anadarko is working and how to best design the project to
meet future needs.
1:19:53 PM
REPRESENTATIVE GUTTENBERG noted the desire for distance
sensitive rates and asked about how Anadarko views distance
sensitive rate issues.
MR. HANLEY responded that the Federal Energy Regulatory
Commission (FERC) has addressed distance sensitive rates. He
stated that Anadarko could argue to FERC that it should not have
to pay the rate "if we come in 200 miles south." He agreed with
an observation that there may need to be a gas treatment plant
(GTP) to prepare the gas to enter a pipeline.
1:20:59 PM
REPRESENTATIVE SEATON asked whether as an independent producer,
Anadarko is covered under the expansion criteria of AGIA as
currently drafted.
MR. HANLEY said he believes so, but that he will look at AGIA's
language again to make sure it should not say "delivery and
receipt points," a change he indicated may make Anadarko "feel
more comfortable." He explained that the issue of where in-take
points should be will likely depend on the actual project
design.
1:21:58 PM
MR. HANLEY said that Anadarko supports the process set forth in
AGIA and opined that it provides three opportunities for input:
the initial legislation, public comment on submitted
applications, and final legislative review of the recommended
application.
1:23:54 PM
REPRESENTATIVE SEATON asked how the witness views the final
legislative review and whether he thinks that the license
application could be modified at that point.
MR. HANLEY replied that it appears that the process for final
legislative review is still being developed. He opined that
whatever the process, Anadarko has the ability for input. He
said he thinks AGIA creates a competitive process, noting that
over 90 percent of gas reserves are controlled by three
companies. He suggested that if the producers own the pipeline,
the project deserves extra scrutiny, a point he claimed is borne
out by prior FERC actions in the 1970s whereby the producers
were prohibited from "owning this pipe." He opined that there
are different motivators between pipeline companies and
producers. He suggested that pipeline companies have experience
working to consolidate interests so that a project can get
started. He explained that pipelines are risky financially and
that tensions between different interests are considered by FERC
in the regulatory process. He suggested that a producer owned
pipeline may not be developed with the business interest
tensions that typically help establish a lower tariff. He
reminded the committee that a higher tariff means a lower well-
head price.
1:29:55 PM
MR. HANLEY went on to say that Anadarko approves of the "must
haves" set forth in AGIA such as the mandatory provisions on
access and rates. Anadarko supports requiring biennial
assessment of market demand for expansions. He expressed
approval for requiring the pipeline owner to commit to expand in
reasonable increments on reasonable terms. Furthermore, he
indicated approval of rolled-in rates up to 15 percent above
initial rate and of precluding negotiated rate agreements that
would preclude rolled-in rates. He said these three provisions
increase the "comfort of explorers" to "get into the pipeline."
1:32:39 PM
REPRESENTATIVE SEATON asked whether negotiated rates could
result in a rate of return so low that the pipeline becomes
uneconomic for the builder.
MR. HANLEY opined that negotiated rates are common business
practice and are the subject of at least two FERC orders. He
suggested that there are ways for the owners to structure the
rates so that the project is economically advantageous. He said
he was not aware of whether negotiated rates could be used for
leverage, but that Anadarko supports the language in AGIA that
negotiated rates cannot be used to preclude rolled-in rates.
1:35:16 PM
REPRESENTATIVE ROSES noted that Anadarko does not anticipate
bidding to build the pipeline or participating in the first open
season, and opined that therefore only the provisions in
proposed AS 43.90.130(5)-(7) would apply to it. He stated he
understands why Anadarko would support subsections five and six.
He opined that subsection seven on rolled-in rates would limit
later rates charged to additional shippers. He noted that the
prior testimony by the producers indicated disapproval with
these three subsections and offered that is because the pipeline
builder has concerns over accepting the risk at the first part
of the project. He asked whether an expansion process could
result in lower rates.
MR. HANLEY answered that yes, an expansion could "drive
everybody's tariffs down."
1:38:21 PM
REPRESENTATIVE ROSES asked why an entity with gas for sale would
commit all its gas during an initial open season if it could
potentially wait and get a better price during a future
expansion.
MR. HANLEY opined that there is incentive to participate on a
large scale because economies of scale help to reduce the
tariffs. He offered that during an expansion gas is offered
that may not have been identified during the initial open
season.
REPRESENTATIVE ROSES noted that under certain expansion
circumstances initial suppliers can opt out of the volume they
initially put in the pipeline.
