Legislature(2017 - 2018)SENATE FINANCE 532

02/06/2017 09:00 AM Senate FINANCE

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                 SENATE FINANCE COMMITTEE                                                                                       
                     February 6, 2017                                                                                           
                         9:02 a.m.                                                                                              
9:02:31 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  MacKinnon  called  the  Senate  Finance  Committee                                                                    
meeting to order at 9:02 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Click Bishop, Vice-Chair                                                                                                
Senator Mike Dunleavy                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Natasha von Imhof                                                                                                       
MEMBERS ABSENT                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
ALSO PRESENT                                                                                                                  
Jim  Shine, Commercial  Manager,  Division of  Oil and  Gas,                                                                    
Department  of  Natural  Resources;  Senator  John  Coghill,                                                                    
Sponsor;  Rynnieva   Moss,  Staff,  Senator   Coghill;  Gene                                                                    
Therriault,   Deputy  Director,   Statewide  Energy   Policy                                                                    
Development,   Alaska   Energy  Authority,   Department   of                                                                    
Commerce, Community and Economic Development.                                                                                   
PRESENT VIA TELECONFERENCE                                                                                                    
Doug Chapadose,  President and  CEO, Petro  Star, Anchorage;                                                                    
Sean  Skaling,  Deputy   Director,  Alternative  Energy  and                                                                    
Energy  Efficiency, Alaska  Energy Authority,  Department of                                                                    
Commerce,  Community and  Economic Development;  Chris Rose,                                                                    
Executive   Director,  Renewable   Energy  Alaska   Project,                                                                    
Sutton;  Brittany  Smart,   Fairbanks  North  Star  Borough,                                                                    
SB 30     APPROVAL: ROYALTY OIL SALE TO PETRO STAR                                                                              
          SB 30 was HEARD and HELD in committee for further                                                                     
SB 39     MUNI ENERGY IMPROVEMNT ASSESSMNTS/BONDS                                                                               
          SB 39 was HEARD and HELD in committee for further                                                                     
SENATE BILL NO. 30                                                                                                            
     "An  Act approving  and ratifying  the sale  of royalty                                                                    
     oil  by the  State of  Alaska to  Petro Star  Inc.; and                                                                    
     providing for an effective date."                                                                                          
9:03:38 AM                                                                                                                    
JIM  SHINE, COMMERCIAL  MANAGER,  DIVISION OF  OIL AND  GAS,                                                                    
DEPARTMENT    OF    NATURAL   RESOURCES,    discussed    the                                                                    
presentation, "Proposed  Sale of the State's  Royalty Oil to                                                                    
Petro Star: Senate Bill 30;  Senate Finance Committee" (copy                                                                    
on file).                                                                                                                       
Co-Chair MacKinnon stated that Mr. Chapadose was online for                                                                     
Mr. Shine looked at slide 2, "Royalty In-kind Versus                                                                            
Royalty In-value":                                                                                                              
     The  State has  a choice  to take  its royalty  in-kind                                                                    
     (RIK) or in-value (RIV).                                                                                                   
     When the  State takes its  royalty as RIV,  the lessees                                                                    
     who  produce  the oil  also  market  the State's  share                                                                    
     along with their  own production and pay  the State the                                                                    
     value of its royalty share.                                                                                                
     When  SOA  takes its  royalty  share  as RIK,  the  SOA                                                                    
     assumes ownership of the oil,  and the DNR Commissioner                                                                    
     disposes of  it through the sale  procedures prescribed                                                                    
     by AS 38.05.183.                                                                                                           
     The SOA  has regularly  taken royalties  of ANS  oil as                                                                    
     RIK (starting in 1979).                                                                                                    
     The State  will receive between  $29 to $37  million in                                                                    
     additional revenue  over what  the state  would receive                                                                    
     if the contracted volumes were taken RIV.                                                                                  
     Petro Star contract has been  through public review and                                                                    
     Royalty Board processes.                                                                                                   
Mr.  Shine  addressed  slide 3,  "Non-competitive  RIK  Sale                                                                    
     Before taking  RIK, the DNR  Commissioner must  find it                                                                    
     is in the State's best interest.                                                                                           
     DNR  must decide  whether  to sell  RIK  pursuant to  a                                                                    
     competitive  auction or  a non-competitive,  negotiated                                                                    
     Solicitation  of   Interest  issued  January   2015  to                                                                    
     prospective purchasers to gauge market interest.                                                                           
     DNR determined that there  was not competition allowing                                                                    
     for a competitive sale, and  proposed to enter into two                                                                    
     negotiated contracts with Petro Star.                                                                                      
     The first contract, in effect  for the period January -                                                                    
     December 2017, did not  need legislative approval under                                                                    
     AS 38.06.055(a) and  (b)(1), received recommendation of                                                                    
     the Royalty Board and was entered into in August 2016.                                                                     
     The second  contract, effective for the  period January                                                                    
     2018  -December 2021,  received  the recommendation  of                                                                    
     the Royalty Board, but requires Legislative approval.                                                                      
Co-Chair MacKinnon acknowledged Senator Micciche.                                                                               
9:08:44 AM                                                                                                                    
Senator Olson looked at slide  2. He queried the period that                                                                    
the increase of  $29 million to $37 million  took place. Mr.                                                                    
Shine  replied   that  it  included  the   current  one-year                                                                    
contract  and  the  four-year   contract  contained  in  the                                                                    
legislation. The one-year contract  did not need legislative                                                                    
approval. The $29  million to $37 million  included the one-                                                                    
year and four-year contracts through calendar year 2021.                                                                        
Senator Dunleavy  stressed that the proceeds  were deposited                                                                    
into the Permanent Fund. Mr. Shine agreed.                                                                                      
Co-Chair  MacKinnon noted  that  50 percent  of revenue  was                                                                    
deposited into  the Permanent Fund;  45 percent went  to the                                                                    
general fund; and 5 percent  went to the Public School Trust                                                                    
Fund. Mr. Shine agreed.                                                                                                         
Mr. Shine looked at slide 4, "Commissioner's Decision                                                                           
     AS 38.05.183(e) states that  the commissioner must sell                                                                    
     the  State's  royalty  oil  to  the  buyer  who  offers                                                                    
     "maximum  benefits to  the citizens  of the  state." In                                                                    
     making  this   determination,  the   commissioner  must                                                                    
          1. The cash value offered;                                                                                            
          2. The projected effects of the sale on the                                                                           
          economy of the state;                                                                                                 
          3. The projected benefits of refining or                                                                              
          processing the oil in state;                                                                                          
          4.  The  ability  of   the  prospective  buyer  to                                                                    
