HOUSE BILL NO. 290 An Act relating to stranded gas pipeline carriers and to the intrastate regulation by the Regulatory Commission of Alaska of pipelines and pipeline facilities of stranded gas pipeline carriers. LORALI MEIER, STAFF, REPRESENTATIVE BEVERLY MASEK, stated that before a North Slope natural gas pipeline project can proceed, certain amendments to existing State statutes would be required. These changes are intended to: ? 1) Apply to all potential North Slope natural gas pipeline projects, ? 2) Clarify respective State and federal jurisdictions in regulating such projects, ? 3) Be complementary to a non-discriminatory federal process which will apply to any export volumes of North Slope natural gas, ? 4) Provide for local (in State) gas transportation and sales; and ? 5) Provide needed exemption from public utility designation for a North Slope natural gas pipeline project. Ms. Meier noted that HB 290 would amend the Pipeline Act (AS 42.06) to define a North Slope natural gas pipeline and would clarify that the Regulatory Commission of Alaska's (RCA) authority in regulating a North Slope natural gas pipeline, extends only to the intrastate transportation of gas through such a system, so as to define a fair, predictable and timely process to identify and dedicate sufficient initial capacity in a North Slope natural gas pipeline. Also it would establish the criteria for needed pipeline system expansions over the life of a North Slope natural gas pipeline system to accommodate increased demand for in State gas supplies. Ms. Meier pointed out that HB 290 would amend the Public Utilities Act (AS 42.05) to clarify that North Slope natural gas pipeline systems are exempt from the requirement of operating as a public utility. The bill would also amend the right-of-way Leasing Act (AS 38.35) to limit the requirement of common carriage for North Slope natural gas pipeline systems to the transportation of intrastate gas volumes. Ms. Meier stated that HB 290 would define the types of intrastate transportation services that would be available in a North Slope natural gas pipeline system. The legislation will provide that the North Slope natural gas pipeline carrier may charge separate rates for those services. Additionally, they would charge a reservation fee for reserving capacity in a North Slope natural gas pipeline system. Ms. Meier concluded that collectively, these changes are intended to provide greater certainty and predictability in the regulation of North Slope natural gas pipeline systems. The increased certainty would enhance the ability of gas export project sponsors to market Alaska's North Slope natural gas reserves, to compete more effectively with alternative export projects and to attract the large investments required to construct and operate the pipeline and related facilities. In response to Co-Chair Mulder, Ms. Meier explained that the proposed legislation was the "second phase" of the Stranded Gas Act. She added that the Stranded Gas Act established a regulatory framework for a natural gas pipeline system. It applies to any project as well but is not project specific. Representative J. Davies asked the significance of why the pipeline would not be operated as a private carrier but instead it would be operated as a common carrier. Ms. Meier replied that any project sponsor would not want to distribute natural gas to a residential area. They would want to leave that up to the Fairbanks Natural Gas Industry. The local distribution companies will act as public utilities. JIM EASON, REPRESENTATIVE, ANS LNG SPONSOR GROUP, ANCHORAGE, spoke to the group's membership. He reiterated that the intent of the bill is straightforward and was written to provide clarity of federal and State regulations for a pipeline. Additionally, it is intended that the regulatory commission would regulate the intrastate portion, the part in the State available for use. The Department of Energy would regulate the export portion. Mr. Eason clarified that the legislation provides for a system to establish how much gas would need to be moved to insure that such a project would be creating a system large enough to be able to compete in projected demand for instate use. Mr. Eason emphasized that the most important purpose of the legislation is to provide certainty to the market and to insure that the volume of gas needed to contract will be available for a long period of time. He added that it is important to insure that the need to guarantee the gas in State is accommodated, which could be accomplished through the oversight of the regulatory commission. KEN BOYD, (TESTIFIED VIA TELECONFERENCE), DIRECTOR, DIVISON OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES, offered to answer questions of the Committee. He noted that the bill is outside the Division of Oil and Gas and involves the RCA and the State Pipeline Coordinators Office. Representative J. Davies asked about the volume limit. Mr. Eason responded that the regulatory commission would approve the construction of a line larger than any previously constructed before the commission. He believed that the cost could be assessed fairly. The intent of the language would insure that the pipeline sponsor would not be required to build a line. Representative J. Davies questioned the language "substantiated by written commitments and contract" previously mentioned. He asked if that would include more than the sponsor group. Ms. Eason did not believe that it would specifically include the sponsor and its contracts, as it would be for export purposes. The intent is that the regulatory commission could monitor the in state use. It is important that there a system be in place, which could expand the capacity as in State demand grows. It is critical to have some idea of the expected demand in the State. ROGER MARKS, (TESTIFIED VIA TELECONFERENCE), DEPARTMENT OF REVENUE, ANCHORAGE, noted that he had been coordinating review of the bill for the Administration. The Administration