1:41:14 PM
MR. HANLEY referred to a graph titled "Indicative Expansion
Tariffs," [slide one to a PowerPoint presentation provided to
the committee] which he explained shows the result of expansions
on both rolled-in and incremental tariffs. The prediction is
that rolled-in tariffs would result in a lower tariff,
particularly if the expansion required looping rather than
compression. He suggested that shippers would want to keep
their gas in the line and not pull any out.
1:43:53 PM
REPRESENTATIVE ROSES noted that the samples shown on the graph
predict a lower tariff after the first expansion and questioned
why a shipper would not want to adjust its input to capture
lower tariffs.
MR. HANLEY indicated some confusion regarding the aforementioned
scenario, and stated he did not know why a shipper would "back
out" volume from a pipeline.
REPRESENTATIVE ROSES asked whether the initial suppliers also
benefit from later lowered rates.
MR. Hanley answered yes.
REPRESENTATIVE ROSES questioned why there was dispute over the
incremental 15 percent increase above the maximum recourse rate
if everyone, even initial shippers, would benefit from lowered
tariffs during an expansion.
MR. HANLEY continued to describe expansion possibilities, using
the examples on slide 1. He noted that a second expansion by
compression would be more costly than the first expansion, but
that the incremental rate would be higher than the rolled-in
rate under this scenario. He said that constructing new
pipeline for expansion is more expensive, and raises the
tariffs, particularly if incremental tariffs are used. He
explained that the issue of what constitutes a subsidy would be
considered by FERC. He offered that under current FERC rules,
the rate is rolled-in when it goes down for everyone, but is
raised incrementally "when it goes up." However, he reminded
the committee that under FERC there is a "presumption of rolled-
in rates." He pointed out that prior testimony claiming AGIA
can result in one party subsidizing another could be
characterized as correct, except that AGIA does not determine
the rate. Instead, the pipeline owner is required to ask for a
rolled-in rate "up to those certain levels." He offered that
FERC will decide whether there is a subsidy or not. He opined
that AGIA as written requires the pipeline to "ask for a rolled-
in rate" while the initial shippers are free to argue before
FERC that the rates not go up. He characterized this as a
"natural tension to the system." He indicated that if the
producers own the pipeline, the tensions that contribute to low
rates may not exist. He concluded that FERC would make any
actual decision regarding whether the future expansion rates
result in any subsidy.
CO-CHAIR GATTO noted that a looping expansion could cause rates
to rise for everyone; therefore there may be some incentive to
not expand to 7.5 billion cubic feet (Bcf) per day.
1:52:54 PM
REPRESENTATIVE SEATON asked whether the provisions in AGIA which
set a rolled-in rate up to 15 percent basically sets a
negotiated rate, and therefore avoids "the problem of whether it
is a subsidy or not."
MR. HANLEY opined that AGIA prohibits a negotiated rate that
would prohibit roll-in and offered that FERC will still decide
the subsidy question. AGIA requires the pipeline owner to ask
for rolled-in rates up to 15 percent above the initial recourse
rates. He explained that all providers run the risk of
increased rates, but that it is important that explorers have
access to the pipeline. He offered that at least one pipeline
company claims it is possible to expand up to 7 Bcf per day and
still be below the initial tariff if rolled-in rates are used.
1:59:48 PM
REPRESENTATIVE WILSON noted that rolled-in rates are used in
Canada, and that much of the pipeline may go through Canada,
where it would be subject to rolled-in rates. She offered that
a pipeline owner and shipper may desire a different rate
structure, but that if a shipper was also the owner it would
still be able to be "able to write off things and still come out
better."
MR. HANLEY opined that the producers support incremental rates
and do not like the rolled-in rates.
REPRESENTATIVE WILSON offered that incremental rates may benefit
the initial shippers.
MR. HANLEY said that current FERC policy "would roll-in this
rate."
2:02:23 PM
REPRESENTATIVE WILSON said that she has been told by producers
that AGIA requires use of rolled-in rates even though there may
be a situation where they would not want rolled-in rates.
MR. HANLEY agreed and opined that rolled-in rates could require
the producers as shippers to pay a higher tariff after an
expansion. However, a pipeline company that would make money on
an expansion would not mind rolling the costs in as it is "not
that much more."
2:04:39 PM
REPRESENTATIVE ROSES clarified that a rolled-in rate would apply
to all who ship gas in the pipeline. He asked if the same holds
true for incremental rates - does the incremental cost increase
apply only to the new gas being shipped while everybody else
"would stay at the old rate."
2:05:37 PM
MR. HANLEY agreed that everyone shares rolled-in rates, while
incremental rates apply only to the new shippers.