          provide  refined  products  for  distribution  and                                                                    
          sale in  the state  with price or  supply benefits                                                                    
          to the citizens of the state; and                                                                                     
          5. The eight criteria listed in AS 38.06.070(a),                                                                      
          as reviewed by the Royalty Board.                                                                                     
     In  considering these  criteria, the  commissioner will                                                                    
     state which criteria apply  to the proposed disposition                                                                    
     and  discuss   the  weight  given  to   the  applicable                                                                    
     criteria  in determining  the maximum  benefits to  the                                                                    
Mr. Shine highlighted slide 5, "Approval Process for the                                                                        
RIK Sale":                                                                                                                      
     DNR must make a Best  Interest Finding (BIF) in support                                                                    
     of the sale.                                                                                                               
          Preliminary BIF issued July 2016.                                                                                     
          Final BIF issued in September 2016.                                                                                   
     DNR presented  the proposed sale  to the  Royalty Board                                                                    
     on August 31, 2016.                                                                                                        
     The  Board   reviewed  the  Preliminary  BIF   and  the                                                                    
     proposed contracts, and  unanimously voted to recommend                                                                    
     the Legislature approve the sale  of ANS royalty oil to                                                                    
     Petro Star.                                                                                                                
          The   Board  issued   a  Report   to  the   Alaska                                                                    
          Legislature  and  Resolution 2016-2  stating  that                                                                    
          the  proposed disposition  of ANS  royalty oil  to                                                                    
          Petro   Star   meets   the  requirements   of   AS                                                                    
     Prior to  finalizing the RIK contract,  the Legislature                                                                    
     must  pass a  bill  ratifying the  contract with  Petro                                                                    
     Star (HB 70; SB 30).                                                                                                       
Mr.  Shine  addressed  slide 6,  "Royalty  Board's  Decision                                                                    
     AS 38.06.070(a) states that the  Alaska Royalty Oil and                                                                    
     Gas Development Advisory Board must consider:                                                                              
     1. The revenue needs  and projected fiscal condition of                                                                    
     the state;                                                                                                                 
     2. The  existence and extent  of present  and projected                                                                    
    local and regional needs for oil and gas products;                                                                          
     3.  The desirability  of localized  capital investment,                                                                    
     increased  payroll,  secondary  development  and  other                                                                    
     possible effects of the sale;                                                                                              
    4. The projected social impacts of the transaction;                                                                         
     5. The projected  additional costs and responsibilities                                                                    
     which  could be  imposed  upon the  state and  affected                                                                    
     political  subdivisions by  development related  to the                                                                    
     6. The  existence of specific  local or  regional labor                                                                    
     or consumption markets  or both which should  be met by                                                                    
     the transaction;                                                                                                           
     7.  The projected  positive  or negative  environmental                                                                    
     effects related to the transactions; and                                                                                   
     8. The  projected effects  of the  proposed transaction                                                                    
     upon   existing  private   commercial  enterprise   and                                                                    
     patters of investment.                                                                                                     
Senator  Dunleavy  looked  at number  7,  and  wondered  who                                                                    
oversaw that  criteria. Mr. Shine replied  that the Division                                                                    
of Oil  and Gas oversaw that  criteria, but he did  not know                                                                    
how much  consultation was done  with other  state agencies.                                                                    
He stated that  the report indicated that there  would be no                                                                    
negative  environmental  impacts.  He  stated  that  it  was                                                                    
existing status quo operations for Petro Star.                                                                                  
9:13:46 AM                                                                                                                    
Mr. Shine discussed slide 7, "Petro Star RIK Contract                                                                           
          1-year  contract: from  18,800 bpd  to 23,500  bpd                                                                    
          for Jan. 2017 -Dec. 2017                                                                                              
          4-year  contract: from  16,400 bpd  to 20,500  bpd                                                                    
          for  Jan.  2018  -Dec.  2018 from  13,200  bpd  to                                                                    
          16,500 bpd  for Jan.  2019 -Dec. 2019  from 10,800                                                                    
          bpd to  13,500 bpd for  Jan. 2020 -Dec.  2020 from                                                                    
          8,400 bpd to 10,500 bpd for Jan. 2021 -Dec. 2021                                                                      
     Price: the contracts use a netback formula and                                                                             
     provides higher revenue to State compared to RIV.                                                                          
     Quantity flexibility                                                                                                       
          Petro  Star  may nominate  zero  barrels  up to  3                                                                    
          consecutive  months  if   "turnaround  clause"  is                                                                    
         used, otherwise the contract terminates.                                                                               
          The  State  can cap  its  delivery  amounts to  95                                                                    
          percent  of  the  total ANS  royalty  oil  if  the                                                                    
          nominations from  all RIK  buyers is  greater than                                                                    
          the 95 percent threshold.                                                                                             
          Provided  that  the  supply  of  ANS  royalty  oil                                                                    
          exceeds  demand from  both RIK  buyers, the  State                                                                    
          can sell Additional Sale Oil  as long as the total                                                                    
          deliveries  are not  greater than  the 95  percent                                                                    
          Petro  Star's  guarantor  (ASRC) shall  provide  a                                                                    
          letter of  opinion from a  financial analyst  or a                                                                    
          stand-by letter of credit or  surety bond equal in                                                                    
          value to 50 days of delivery.                                                                                         
          If   guarantor's   credit   rating   falls   below                                                                    
          investment  grade  level,   then  guarantor  shall                                                                    
          provide  a stand-by  letter  of  credit or  surety                                                                    
          bond described previously.                                                                                            
     In-state processing: Petro Star to use "commercially                                                                       
     reasonable efforts" to manufacture refined products                                                                        
     in-state from the ANS royalty oil.                                                                                         
     Employment of Alaska residents: no discrimination                                                                          
     against AK companies and residents.                                                                                        
9:19:01 AM                                                                                                                    
Mr. Shine addressed slide 8, "RIK Contract Price":                                                                              
     ANS Spot Price -$1.95 -Tariff Allowance +/-Quality                                                                         
     Bank Adjustments -Line Loss                                                                                                
     ANS Spot Price= Average US West Coast Price for Alaska                                                                     
     North   Slope   oil   (reported   by   industry   trade                                                                    
     publications Plattsand Reuters)                                                                                            
