SB 243-GEOTHERMAL RESOURCE:ROYALTY/PERMIT/FEE      4:06:20 PM CHAIR OLSON announced that the next order of business would be CS FOR SENATE BILL NO. 243(FIN), "An Act relating to geothermal resources; relating to the royalty obligation for geothermal resources; transferring from the Department of Natural Resources to the Alaska Oil and Gas Conservation Commission authority over permitting and inspection of geothermal wells; providing for a regulatory cost charge for geothermal wells; and providing for an effective date." [Before the committee was HCS CSSB 243(RES).] 4:06:26 PM MIKE PAWLOWSKI, Staff, Senator Lesil McGuire, Alaska State Legislature, stated that SB 243 really "opens the door for commercial development of geothermal energy in Alaska and puts that development under a regulatory regime that exists in every other state that is an oil and gas producing region. Under current law, geothermal resources would pay a 10 to 15 percent royalty rate. When the state originally considered the appropriate rate, the sponsor contemplated the rate should be zero since the product is hot water, is not exported, and any royalty would be passed on to consumers in the form of higher electric rates. However, after working with Department of Natural Resources (DNR), the sponsor agreed that the leasing of land for geothermal resource actually is the equivalent of a "property right" so some form of royalty made sense. MR. PAWLOWSKI referred to page 1 line 12 and to page 2, line 8, which refers to the proposed royalty rate for geothermal in Alaska on state land of 1.5 percent on the gross value of production, during the first ten years, and 3.5 percent following those ten years. This royalty rate is the same as on federal land, he noted. The goal was to achieve a reasonable rate that comports with the federal land and does not create any real competition. A 10 to 15 percent royalty rate was written 20 to 30 years ago, and was "picking a number out of thin air, not knowing what makes geothermal economic." MR. PAWLOWSKI explained that the other sections of the bill divide the authority between the Alaska Oil and Gas Conservation Commission (AOGCC) and the Department of Natural Resources (DNR) to regulate geothermal resources. He referred to page 2, lines 9-15, to Section 3 to the commission's authority over geothermal wells, which read: "The commission has jurisdiction under this chapter over geothermal wells to prevent waste, to protect correlative rights, and to ensure public safety." He stated that this language provides the regulation of the drilling, exploration, and actual use of the resource. The DNR would have control over the leasing, the unitization, and land issues that DNR typically performs with oil and gas matters. The geothermal system would be very similar to oil and gas management, he stated. This change should save the state money since DNR does not have in-house expertise to carry out what he characterized as an outdated regulatory system. More importantly, looking at the map that shows state land ownership, under current law DNR has authority over state land but there might be geothermal development that is not on state land. He explained that only the AOGCC can regulate to protect the public safety on all land outside state lands. That change represents the critical piece to ensure safe development of a renewable energy that actually pays a royalty to the treasury. He paraphrased from the sponsor statement, which read [original punctuation provided]: Electric power generated from geothermal sources is a clean, sustainable, and environmentally friendly alternative to fossil fuels. It can play a major part in meeting the future energy needs of the railbelt and other regions. The problem for any company seeking to build a commercial grade geothermal plant in Alaska is high capital costs that run 25-50 percent higher than the Lower-48. Operational costs could run 100 percent higher than the rest of the country. Senate Bill 243 assists companies in developing geothermal resources discovered in commercial quantities on state land by lifting the 10 to 15 percent royalty payment obligation currently in state statute. SB 243 is a common sense effort to make geothermal power projects economically viable and produce more affordable and reliable electric power for homes and businesses. Geothermal electrical generation has been used for decades all over the world and creates "green" jobs. Alaska can now join other states and nations using geothermal sources to create a safe and secure source of electricity. I urge all my colleagues to support SB 243 and move our state towards a secure energy future. 4:10:05 PM REPRESENTATIVE T. WILSON asked whether this bill regulates geothermal resources on private property. MR. PAWLOWSKI answered that the regulation on private land would be subject to AOGCC. It would not apply to the royalty sections since the state does not own the subsurface rights. 4:11:06 PM MR. PAWLOWSKI explained the House Resources Standing Committee made a change that set an important policy provision. He referred to page 7, to proposed Section 17, and the definition of commercial use. He read: "(1) commercial use" means the sale of heat or power to a third party;" which he said does not affect personal ground source heat pumps that people may use for their homes or for small scale geothermal energy use for personal use." 4:12:02 PM REPRESENTATIVE HOLMES related that she did not think the change creates any problem, but if somewhere "down the line" the resources are being deleted, the problem could be dealt with at that time. She thought this change represented a reasonable step at this point. 4:12:42 PM REPRESENTATIVE T. WILSON asked if she has a business on her property and uses the geothermal resource whether that use would be considered personal use. MR. PAWLOWSKI answered yes, that since the person would be using the geothermal resource for his/her own use and is not selling the heat or power that the use would not be considered a commercial use of geothermal energy. 4:14:00 PM CATHY P. FORESTER, Commissioner, Alaska Oil & Gas Conservation Commission (AOGCC), Department of Administration, stated that the AOGCC strongly supports SB 243. She explained that the bill would transfer from Department of Natural Resources (DNR) to the AOGCC a function that is more appropriately handled by the AOGCC. She offered her belief that the DNR also supports this transfer. 4:14:41 PM PAUL THOMSEN, Director, Public Policy and Business Development, ORMAT Technologies, Inc., stated that ORMAT was delighted to win the leases at Mt. Spur and is excited to develop a large scale commercial geothermal project near Anchorage. This bill will move us forward in developing that project and reducing the royalties to the federal level brings the royalty taxes on par to allow projects to compete with resources in the Lower 48. Additionally, SB 243 will help "pave the way" to develop additional geothermal resources in Alaska. He stated that ORMAT Technologies strongly supports SB 243. He commented on the previous discussion on commercial applications. This bill reduces an existing royalty rate of 10 percent to the federal level. He offered that people would pay a 10 percent royalty if the project is defined as commercial. He indicated that in the event the use is not defined as commercial, the owner could take comfort that he/she will be taken care of with Senator McGuire's amendment that was previously adopted. 4:16:23 PM KEVIN BANKS, Acting Director, Central Office, Division of Oil & Gas, Department of Natural Resources (DNR), explained that DNR has been "saddled" with the responsibilities of managing geothermal land. This bill surgically carves out of the DNR statutes the ones that are more appropriate to the AOGCC. The bill does not add any further regulation, but would provide for safety and correlative rights and conservation of the resource. This bill also creates a relationship with the AOGCC and the DNR that is similar to what the DNR shares in oil and gas matters. He offered DNR's support for this bill. 4:17:46 PM CHAIR OLSON, after first determining no one else wished to testify, closed public testimony on SB 243. 4:18:13 PM REPRESENTATIVE T. WILSON moved to report the HCS CSSB 243(RES) out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, HCS CSSB 234(RES) was reported from the House Labor and Commerce Standing Committee.