2:05:56 PM
REPRESENTATIVE ROSES clarified that the AGIA provisions on
rolled-in rates limits the rates to not more than 15 percent
above the initial rates. If the rate increased more than 15
percent, would any excess "then fall back on the person that is
adding the gas," he asked.
MR. HANLEY replied that the pipeline owner will be free to argue
that any increase over 15 percent be by incremental rates, but
said that FERC will make the decision.
2:06:38 PM
CO-CHAIR GATTO asked if the contract provisions limiting the
increase to 15 percent would limit the ability of the pipeline
owners to make this argument.
MR. HANLEY responded that under the bill, the shipper is free to
argue against the rolled-in rate limitation. The pipeline owner
is required to support rolled-in rates up to "those levels"
before FERC, while the shipper is free to argue against use of
rolled-in rates and in favor of incremental rates.
2:07:21 PM
CO-CHAIR GATTO asked if the initial rate will stay the same
should the pipeline not be expanded.
MR. HANLEY stated he believed the rates can change even absent
expansion.
CO-CHAIR GATTO noted that inflation alone could potentially
raise rates and questioned how that would affect an expansion if
the 15 percent rate increase is already reached due to inflation
at the time of a proposed expansion.
MR. HANLEY responded that AGIA addresses that by putting a cap
on the rate increases. He suggested that the language regarding
the terminus of expansion be clarified so that the rate
increases apply only to the sections of the pipeline being
expanded.
2:09:31 PM
REPRESENTATIVE WILSON requested clarification as to whether AGIA
requires a shipper to argue for rolled-in rates before FERC even
if it prefers incremental rates.
REPRESENTATIVE GUTTENBERG noted that the owner will receive a
return on its investment regardless of whether rolled-in or
incremental rates are used. However, if the owner is also a
shipper, "you would argue the other way." He suggested that
there may be a benefit to "separating those out," and to either
not allow a shipper to be an owner, or to require a shipper to
be an independent subsidiary of its owner-parent company.
MR. HANLEY stated that his understanding of AGIA is that the
pipeline owner is required to request rolled-in rates, but the
shipper is not. He opined that the bill tries to separate owner
and shipper interests to maintain some competitive tension that
would not exist were the shipper and owner combined.
CO-CHAIR GATTO noted that this is a monopoly pipeline as there
are no competing projects in the vicinity. He said that he
believes FERC is aware of this and will move in the best
interest of the public.
REPRESENTATIVE GUTTENBERG noted that prior testimony was that
the percentage of ownership of the gas should be equal to the
percentage of ownership of the pipe; therefore "we only have
that problem if the producers build this line."
2:14:08 PM
REPRESENTATIVE SEATON asked the witness' opinion of requiring
expansion to be substantially similar to the original pipe size
[AS 43.90.130(6)(B)].
MR. HANLEY replied he did not know why this requirement would be
in the bill, although he has asked others for this information.
REPRESENTATIVE SEATON asked whether there should be a provision
in AGIA about places for future in-put points and where those
should be.
MR. HANLEY agreed this was a valid point, and could use some
additional discussion and clarification.
2:17:14 PM
REPRESENTATIVE SEATON asked whether applicants should be
required to specify where their gas will come from and the
amounts thereof. He noted there may be a risk of authorizing a
project that cannot supply the amount of gas necessary to make
the planned project work.
2:19:10 PM
MR. HANLEY opined that the shippers or others need to ask the
Alaska Oil and Gas Conservation Commission (AOGCC) about the
amount of gas available. As to whether a project could be
designed absent this knowledge, he noted that the state is
"asking folks to come up with some rough idea of what they would
do in an application process." He offered that whether the
amount of volume needed for a particular project would be
available is a question that needs to be answered at some point.
REPRESENTATIVE SEATON asked about possible future carbon
emissions tax issues and whether funds from carbon trading
should go into reducing the tariff.
MR. HANLEY replied "we like anything that reduces the tariff,"
and noted this is a potential issue that could be addressed by
applicants in their proposal.
2:22:38 PM
CO-CHAIR GATTO asked how carbon emission issues, such as taxes
and caps are handled by his company.
MR. HANLEY answered that his company is aware of these issues
and has done work so as to recover more oil in at least one
situation.
CO-CHAIR GATTO noted that the gas is rich in carbon dioxide and
the issue of where to put it will come up.
MR. HANLEY replied that in Prudhoe Bay the gas is re-injected to
help recover more oil and noted there are some engineering
issues involved regarding what to do with gas that "comes back
up" after re-injection. He offered to provide the committee
with more information on this issue.
The committee took an at ease from 2:25:26 PM to 2:41:39 PM.