     $1.95 RIK Differential                                                                                                     
          This is  a deduction  used to calculate  the price                                                                    
          of ANS oil sold in Alaska.                                                                                            
          The deduction is  applied to the price  of ANS oil                                                                    
          at its  most common  destination market  (the U.S.                                                                    
          West Coast).                                                                                                          
          It resembles  the deduction used  in sales  of ANS                                                                    
          oil in  Alaska between  North Slope  producers and                                                                    
          between   North  Slope   producers  and   in-state                                                                    
          In contrast, for the ANS  royalty oil that is sold                                                                    
          outside  of Alaska  and  that  is taken  in-value,                                                                    
          producers  use a  deduction that  approximates the                                                                    
          marine transportation cost.                                                                                           
          Since   deduction  that   represents  the   marine                                                                    
          transportation cost  is generally higher  than the                                                                    
          value of  the RIK differential, the  State has the                                                                    
          potential  to obtain  a higher  price for  its ANS                                                                    
          royalty oil  by taking  it in-kind and  selling it                                                                    
          in Alaska.                                                                                                            
Senator Micciche  queried the range  of ANS spot  prices for                                                                    
the  calculation. Mr.  Shine replied  that  the actual  spot                                                                    
price was not included. He  remarked that the local in-state                                                                    
differential gave  the approximate $1.50 per  barrel benefit                                                                    
over RIV.  He stated  that the starting  point was  the same                                                                    
regardless of the price of oil.                                                                                                 
Co-Chair MacKinnon wondered  if it was fair  to consider the                                                                    
revenue from  the one-year contract. Mr.  Shine replied that                                                                    
the one-year contract did  not require legislative approval,                                                                    
so it was  not included in the fiscal note.  The $29 million                                                                    
to $37 million did include  the benefit that the state would                                                                    
receive with the four-year contract and one-year contract.                                                                      
Senator Olson noted the volatility  of the oil price market,                                                                    
and queried the  advantage of a four-year  contract versus a                                                                    
year-to-year contract.  Mr. Shine  replied that  the benefit                                                                    
the state  received was that it  was not subject to  a $3.50                                                                    
per  barrel deduction  for  marine  transportation from  the                                                                    
Valdez Marine Terminal to its west coast destination.                                                                           
Senator Olson announced  that the price did  not matter. Mr.                                                                    
Shine agreed.                                                                                                                   
Mr. Shine continued to discuss slide 8:                                                                                         
     Tariff Allowance= Tariffs for TAPS and pipelines                                                                           
     upstream of Pump Station 1 (PS-1).                                                                                         
     Quality Bank Adjustments= adjustments reported by TAPS                                                                     
     Quality Bank Administrator.                                                                                                
     Line  Loss= loss  or mismeasurement  of volume  between                                                                    
     PS-1  and  the  Valdez  Marine Terminal  (VMT).  It  is                                                                    
     calculated  as 0.09  percent  of  the amount  resulting                                                                    
     from the formula above, excluding "Line Loss."                                                                             
Senator  Micciche noted  that the  differential between  $29                                                                    
million and  $37 million  was the  transportation difference                                                                    
between  the take-or-pay  quantity and  the max-quantity  of                                                                    
the  contract. Mr.  Shine  agreed. He  stated  that the  $29                                                                    
million  would represent  the benefit  to the  state if  the                                                                    
minimum  volumes  were  nominated in  each  contract  month,                                                                    
versus  the  $37 million  the  state  would receive  if  the                                                                    
maximum volume was nominated each month.                                                                                        
9:24:37 AM                                                                                                                    
Mr. Shine looked at slide 9, "Contract is in the State's                                                                        
Best Interest":                                                                                                                 
     The State  will receive between  $29 to $37  million in                                                                    
     additional revenue  over what  the state  would receive                                                                    
     if  the volume  of  ANS royalty  oil  the contracts  is                                                                    
     taken in-value.                                                                                                            
          1-year contract (Jan. -Dec. 2017): from $7.6 to                                                                       
          $9.5 million                                                                                                          
          4-year contract (Jan. 2018 -Dec. 2021): from                                                                          
          $22.3 to $27.9 million                                                                                                
     On average,  producers selling ANS royalty  oil outside                                                                    
     Alaska  for  the  5-year period  of  the  proposed  RIK                                                                    
     contracts with  Petro Star are expected  to deduct from                                                                    
     $3.37 to  $3.70 per barrel as  a "marine transportation                                                                    
     cost" in arriving at the price for RIV.                                                                                    
          This is the deduction used to adjust the price of                                                                     
          ANS oil from the U.S. West Coast to Alaska.                                                                           
     The  proposed contracts  with  Petro  Star will  deduct                                                                    
     only $1.95  as a "location differential"  from the west                                                                    
     coast ANS value.                                                                                                           
     The  proposed  sale  provides  crude  to  Petro  Star's                                                                    
     refineries   at  North   Pole  and   Valdez  with   the                                                                    
     associated  economic and  social  benefits to  Alaska's                                                                    
          Petro Star employs approximately 44 people in its                                                                     
          refining operations.                                                                                                  
          Maximum throughput capacity                                                                                           
               North Pole refinery: 22,000 barrels per day                                                                      
               (bpd). Valdez refinery: 60,000 bpd.                                                                              
          Of the throughput amounts, approximately 25                                                                           
          percent-30 percent will be refined products.                                                                          
          Petro Star refineries' estimated contribution to                                                                      
          the local economy in 2014 was $25mm                                                                                   
Vice-Chair  Bishop felt  that the  four-year contract  was a                                                                    
national security issue. He wanted comments on his concern.                                                                     
9:25:54 AM                                                                                                                    
DOUG  CHAPADOSE, PRESIDENT  AND CEO,  PETRO STAR,  ANCHORAGE                                                                    
(via  teleconference),  stated  that   Petro  Star  was  the                                                                    
largest supplier  of fuel to  the Defense  Logistics Agency,                                                                    
which  was  the  federal agency  responsible  for  supplying                                                                    
energy in all  forms to the Department of  Defense (DOD). He                                                                    
stated that  the fuel supplied  by Petro Star  was essential                                                                    
to  the  war-fighting  capabilities of  the  Pacific  forces                                                                    
located in  Alaska. He stressed  that it was a  large factor                                                                    