2:42:03 PM
TONY PALMER, Vice-President, Alaska Development, TransCanada
Corporation, Inc., (TransCanada) referred to a PowerPoint
presentation that was provided to the committee and explained
that the company has been in business for 50 years and owns
36,500 miles of regulated natural gas pipeline which moves 15
Bcf of gas per day. The company owns approximately two-thirds
of the take-away capacity from the Alberta Energy Company Ltd.,
(AEC) hub to North American markets. He offered that the AEC
hub is the most liquid trading hub in North America, which he
opined would be beneficial for Alaska's gas. He said that
TransCanada also owns significant storage capacity, which can
allow for storage of gas during the summer for sale during the
winter when the price may be higher. He noted that one-third of
Alaska Highway pipeline, called the Foothills pre-build, is
currently in the ground and transports 3 Bcf a day. He
mentioned that in 2006 TransCanada's cash flow was $2.4 billion,
which he claimed was sufficient to cover the entire equity of
the Canadian section of the Alaska project for one year. He
explained that TransCanada recently successfully raised
approximately $1.7 billion in equity. He relayed that
successful pipeline projects require more than engineering; they
also require the ability to obtain necessary regulatory
approval. He emphasized that TransCanada has operated with an
independent pipeline model and rolled-in tolls [rates] to
develop its Canadian resources. He referred to slide 5, which
shows the proposed Alaska Highway Project and how its current
infrastructure is integrated into the planned Alaska project.
He characterized TransCanada as being a lead player in the
Alaska gas pipeline project since its inception. The company
has invested over $2 billion over the last 30 years in this
project. He explained that TransCanada's subsidiary, Foothills
Pipe Lines Ltd., (Foothills), holds exclusive certificates under
the Northern Pipeline Act (NPA) for the Canadian section of the
Alaska project and that these certificates do not have an
expiration date. He told members that Canada and the United
States have entered a treaty regarding this project which
identifies Foothills as the Canadian sponsor and sets out the
rights and responsibilities of each nation. He said that
TransCanada holds an easement for the proposed right that is
recognized by the Canadian government, the Yukon Territorial
government, and Yukon First Nations.
2:53:20 PM
MR. PALMER explained that 30 years ago, the Canadian National
Energy Board (NEB) held competitive hearings to select the
Canadian project sponsor and Foothills was selected as the
Canadian sponsor. Subsequently, Canada and the United States
negotiated a treaty for the Alaska gas project whereby Canada
obtained benefits in exchange for access across Canada for
Alaska gas. This treaty also established a single-window
regulator to complement the NEB. TransCanada has used NPA to
construct and expand the pre-build sections of the pipeline. He
emphasized that Foothills was granted exclusive rights with
regard to the Alaska project and that no party would invest the
huge sums necessary without that exclusivity.
MR. PALMER referred to slide 8 and explained that in 1976
TransCanada received a conditional FERC certificate granted
under the Alaska Natural Gas Transportation Act of 1976
(ANGTA). He said that in 2004 further enabling legislation
updated these provisions to give TransCanada further options as
to how to proceed under AGIA. He reminded members that
TransCanada has applied to Alaska for a state right-of-way and
is still awaiting a decision on this matter. He mentioned that
TransCanada has openly offered to vend its Alaska assets to
whoever successfully commercializes the Alaska portion with one
caveat - to connect to TransCanada's system at the Alaska-Yukon
border. He described the route of the Canadian section and
noted it follows highway routes fairly closely in many sections.
2:58:09 PM
MR. PALMER referred to slide 10 and emphasized that TransCanada
has a federal easement for the pipeline route through the Yukon
Territory. He indicated that work is still being done for the
route through British Columbia and Alberta, but mentioned that
the route passes through very little private land and through no
First Nations' reserves in British Columbia and Alberta. He
offered that six of eight First Nations groups have recognized
the pipeline route and settled for their land claims with the
Canadian federal government. He characterized the project as
providing significant benefits to First Nations' people such as
employment, local natural gas availability, representation on
the Foothills Board of Directors, environmental protections,
equity participation, and zonal tolls.
3:07:05 PM
REPRESENTATIVE WILSON asked about the process of working with
First Nations groups in British Columbia and how long it may
take to settle some claims.
MR. PALMER clarified that within the Yukon Territory the Kaska
and White River groups are the only parties without final land
claims settlement at this point. There are some groups in
British Columbia that do not have a final land claims
settlement, however the proposed pipeline route would not go
through any First Nations' reserve land in that province, he
explained. He said that now is not the appropriate time to
secure those right-of-ways needed in British Columbia, but
opined that obtainment of the necessary right-of-ways could be
done expeditiously once the Alaska gas pipeline project was
underway.