in determination  to base the  F-35 fighters at  Eielson Air                                                                    
Force Base.                                                                                                                     
Senator  von  Imhof  noted  that  Golden  Valley  Electrical                                                                    
Association  felt  that  the contract  would  provide  a  10                                                                    
percent  or  more  reduction  for  the  cost  of  power  for                                                                    
approximately 35,000  Interior Alaska residence,  because of                                                                    
the new  fuel blend. Mr.  Shine agreed. He  acknowledged the                                                                    
letter of support in the bill packet.                                                                                           
Senator  von Imhof  queried plans  to  expand beyond  35,000                                                                    
customers. Mr. Shine deferred to Mr. Chapadose.                                                                                 
Co-Chair MacKinnon shared that  the public testimony portion                                                                    
of the meeting might address that concern.                                                                                      
Co-Chair MacKinnon  stressed it  a contract which  the state                                                                    
had made with Petro Star.  She noted that the bill mentioned                                                                    
the  Arctic  Slope  Regional Corporation,  and  queried  the                                                                    
relationship and  its inclusion  in the statutory  bill. Mr.                                                                    
Shine  replied that  Arctic Slope  Regional Corporation  was                                                                    
the parent wholly-owned subsidiary was Petro Star Refining.                                                                     
Mr. Chapadose thanked the efforts  in drafting the contract.                                                                    
He  stated  that  it  was  a   long  period  to  come  to  a                                                                    
resolution, and felt that it  was a rewarding period. He was                                                                    
pleased with the contracts.                                                                                                     
9:30:33 AM                                                                                                                    
Senator  von  Imhof  noted  that  Golden  Valley  Electrical                                                                    
Association  (GVA) had  entered into  a contract  with Petro                                                                    
Star to  provide NAPTHA fuel  costs, which resulted in  a 10                                                                    
percent decrease  in costs. She  remarked that  GVA provided                                                                    
power to  approximately 35,000 Interior Alaska  members. She                                                                    
wondered  if there  were  further plans  for  Petro Star  to                                                                    
expand  their  footprint  to provide  natural  gas  to  more                                                                    
residents.   Mr.  Chapadose   responded   that  the   35,000                                                                    
referenced the  number of account  holders of  Golden Valley                                                                    
Electrical Association. Those  individuals would receive the                                                                    
benefit of the new contract;  therefore, the lower cost fuel                                                                    
was  passed  onto  the  consumers. He  could  not  speak  to                                                                    
expanding the GVA membership.                                                                                                   
Senator Micciche  wondered why  the availability  of royalty                                                                    
oil to the refineries was  not only beneficial to the parent                                                                    
company of  the refinery. He  queried its importance  to the                                                                    
overall economy in Alaska. Mr.  Chapadose replied that Petro                                                                    
Star operated the  only refinery in the  interior. The Flint                                                                    
Hills refinery  was currently being demolished.  He stressed                                                                    
that  Petro Star  was the  only source  of refined  products                                                                    
within the  interior region, including Valdez.  The oil from                                                                    
the  Trans-Alaska Pipeline  System (TAPS)  was the  only oil                                                                    
available to refine. He stressed  that the ability to source                                                                    
crude was critical to the  Petro Star operation. He remarked                                                                    
that  acquiring  crude  from  producers  was  becoming  more                                                                    
difficult, as  production had decreased on  the North Slope.                                                                    
He  stated that  the  source  of crude  from  the state  was                                                                    
essential to remain in business.                                                                                                
9:35:09 AM                                                                                                                    
Co-Chair MacKinnon CLOSED public testimony.                                                                                     
9:35:09 AM                                                                                                                    
AT EASE                                                                                                                         
9:36:38 AM                                                                                                                    
9:36:40 AM                                                                                                                    
Vice-Chair Bishop detailed the fiscal note.                                                                                     
9:37:05 AM                                                                                                                    
AT EASE                                                                                                                         
9:37:16 AM                                                                                                                    
Vice-Chair Bishop readdressed the fiscal note.                                                                                  
SB 30 was HEARD and HELD in committee for further                                                                               
9:38:25 AM                                                                                                                    
AT EASE                                                                                                                         
9:40:00 AM                                                                                                                    
SENATE BILL NO. 39                                                                                                            
     "An Act adopting the  Municipal Property Assessed Clean                                                                    
     Energy  Act;  authorizing municipalities  to  establish                                                                    
     programs to impose  assessments for energy improvements                                                                    
     in  regions  designated   by  municipalities;  imposing                                                                    
     fees; and providing for an effective date."                                                                                
9:40:29 AM                                                                                                                    
Co-Chair MacKinnon read the title of the bill.                                                                                  
9:40:58 AM                                                                                                                    
SENATOR JOHN COGHILL, SPONSOR, gave a high-level overview                                                                       
of the legislation.                                                                                                             
9:42:29 AM                                                                                                                    
RYNNIEVA MOSS, STAFF, SENATOR COGHILL, discussed the                                                                            
Sectional Analysis (copy on file):                                                                                              
     Sec. 1.  Adds C-PACE financing  to powers of  Home Rule                                                                    
     Sec. 2. Adds C-PACE financing  to powers of First Class                                                                    
     Sec.  3.  Adds C-PACE  financing  to  powers of  Second                                                                    
     Class Boroughs on a non-areawide basis.                                                                                    
     Sec.  4.  Adds C-PACE  financing  to  powers of  Second                                                                    
     Class Boroughs on an areawide basis.                                                                                       
     Sec.  5. Creates  a  new chapter  (Chapter  55) of  law                                                                    
     under   Title   29   -   Municipal   Government   which                                                                    
     establishes the Municipal Property Assessed Clean                                                                          
     Energy Act, sets the requirements for establishing the                                                                     
          (b)(1)   Adopt  a   resolution   of  intent   with                                                                    
          findings,  intent, description  of eligibility  of                                                                    
          property  owners and  projects, repayment,  third-                                                                    
          party   financing,    municipal   debt   servicing                                                                    
          procedures for third-party financing.                                                                                 
          (2)  Provide  a  notice of  the  report  regarding                                                                    
          assessment  program with  location of  the report,                                                                    
          time and  place of  public hearing, name  of local                                                                    
          administrator   of  program,   and  name   of  the                                                                    
          (3) Hold a public hearing taking public comment.                                                                      