3:08:56 PM
CO-CHAIR JOHNSON asked about whether the tax rates were "locked
in with regard to Canada." He asked what the rate was, and for
how long it was guaranteed.
MR. PALMER explained that the treaty between the United States
and Canada established the structure of Canadian property taxes
within Canada for this project. Under the terms of the treaty,
the parties agreed that the Canadian provinces with existing
pipelines will charge the Alaska pipeline the same property tax
rate applied to domestic projects. At the time of the treaty,
there was no pipeline within the Yukon Territory, so the treaty
established some specific numbers regarding what rate could be
charged. He said that the rates in Canada do change, and are
not uniform between provinces, but opined they are competitive
with Lower 48 rates. He explained that the rates are
established for the duration of the treaty, which continues
through 2012 and beyond, unless either country revokes the
treaty. He clarified that those parties agreed that the tax
rates for the Alaska project would be the same as for domestic
Canadian pipelines. The parties did not establish a specific
rate within the Canadian provinces but they agreed to apply the
Canadian rate to Alaska gas, he explained.
3:13:00 PM
CO-CHAIR GATTO asked about the term "greenfield project."
MR. PALMER explained that a greenfield project would not use the
NPA or the treaty and that TransCanada and Foothills are not
proposing a greenfield project.
CO-CHAIR GATTO asked about project labor agreements and whether
TransCanada would want to participate in such an agreement.
MR. PALMER suggested that for Alaska sections of the project
TransCanada would look to Alaska standards and for the Canadian
sections would look to Canadian standards. He offered
TransCanada will do whatever is appropriate at the time to
insure the project can be completed economically.
3:14:23 PM
CO-CHAIR GATTO asked whether under AGIA, TransCanada would be
willing to submit an offer, or whether there are some parameters
in AGIA "that aren't livable."
MR. PALMER responded that he would like amendments to the
provision that requires the chosen applicant to pursue a FERC
certificate through an unsuccessful open season. He offered
that TransCanada would like that provision amended so that an
applicant could continue to pursue customers and alternate forms
of credit, but would not be required to pursue a FERC
certificate if insufficient volumes had been tendered at the
initial open season. He offered that he understands that the
state has many potential benefits from the project, such as
royalties and taxes. However, the pipeline company only has one
form of reimbursement - the return on the investment it makes in
the equity component of the project. He indicated TransCanada
would like to hold off from pursuit of a FERC certificate if
there was not sufficient credit or an adequate customer base.
3:16:27 PM
CO-CHAIR GATTO characterized the provision regarding FERC
certification [AS 43.90.130(3)] as one of the twenty "must
haves."
CO-CHAIR JOHNSON asked if the treaty required TransCanada to
provide off-take points to the Yukon communities of Beaver Creek
and Whitehorse.
MR. PALMER clarified that TransCanada has an obligation through
the treaty and NPA to install an off-take valve to allow those
communities to take gas from the system. He characterized the
volume that would go to these communities as minimal compared to
the whole volume of gas in the pipeline, but important to those
customers.
CO-CHAIR JOHNSON asked if AGIA's distance-sensitive rates would
be taken into consideration in providing access to gas to
Canadian communities.
MR. PALMER explained that the pipeline in Canada would have
"zonal tolls" in which customers pay only the upstream portion
of pipeline tolls. For example, a customer in Beaver Creek
would only pay tolls for the section of pipeline from Beaver
Creek to Whitehorse.
3:19:02 PM
CO-CHAIR JOHNSON asked if rolled-in rates in Canada are
calculated the same as rolled-in rates in the United States.
MR. PALMER replied no. He explained that within Canada rolled-
in tolls [rates] are the norm. When there is a pipeline
expansion the new rate is charged on an "average, rolled-in"
basis to all customers regardless of whether the rate increases
or decreases. However in the United States, FERC has tended to
allow rolled-in rates when tariffs decline as a result of an
expansion, but not when they increase. Furthermore, when the
volume of gas decreases, the rate would increase on a unit
basis.
3:21:43 PM
CO-CHAIR JOHNSON asked if the toll to Canadian shippers will
decrease when Alaska gas reaches Alberta due to the additional
volume of gas.
MR. PALMER responded that TransCanada expects that the total
pipeline system leaving Alberta will have sufficient spare
capacity in 10 years' time to move Alaska's entire volume of gas
to market without incremental facilities. He opined that this
would benefit Alaska by providing market diversity to Alaska's
gas. Second, it should reduce the risk of capital cost overrun
by abbreviating the project. However, under the current toll
mechanism in Canada, Canadian customers would benefit because
the toll rates would decrease due to the volumes of Alaska's
gas. He offered that there would also be benefits to Alaska
because the toll would be lower than would apply to a new
pipeline.