          (4)  Adopt an  ordinance establishing  the program                                                                    
          and the terms of the program.                                                                                         
               (c)  A   municipality  may  hire   a  program                                                                    
               director   or   contract   for   professional                                                                    
               services to administer the program.                                                                              
               (d)  A municipality  may  set an  application                                                                    
               fee, an  interest rate,  or a  combination of                                                                    
               both  to offset  costs of  administrating the                                                                    
          Sec. 29.55.105.  (a) Allows  for an  assessment to                                                                    
          be  imposed to  repay the  financing of  qualified                                                                    
          projects  on  commercial   real  property  in  the                                                                    
          municipality that adopts the program.                                                                                 
               (b)  All  parties to  the  loan  must have  a                                                                    
               written contract.                                                                                                
               (c) Identifies qualifying costs.                                                                                 
               (d)   Qualified  projects   do  not   include                                                                    
               undeveloped    lots   or    lots   undergoing                                                                    
               development at the time  of assessment or the                                                                    
               purchase of products or  devises that are not                                                                    
               a permanent part of the property.                                                                                
               (e) Provides  that a municipality  can create                                                                    
               programs  in  more  than one  region  of  the                                                                    
          Sec.   29.55.110.   To    create   a   program   a                                                                    
          municipality  must  prepare   a  report  with  the                                                                    
          following items:                                                                                                      
               (1)  A map  showing  the  boundaries of  each                                                                    
               region of the municipality in the program.                                                                       
               (2)  A  form  for written  contracts  between                                                                    
               municipality and property owner.                                                                                 
               (3) A form for  written contracts between the                                                                    
               municipality and third-party financers.                                                                          
               (4) A description of qualified projects.                                                                         
               (5)  A  plan ensuring  third-party  financing                                                                    
               sources(s)   and,   if  applicable,   raising                                                                    
               capital  for   municipal  funding   (such  as                                                                    
               (6)  Setting   perimeters  for   issuance  of                                                                    
               (7) Justifying the period of assessment.                                                                         
               (8)  Description of  application process  and                                                                    
               eligibility for funding.                                                                                         
               (9) Solvency requirements for applicant.                                                                         
               (10) Process municipality  will use to assess                                                                    
               the property and collect assessments.                                                                            
               (11)  Method  of  notice to  mortgage  holder                                                                    
               required for participation.                                                                                      
               (12) Method of review by third party.                                                                            
               (13)    Description    of    marketing    and                                                                    
               participant   education   provided   by   the                                                                    
               (14)  Description  of quality  assurance  and                                                                    
               antifraud measures.                                                                                              
               (b) The report will  be made available on the                                                                    
               Internet website  of the municipality  and at                                                                    
               the  primary  administrative  office  of  the                                                                    
          Sec. 29.55.115. Requires  the municipality to give                                                                    
          30-day  notice  to  any  mortgage  holder  on  the                                                                    
          property and  obtain written consent from  them to                                                                    
          enter into  a written  contract with  the property                                                                    
          Sec. 29.55.120. Requires the property owner to                                                                        
          hire an independent third party to prepare:                                                                           
                    (A)   a    review   of    the   baseline                                                                    
                   conditions, savings;                                                                                         
                    (B) outline  the projected  reduction in                                                                    
                    energy  costs,   energy  consumption  or                                                                    
                    demand,  or  a  reduction  in  emissions                                                                    
                    affecting local air quality; and                                                                            
               (2) verification of completion of project.                                                                       
          Sec. 29.55.125. Allows  property owner to purchase                                                                    
          equipment  and  materials directly;  and  contract                                                                    
          directly for services.                                                                                                
          Sec.  29.55.130.  Requires   the  municipality  to                                                                    
          record  in  the   appropriate  recording  district                                                                    
          details of a C-PACE assessment.                                                                                       
          Sec. 29.55.135.                                                                                                       
               (a) C-PACE  assessments are paramount  to all                                                                    
               other  liens except  municipal tax  liens and                                                                    
               other special assessments.                                                                                       
               (b)  Assessment liens  run with  the property                                                                    
               and remaining balances  are not eliminated by                                                                    
               (c) Penalties  and interest  can be  added to                                                                    
               delinquent installments.                                                                                         
               (d)  Allows municipalities  to recover  costs                                                                    
               and   expenses  of   a  lawsuit   to  collect                                                                    
               delinquent PACE assessments.                                                                                     
          Sec.  29.55.140. Allows  a  municipality to  issue                                                                    
         bonds or notes to finance PACE projects.                                                                               
          Sec.  29.55.145. Allows  a  municipality to  enter                                                                    
          into an  agreement with  a third  party or  one or                                                                    
          more   municipalities  to   administer  a   C-PACE                                                                    
          Sec. 29.55.150.  A municipality  may not  coerce a                                                                    
          property  owner  by  making   the  issuance  of  a                                                                    
          permit, license, or  other authorizations from the                                                                    
          municipality  contingent  on that  property  owner                                                                    
          entering into a PACE contract.                                                                                        
          Sec. 29.55.155. Applicability section.                                                                                
          Sec. 29.55.160. Definitions.                                                                                          
          Sec. 29.55.165. Short title.                                                                                          
     Sec. 6. Immediate effective date.                                                                                          
Co-Chair MacKinnon remarked that  the current version of the                                                                    
bill was version J.                                                                                                             
Senator  Micciche  looked at  29.55.150,  and  noted that  a                                                                    
municipality could  only use it  as a  "carrot and not  as a                                                                    