CO-CHAIR JOHNSON asked if there is anything in Canadian law that
prohibits Alaska from sharing in the tariff reduction.
MR. PALMER replied that the "tolling mechanism" in place in
Canada would result in a lower tariff for all pipeline shippers;
however it would not specifically designate value solely to
Alaska gas.
3:23:59 PM
REPRESENTATIVE ROSES asked if increased in rates in Canada would
also apply to Alaska gas since under the Canadian system, rates
are "rolled-in" for both increases and decreases.
MR. PALMER answered yes-each shipper would pay the average rate.
3:24:39 PM
CO-CHAIR GATTO asked whether it is unusual for gas to move from
one country to a second country and back to the first country.
MR. PALMER replied that such a situation is "very rare". He
noted that gas is moved from Canada, through the northern mid-
western United States and back into Canada. He indicated that
United State's markets are served from the segment of the line
in the United States.
3:25:49 PM
REPRESENTATIVE ROSES asked if there is a minimum volume
necessary for TransCanada to be interested in the Alaska gas
pipeline project.
MR. PALMER replied that is a difficult prediction to make as it
depends upon natural gas prices and markets over the coming
years. However, if the design were to be for a 48 inch
pipeline, it would be appropriate that volume be somewhere
between 4 and 4.5 Bcf a day to start. He opined that the volume
could be slightly less and "still make the economics work,"
although the tariffs would increase. He observed that if the
volume was estimated to be significantly lower than 4 Bcf a day
for some time, then the parties should "look clearly" at a
smaller diameter pipeline, and noted that with this approach, if
volumes increased, one "would see higher costs." He said these
decisions would need to be made based on the expectations of
initial and predicted future gas flow. He reminded the
committee that TransCanada's system started at less than .5 Bcf
a day but it now has a series of six pipelines that carry
approximately 7 Bcf a day. He concluded that much of the design
is based on available gas, expected market prices, and market
demands. TransCanada has estimated that the Alaska project
would have 4 to 4.5 Bcf of gas available at the beginning of the
project and be expandable "quite readily" up to 6 Bcf with
compression alone.
REPRESENTATIVE ROSES asked whether a volume of 2.5 Bcf would
still allow for a viable project, and noted that if there was an
in-state line to Valdez it would reduce capacity available for a
pipeline through Canada.
MR. PALMER replied that under the aforementioned scenario, tolls
[tariffs] in Canada would be higher. The project could still be
economic if customers were prepared to sign shipping agreements
based on the higher prices. He offered his belief that the
potential buyers "would look very carefully" at the pipeline
tariff and that "would be significant factor" in their decision.
3:29:46 PM
CO-CHAIR GATTO asked whether in approximately 10 years, "Alberta
would need 1 Bcf to operate the Tar Sands."
MR. PALMER replied that there are different forecasts for demand
and observed that "oil sands and heavy oil" developments are
significant factors that are expected to drive demand in Western
Canada. He said that he has seen differing estimates for the
amount of future demand for gas. He said that there has been a
very large growth in Western Canada's demand for gas, but a
relatively low production profile. He expected that gas
production in Western Canada is expected to decline over the
next 10 years which will open up more gas pipeline capacity.
Some estimates are that within 10 years' time there will be 4.5
Bcf of spare capacity in the gas pipelines leaving Alberta, he
said.
CO-CHAIR GATTO observed that if Alaska shipped 6.5 Bcf to
Alberta, Alberta could take off 1 to 1.5 Bcf and leave gas in
the pipeline for transport to other markets. He asked about the
estimated future demands for gas.
MR. PALMER reiterated that he expects that Alaska's gas volume
would start at around 4 to 4.5 Bcf a day. If the gas started at
6 to 6.5 Bcf a day, then there may be a need to construct other
facilities away from Alberta to ship Alaska gas to other
markets. He explained that TransCanada expects a continued
increase in the market's need for gas. He also expects that gas
production in Western Canada will continue to decline in the
future.
3:33:04 PM
CO-CHAIR GATTO asked whether the future demand for gas may
decrease due to other energy sources and whether the future
price of gas "may be somewhat reliable over the long term." He
relayed that gas is currently priced at "around $7.90."
MR. PALMER recalled that energy forecasts predict natural gas
prices in 10 years to be around $6.60 (in future dollars), which
is lower than today's prices. The expectation is that
additional supplies will moderate the price of gas. He offered
his belief that higher gas prices have a "dampening" effect on
demand. However, if the estimates for lower prices are correct,
he predicted one would "see a modest increase in natural gas
demand over the next decade."