stick"  on  other municipal  processes.  He  asked that  the                                                                    
issue  be addressed.  Ms. Moss  asked  for a  repeat of  the                                                                    
9:47:12 AM                                                                                                                    
Senator Micciche looked at page 3, Section 29.55.150.                                                                           
Co-Chair   MacKinnon  wondered   if  Senator   Micciche  was                                                                    
referring  to  the   Sectional  Analysis.  Senator  Micciche                                                                    
replied in the affirmative.                                                                                                     
Co-Chair MacKinnon queried the page number of the bill.                                                                         
Ms. Moss  explained that the issue  was on page 10,  line 7.                                                                    
She stated that it was  a coercive clause that outlined that                                                                    
a municipality  may not  issue a  permit, license,  or other                                                                    
authorization to a  person on the condition  that they enter                                                                    
into the PACE program.                                                                                                          
Senator  Dunleavy wondered  if  there  were any  anticipated                                                                    
costs to  the state. Ms.  Moss replied in the  negative. She                                                                    
noted that page  7, line 16, which stated that  if there was                                                                    
a mortgage  on the  property the  mortgage holder  must sign                                                                    
off on  the loan as they  were waiving some of  their rights                                                                    
for collection.                                                                                                                 
Senator von  Imhof wondered whether  the act could  create a                                                                    
fund that  could be  comingled with  other sources  of money                                                                    
other  than bond  money  such as  federal  or private  grant                                                                    
money.  Ms. Moss  replied in  the affirmative,  and declared                                                                    
that there were federal loan  and grant programs. She stated                                                                    
that there was a speaker  from the Alaska Energy Association                                                                    
(AEA) who would address loans  and grants available from the                                                                    
USDA  and rural  utilities programs  that had  zero interest                                                                    
and other programs at approximately 3 percent interest.                                                                         
Senator  von Imhof  wondered whether  the  program could  be                                                                    
comingled  with municipal  bond  money for  one program;  or                                                                    
were there separate  programs that a homeowner  could use on                                                                    
each source of funds. Ms. Moss deferred to AEA.                                                                                 
Co-Chair  MacKinnon   asked  whether   municipalities  could                                                                    
access the  State Municipal Bond  to provide  similar loans.                                                                    
Ms. Moss replied in the affirmative.                                                                                            
Co-Chair   MacKinnon   queried   a  requirement   that   the                                                                    
applicants  have a  good credit  rating. Ms.  Moss responded                                                                    
that she  assumed that  would be  a requirement.  She stated                                                                    
that the banks required good credit.                                                                                            
Co-Chair MacKinnon  announced that she  wanted clarification                                                                    
from  AEA  as  to  how  potential  borrowers  met  a  credit                                                                    
standard.   She   wondered   whether  there   could   be   a                                                                    
manipulation  to a  construction loan  to someone  who would                                                                    
not   otherwise  qualify.   Ms.   Moss   replied  that   the                                                                    
municipality would create the rules for the loans.                                                                              
9:51:46 AM                                                                                                                    
AT EASE                                                                                                                         
9:54:25 AM                                                                                                                    
9:54:29 AM                                                                                                                    
Co-Chair MacKinnon  noted that there  was a similar  bill in                                                                    
the previous  session, which included  a letter  dated March                                                                    
16,  2015. She  wondered  if  there was  a  letter from  the                                                                    
Alaska Bankers  Association on the current  legislation. Ms.                                                                    
Moss replied that  there was not yet a letter,  but they had                                                                    
met the week prior and anticipated sending a new letter.                                                                        
Senator Dunleavy  wondered whether the bill  put an existing                                                                    
lienholder  in a  lower position.  Ms. Moss  replied in  the                                                                    
affirmative.  She looked  at page  7, line  16, which  noted                                                                    
that the  mortgage holder was  required to approve  the loan                                                                    
before the loan  was issued. The value of  the investment of                                                                    
the loan-held property would increase.                                                                                          
Co-Chair  MacKinnon felt  that the  issue may  speak to  the                                                                    
credit  worthiness issue.  She remarked  that the  remaining                                                                    
consideration would  be related to the  maximum dollar value                                                                    
of a  loan. Ms.  Moss looked  at page 7,  line 3,  and noted                                                                    
that there had been appropriate  ratio between the amount of                                                                    
the assessment and the assessed value of the property.                                                                          
Co-Chair  MacKinnon   queried  an  appropriate   ratio,  and                                                                    
wondered  if that  was approved  by the  local municipality.                                                                    
Ms. Moss replied that it was approved by the municipality.                                                                      
Co-Chair MacKinnon felt  that there should be  work with the                                                                    
Alaska  Energy  Authority  (AEA)  to  streamline  some  best                                                                    
practices, rather  than a variety  of best  credit practices                                                                    
adopted individually by multiple municipalities.                                                                                
9:58:22 AM                                                                                                                    
GENE  THERRIAULT, DEPUTY  DIRECTOR, STATEWIDE  ENERGY POLICY                                                                    
DEVELOPMENT,   ALASKA   ENERGY  AUTHORITY,   DEPARTMENT   OF                                                                    
COMMERCE,  COMMUNITY  AND ECONOMIC  DEVELOPMENT,  introduced                                                                    
SEAN  SKALING,  DEPUTY   DIRECTOR,  ALTERNATIVE  ENERGY  AND                                                                    
ENERGY  EFFICIENCY, ALASKA  ENERGY AUTHORITY,  DEPARTMENT OF                                                                    
COMMERCE,   COMMUNITY   AND    ECONOMIC   DEVELOPMENT   (via                                                                    
teleconference),  discussed   the  presentation,  Commercial                                                                    
Property Assessed Clean Energy (C-PACE)" (copy on file).                                                                        
Mr.   Skaling  addressed   slide  2,   "Commercial  Property                                                                    
Assessed Clean Energy":                                                                                                         
     C-PACE is a financing mechanism for cost-effective                                                                         
     energy improvements to commercial building.                                                                                
     Energy improvement loans are repaid through a                                                                              
    separate, voluntary line on the property tax bill.                                                                          
Mr.  Skaling  looked  at  slide  3,  "C-PACE  Scenario."  He                                                                    
remarked  that AEA  had provided  partial reimbursement  for                                                                    
commercial energy audits to  commercial building owners, and                                                                    
many  took advantage  of that  program. He  stated that  the                                                                    
scenario  was typical  of the  businesses  that received  an                                                                    
energy audit.                                                                                                                   
10:03:27 AM                                                                                                                   
Senator  Micciche   stressed  that  the   four-year  payback                                                                    
challenged  the cash  flows of  a commercial  property owner                                                                    
and provided an appropriate ratio  between the amount of the                                                                    
assessment  and  the  assessed value  of  the  property.  He                                                                    
asserted that the bill did  not define an appropriate ratio.                                                                    
He  queried  a  definition  of  an  appropriate  ratio.  Mr.                                                                    
Skaling  replied  that  the   typical  investments  in  PACE                                                                    
programs in  the country  were all  cost-effective measures.                                                                    
The energy cost savings would pay back the loan period.                                                                         
Co-Chair   MacKinnon   stressed  that   Senator   Micciche's                                                                    
comments were a concern for the committee.                                                                                      
10:05:07 AM                                                                                                                   
Mr. Skaling looked at slide 4, "How C-PACE Works":                                                                              
     Long-term financing                                                                                                        
     Attractive loan terms                                                                                                      
     Less Risk                                                                                                                  
     Positive cash flow                                                                                                         
     Seamless transfer if building sold                                                                                         
     Repayment attached property                                                                                                
Mr.   Skaling   addressed    slide   5,   "C-PACE   Eligible                                                                    
     Energy efficiency                                                                                                          
          Heating/Cooling system                                                                                                
          Building envelope/insulation                                                                                          
Mr.   Skaling   addressed    slide   6,   "C-PACE   Eligible                                                                    
     Alternative energy                                                                                                         
          Heat pumps                                                                                                            
          Fuel switching with efficiency                                                                                        
Mr.  Skaling  looked at  slide  7,  "Cash Flow  from  Energy                                                                    
Improvements." He  explained that  the green was  the energy                                                                    
cost  that  the building  owner  was  paying. He  noted  the                                                                    
energy  efficiency  improvements,  and noted  a  roughly  30                                                                    
percent  savings in  the energy  costs of  the building.  He                                                                    
noted that, through  the savings, a loan could  be repaid as                                                                    
long as  the loan was  stretched out long enough  to provide                                                                    
positive cash  flow in  the yellow  area. He  explained that                                                                    
they were trying to achieve  a loan repayment that was cash-                                                                    
flow positive after the improvements.                                                                                           
Mr.  Skaling  highlighted  slide   8,  "PACE:  How  Loan  is                                                                    
Repaid."  The slide  showed how  the program  functioned. He                                                                    
noted the property  owner in the middle.  The property owner                                                                    
made  improvements to  the  building,  therefore hiring  the                                                                    
supplier community.  The funding was made  by the investors,                                                                    
banks, or  financial institutions.  The property  owner paid                                                                    
back the loans through a  voluntary line on the property tax                                                                    
payment to  the city  or local  government, which  then paid                                                                    
the investor.                                                                                                                   
Mr. Skaling addressed slide 9,  "33 States Enabled PACE." He                                                                    
stated that  Alaska's PACE program was  modeled after Texas,                                                                    
which  had continued  success. He  stated that  Texas had  a                                                                    
program  called,   "PACE  in  A  Box"   which  helped  Texas                                                                    
communities to quickly  establish uniformed programs between                                                                    
Co-Chair  MacKinnon  wondered  which states  originated  the                                                                    
program. Mr. Skaling deferred to Mr. Therriault.                                                                                
Mr. Therriault agreed to provide that information.                                                                              
10:11:39 AM                                                                                                                   
Co-Chair MacKinnon wanted to know  best practices on whether                                                                    
the  program   was  misused   by  commercial   buildings  in                                                                    
depressed areas. She  queried the unintentional consequences                                                                    
of the program. She wondered  if the bill could be improved.                                                                    
Mr.  Therriault  replied that  the  first  PACE program  was                                                                    
established in California in 2008.  He stated that there was                                                                    
advice from the nationwide group,  PACE Nation, who tried to                                                                    
pull information and education  from all the involved states                                                                    
to  determine the  best practices.  He felt  that the  abuse                                                                    
would drive default  rates, but the default  rates were less                                                                    
than one percent.                                                                                                               
Senator von  Imhof wondered whether there  were any programs                                                                    
that  were rescinded.  Mr. Therriault  replied that  was not                                                                    
aware of  any programs,  but agreed to  provide information.                                                                    
He stated that  there were some initiated  programs that did                                                                    
not see any uptake, and those programs were amended.                                                                            
Senator  von Imhof  noted that  Texas had  requested uniform                                                                    
rules to  apply to all  the municipalities, but  there would                                                                    
be flexibility  in each municipality under  the legislation.                                                                    
She queried  a better best practice.  Mr. Therriault replied                                                                    
that  the  language  was adopted  straight  from  the  Texas                                                                    
statute.  The  uniformity  was related  to  the  community's                                                                    
establishment of  the program, and how  it communicated with                                                                    
banks and businesses. It also  outlined a broad framework of                                                                    
the interworking of the program.                                                                                                
10:16:30 AM                                                                                                                   
Senator von Imhof assumed that  there would be an evaluation                                                                    
of the  loan-to-value, debt-to-equity ratio, ability  to pay                                                                    
credit, etc. She stressed that  there would be an assumption                                                                    
that  the municipality  had done  its own  due diligence  in                                                                    
providing the  loan. She wondered if  the municipality would                                                                    
be  in a  second  position. Mr.  Therriault  replied in  the                                                                    
affirmative.   The   PACE   repayment  obligation   was   an                                                                    
assessment   on  the   tax  bill.   All  property   tax  and                                                                    
assessments were superior liens to mortgages.                                                                                   
Senator von Imhof surmised that  no signature meant no deal.                                                                    
Mr. Therriault agreed.                                                                                                          
Senator  Micciche noted  that line  2  said "obtain  written                                                                    
consent  from  the   holder  of  a  mortgage   lien  on  the                                                                    
property." He noted  that there could be two  lenders on one                                                                    
piece of property,  and the ratio could be  satisfied by one                                                                    
lender. He  wondered if there  should be  clarification that                                                                    
each  holder of  a mortgage  must approve.  He felt  that it                                                                    
could put the primary lender  as a secondary payee, and they                                                                    
may increase the loan with  a secondary lender. He wanted to                                                                    
ensure than each mortgage holder have approval.                                                                                 
Co-Chair   MacKinnon   encouraged    Senator   Micciche   to                                                                    
communicate his concerns with the sponsor of the bill.                                                                          
Senator  Micciche  understood  that  there  was  recommended                                                                    