3:35:50 PM
CO-CHAIR GATTO asked about the future development of coal-fired
power plants in Canada.
MR. PALMER explained that Alberta has historically had a great
number of "mine mouth" coal-fired power plants. He expects coal
plants to continue, although there may be future carbon or
climate change taxes imposed that would change the economics of
coal plants. In eastern Canada, energy comes from coal,
nuclear, and hydropower plants. He explained that the current
Canadian federal government plans to phase out coal plants over
the course of several years. In further response, he explained
that Ontario has had a significant nuclear presence for many
years and TransCanada is an investor in at least one nuclear
power plant. The aforementioned change to nuclear power is
related to environmental concerns as well as to the fundamental
economics of power generation in certain areas of the country.
3:39:00 PM
REPRESENTATIVE SEATON asked about the possible future effect on
pipeline tariffs due to changes in regulations based on
greenhouse gas concerns. He offered that a three percent
through-put for compression and operation of the pipeline could
double the carbon dioxide emissions for Alaska.
MR. PALMER replied that although TransCanada will be facing
those issues, it does not expect there will be a significant
impact on pipeline tariffs. He offered that it is up to
legislators to decide what laws will actually be passed in this
area.
REPRESENTATIVE SEATON asked about TransCanada's efforts to
comply with voluntary emissions' reduction standards.
MR. PALMER responded that TransCanada follows the voluntary
requirements in Canada and the United States. He said it has a
high quality performance record for compliance with
environmental standards.
REPRESENTATIVE SEATON asked whether AGIA should require
applicants to address whether they are in voluntary compliance
with environmental standards.
MR. PALMER opined that inclusion of such a requirement is not
necessary because any party that is responsible and has a track
record will follow voluntary environmental standards.
3:42:43 PM
REPRESENTATIVE SEATON asked if AGIA's provision regarding a
commitment to rolled-in rates up to 15 percent is unusual [AS
43.90.130(7)].
MR. PALMER explained that within Canada there is not a
numerically capped limit to rates. Toll [rate] increases and
decreases are generically rolled-in and applied to all shippers.
Due to the large pipeline base in Canada, even a significant
expansion to the pipeline does not have much of an effect on the
rates, he explained. He told members that TransCanada has
analyzed the Alaska project assuming an initial project volume
of 4.5 Bcf a day. Under its estimated scenario, if expansions
were made through compression in year one, the rolled-in rates
would decline from 4.5 Bcf a day to a lower number, "right
through 5.9 Bcf. Even if future expansions up to 7 Bcf a day
require looping [construction of additional pipeline], the
rolled in rate would still be below the initial 4.5 Bcf rate, he
opined. He emphasized that TransCanada generally supports
rolled-in tariffs and would do so for this project.
3:45:52 PM
REPRESENTATIVE SEATON referred to proposed AS 43.90.130(6)(B)
which requires that an applicant commit to looping with a pipe
size that is substantially similar to the original pipe size.
He asked whether it is usual to use the same pipe size as the
original pipe for looping and whether this provision should be
included in AGIA.
MR. PALMER replied that normally an expansion that required
looping "would see a pipe diameter of equivalent size," although
sometimes larger pipe is used. He went on to say the decision
of how to proceed is based upon the expectation of long-term
supply and demand. He opined that it would introduce
significant system inefficiencies if looping was done with
differing pipe sizes or with different sized compressors. He
offered that the language in AGIA regarding expansion is
appropriate as it would increase future efficiencies for
pipeline expansion.
3:48:53 PM
REPRESENTATIVE SEATON asked whether there are situations where
the initial shippers pay a negotiated rate of 85 percent of the
initial maximum recourse rates.
MR. PALMER noted that he has not seen an analysis in which
shippers pay 85 percent of the initial recourse rates. He
explained that aforementioned situation could occur in the
following scenario: If the project were to proceed with 4.5 Bcf
a day initial volume with 25 year contracts, he would expect
that pipeline "would establish tolls" that would collect the
depreciation on the project over the course of the 25 years.
For the purposes of the example, the toll [rate] would be $2.00.
However if the recourse rates were established to collect the
entire depreciation of the pipeline over 15 years, the toll
[rate] would be significantly higher, such as $2.50. He opined
that in that circumstance, negotiated rates could be established
for 25 years that are significantly below the recourse rate
using a 15 year depreciation period. However, if both the
recourse and negotiated rates had similar recovery periods for
depreciation, then there would not be "anything like a 15
percent difference" between the recourse rate and the negotiated
rates, he offered.