ratio  recommended by  the PACE  program.  He stressed  that                                                                    
there were energy policies that  were often based on hope or                                                                    
political rhetoric  rather than  established science  on the                                                                    
proven practices to improve efficiencies.                                                                                       
Co-Chair MacKinnon  stressed that  the case  previously made                                                                    
sense  because  of  the  previous  high  energy  costs.  She                                                                    
stressed that Fairbanks had air  quality issues, whether the                                                                    
prices  were high  or  not. She  stressed  that the  program                                                                    
could  benefit the  Interior for  other reasons  than costs.                                                                    
She wondered  how active  the programs  were in  the country                                                                    
now that energy prices were decreased.                                                                                          
10:21:19 AM                                                                                                                   
Senator  Olson   wondered  how  the  communities   who  were                                                                    
suffering  with a  debt  load would  take  advantage of  the                                                                    
program.  He  remarked  that  Galena  was  facing  financial                                                                    
strain,  and  wondered  whether that  community  could  take                                                                    
advantage of  the PACE program. Mr.  Therriault replied that                                                                    
the program would  not be available in  Galena. He explained                                                                    
that  the legislation  allowed for  a local  government that                                                                    
levied a property tax to use  the bill to collect to repay a                                                                    
PACE loan.  The statute  would apply  across the  state, but                                                                    
only  be available  to those  municipalities  that levied  a                                                                    
property tax.                                                                                                                   
Senator  Olson wondered  if a  community  with great  strain                                                                    
would be able  to use the program.  Mr. Therriault responded                                                                    
that  the mechanism  allowed for  the community  to use  the                                                                    
existing relationship  with the property owner  to collect a                                                                    
Co-Chair MacKinnon  noted that  there were  approximately 11                                                                    
or 12  of the 33  states did not have  programs established,                                                                    
but  had passed  enabled legislation.  She noted  that there                                                                    
were  even more.  She wondered  if the  comparison to  Texas                                                                    
only showed  one program. Mr. Therriault  replied that there                                                                    
were  12  municipalities  in Texas  who  had  initiated  the                                                                    
program under the refresh of the program.                                                                                       
Co-Chair MacKinnon surmised that there were many states in                                                                      
the starting stages of the program.                                                                                             
10:26:07 AM                                                                                                                   
Mr. Skaling looked at slide 10, "Time to Add Alaska to the                                                                      
Map." He stressed that there was no cost to the state and                                                                       
the program was voluntary.                                                                                                      
Mr. Skaling discussed slide 11, "C-PACE is a Win-Win-Win":                                                                      
     Property owners                                                                                                            
     Contractor, vendors                                                                                                        
     Energy auditors                                                                                                            
     Alaska economy                                                                                                             
Mr. Skaling highlighted slide 12, "Easy Win for Alaska":                                                                        
     Fully vetted last session                                                                                                  
     Strong support                                                                                                             
     Completely voluntary                                                                                                       
     No cost to state                                                                                                           
Mr. Therriault addressed slide 13, "Financing Options":                                                                         
     Bank loan                                                                                                                  
     Muni revenue bond                                                                                                          
     Energy Efficiency and Conservation Loan Program                                                                            
     Rural Energy Savings Program (RESP)                                                                                        
     Other federal sources                                                                                                      
10:33:24 AM                                                                                                                   
Senator  Micciche  remarked  that  he  would  examine  other                                                                    
legislation, and compare the other programs in the country.                                                                     
Co-Chair  MacKinnon  noted  that   the  bill  would  benefit                                                                    
private sector ownership. Mr. Therriault agreed.                                                                                
Co-Chair  MacKinnon announced  that  school districts  could                                                                    
not qualify,  because they were  not paying  property taxes.                                                                    
Mr. Therriault agreed.                                                                                                          
Co-Chair  MacKinnon  wondered  whether school  districts  or                                                                    
other  government  owned  buildings could  qualify  for  the                                                                    
Energy Efficiency  and Conservation Loan Program  or for the                                                                    
Rural Energy  Savings program.  Mr. Therriault  replied that                                                                    
he was not sure. He  explained that the funds were available                                                                    
to help with efficiency.                                                                                                        
Co-Chair MacKinnon noted that  there were schools in climate                                                                    
regions that  were suffering from lack  of weatherization or                                                                    
energy  efficient  opportunities.   She  was  curious  about                                                                    
programs  that schools,  or  other government  organizations                                                                    
could use to lower the energy use and consumption.                                                                              
Senator von  Imhof wondered who  paid for and  conducted the                                                                    
energy  audits. Mr.  Therriault  replied  that the  customer                                                                    
would pay for that expense, but  it could be rolled into the                                                                    
Senator Olson  stressed that the  auditors were  the general                                                                    
raters in  the winterization program, so  those people could                                                                    
be  qualified  to  conduct the  assessment.  Mr.  Therriault                                                                    
Mr.  Skaling   furthered  that  the   commercial  properties                                                                    
required an additional certification for the auditors.                                                                          
10:37:34 AM                                                                                                                   
CHRIS  ROSE,  EXECUTIVE  DIRECTOR, RENEWABLE  ENERGY  ALASKA                                                                    
PROJECT, SUTTON  (via teleconference),  spoke in  support of                                                                    
the bill.                                                                                                                       
Co-Chair MacKinnon wondered whether  they both served on the                                                                    
Alaska   Energy   Advisory.   Mr.  Rose   replied   in   the                                                                    
BRITTANY SMART, FAIRBANKS NORTH STAR BOROUGH, FAIRBANKS                                                                         
(via teleconference), testified in support of the bill.                                                                         
Co-Chair MacKinnon CLOSED public testimony.                                                                                     
Vice-Chair Bishop discussed the fiscal note.                                                                                    
Co-Chair MacKinnon announced that amendments were due by                                                                        
5pm the following day. She discussed the following day's                                                                        
SB 39 was HEARD and HELD in committee for further                                                                               
10:44:04 AM                                                                                                                   
The meeting was adjourned at 10:44 a.m.                                                                                         

Document Name Date/Time Subjects
SB 30 PPT to SFIN 02.06.17.pdf SFIN 2/6/2017 9:00:00 AM
SB 30
SB 39 C-PACE Senate Finance 02.06.17.pdf SFIN 2/6/2017 9:00:00 AM
SB 39
SB 39 Sectional for CRA CS.pdf SFIN 2/6/2017 9:00:00 AM
SB 39