3:51:16 PM
REPRESENTATIVE SEATON recalled TransCanada's desire for an
amendment to the requirement that an applicant pursue a FERC
certificate after open season. He asked for an explanation of
this issue.
MR. PALMER replied that he understands that prior to an open
season the state would pay costs up to 50 percent, and would pay
costs up to 80 percent after open season. Based on this, the
pipeline sponsor would pay 50 percent prior to open season and
20 percent after open season. TransCanada believes it is a
positive development that the state share costs after open
season, as such an arrangement would have the state sharing the
risks as well as the benefits of the project. However, in the
event of an unsuccessful open season, TransCanada would very
much prefer to focus its efforts on obtaining additional
customers or credit rather than to pursue a FERC certificate.
He told members pursuit of a FERC certificate is a "significant
initiative" that requires much effort and a substantial
expenditure of funds that could be used instead to attract
additional customers.
REPRESENTATIVE SEATON asked how a pipeline licensee would
proceed to obtain gas for the pipeline if there is an
unsuccessful open season. He noted that if there is a FERC
certificate, the holders of the gas would be required to sell
the gas if it is economic, but would not be so required absent a
FERC certificate.
MR. PALMER related that TransCanada has held a conditional FERC
certificate on this project for some 30 years. The lack of
customers and credit has caused the project not to proceed. He
stated that he understands the state's desire for a FERC
certificate and its willingness to pay up to 80 percent of the
costs to obtain the certificate. However, obtainment of
customers and credit are the critical factors for a successful
project, he explained. Although a FERC certificate is
important, he reiterated that an amendment to this requirement
would increase TransCanada's ability to bid on this project.
REPRESENTATIVE SEATON inquired as to what TransCanada could do
to secure gas if there is a failed open season.
MR. PALMER responded that TransCanada would review the proposal
made during initial open season and would review comments from
customers who signed as those who did not to determine how to
improve the proposal and attract more customers. He suggested
they may propose a "follow-up" open season. TransCanada would
look to the state to see if it would take any additional
actions. Additionally, it would look to the producers to see if
they were increasing exploration activities.
The committee took an at-ease from 4:00:08 PM to 4:01:36 PM.
4:01:48 PM
REPRESENTATIVE ROSES asked if it would make more sense to hold
open season prior to issuing a license.
MR. PALMER answered that he is not sure how that would work and
expressed uncertainty as to who would conduct the open season in
such a case. He opined that the state would be required to
perform a significant amount of pipeline work to be in the
position to put forth a credible proposal. He questioned
whether the state could choose a party outside of AGIA to
prepare for an open season.
4:02:54 PM
REPRESENTATIVE ROSES asked about AS 43.90.130(5) regarding a
commitment to review market demand for additional capacity every
two years.
MR. PALMER replied that the aforementioned subsection is not of
concern as TransCanada will seek to expand this project.
REPRESENTATIVE ROSES asked whether TransCanada has concerns
about AS 43.90.130(10) regarding commitment to any proposed GTP
based on "a capital structure for rate-making that consists of
not less than 70 percent debt."
MR. PALMER replied that it is not uncommon for large projects to
be highly leveraged with 70 to 75 percent debt. He noted that
the United States federal government is willing to provide a
loan guarantee of up to 80 percent. He opined that the project
will require long-term transportation contracts to be able to
reduce the business risk on the project so that it can bear the
substantial financial risk of 70 percent or more debt. He
concluded that the debt ratio is not of concern to TransCanada
if it can obtain properly structured firm transportation
agreements. In further response, he indicated that the
requirement in subsection 14 that an applicant have local
headquarters in Alaska is not of concern and TransCanada would
look to have a local headquarters.
REPRESENTATIVE ROSES asked whether TransCanada has concerns
about AS 43.90.130(16) which requires an applicant to waive its
right to appeal the award of the project to another applicant.
MR. PALMER replied that TransCanada has participated in many
projects that require responses to requests for proposals. He
opined that if the process for decision-making is fairly
established, "we take our chances as to whether we win or lose."
If the government of Alaska establishes a fair process and if
TransCanada is not chosen, it "will live with the consequences."
REPRESENTATIVE ROSES set forth that AGIA is basically the
structure for the upcoming proposal and asked whether based on
that, TransCanada "can live with the lack of appeal process."
MR. PALMER reminded members that there is not yet an actual
request for proposal [request for application], but assured the
committee that if the application comes out on a fair basis and
establishes a process that is equitable to the parties, we "will
live with the consequences."
[HB 177 was held in committee.]
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 4:09:03
PM.
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