endorses the bill except for one problem on the tariff structure. He noted that Nan Thompson was on line to address that concern. JERRY MCCUTCHEON, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE, stated that there is no such thing as stranded gas as associated with an oil reservoir. He noted that there were only two that he knew about which could qualify for stranded gas. He did not believe that the proposal would be beneficial to the residents of the State. He emphasized that the gas line would cost half of the actual recoverable oil. NAN THOMPSON, (TESTIFIED VIA TELECONFERENCE), REGULATORY COMMISSION OF ALASKA, ANCHORAGE, stated that the interest of the Regulatory Commission would be to protect the interest of potential instate users. She noted that from her perspective, the bill is "almost" there, with only one more issue remaining. That issue is the tariffing methodology. The issue has been raised but has not been discussed thoroughly enough for everyone to understand the implications of it. She asked to assist in that endeavor. Ms. Thompson noted that Co-Chair Therriault had asked for a list of items that would be excluded from a utility pipeline tariff. There are Alaska Public Utility Commission (APUC) decisions excluding the following types of expenses from utility rates, but no comparable decision excluding them from pipeline rates: ? Public relations costs ? Lobbying expenses ? Charitable contributions ? Association dues ? Extraordinary management compensation ? Research and development costs ? Acquisition adjustments ? Pensions and employee benefits Ms. Thompson noted that only imagination and conscience limit the types of expenses, which a pipeline owner could ask be included in the tariff. The sponsor group correctly noted that RCA would have the authority to exclude these expenses when they are presented for review. However, RCA could not exclude them with the assurance that the pipeline owner would not appeal. An appeal could mean time delays and uncertainty in the business environment and additional legal expenses for RCA and carriers. The carriers would be entitled to argue that those legal expenses should be included in their rates. Ms. Thompson noted that the difference between the utility and pipeline tariff methodology, and how it affects RCA's decision-making process, is well-ar1iculated in a 1992 pipeline decision which states that: "The methodology the Commission uses to determine the value of the property of public utilities is set by statute, A.S. 42.05.441 (b) reads as follows: `In determining the value for rate-making purposes of public utility property used and useful in rendering service to the public, the commission shall be guided by the acquisition cost, or, if lower, the original cost of the property to the person first devoting it to public service, less accrued depreciation. plus materials and supplies and a reasonable allowance for cash working capital when required.' There is no similar provision under AS 42.06. Thus, the Commission is free to determine the appropriate way to value pipeline property for the purposes of ratemaking." Ms. Thompson noted that the Alaska Public Utilities Commission (APUC) went on, in that forty-page opinion, to discuss the options and arguments of the parties and make a decision. RCA can determine what is just and reasonable, but the lack of case law in this area to guide the RCA and the pipeline owners creates room for arguments. She noted that arguments mean delay and litigation expenses and a less predictable environment for instate shippers. The RCA would generally follow its utility tariff decisions, except where the Federal Energy Regulatory Commission (FERC), the federal agency with pipeline jurisdiction, has a different rule. Thus, a prospective in-state shipper would have to reference federal case law to predict the likely outcome of a pipeline tariff case. Ms. Thompson advised that the APUC has set rates for only two oil pipelines in this State. The Kenai Pipeline case cited above was one, and Cook Inlet Pipeline was the other. Both cases were extensively litigated. The APUC has set tariffs for all other oil pipelines based on settlements between the affected parties. Ms. Thompson concluded that APUC has set rates for only one gas pipeline under the pipeline statute. The affected parties agreed to those rates as part of a comprehensive settlement package that has no predetermined value. All other gas pipeline tariffs have been set using a utility tariff methodology. Co-Chair Therriault asked for clarification of what was involved in the various tariff methodologies. Ms. Thompson stated that in the utility statute #381, lists all the exclusions and the exceptions to it. She indicated that the other differences have been derived from decision-making laws. She admitted that this is difficult to articulate and offered to provide it in writing to the members. Ms. Thompson pointed out that if there were a clear rule, it would be easier to predict the outcome. She offered to provide a comprehensive list. Co-Chair Therriault noted that the interest is that the tariff gets applied against the value of the resource or passed on to the users. Ms. Thompson commented that ultimately the impact of this would be, that if the utilities have to pay less, those lower costs would be passed on to their consumers. Mr. Eason responded to comments made by the previous speakers. He observed that the focus of testimony had been the issue of lobbying and regulatory costs. Mr. Eason believed, based on prior conversations, that case law exists dealing with their handling of utility tariff issues. He added that concerns of costs were directed where the regulatory commissioner was dealing with "settled" tariffs. Mr. Eason stated that the rate making involved has been a different process than he would have envisioned. Mr. Eason noted that other pipeline disputes have been resolved through settlement to determine what would and would not be allowed as a tariff. Mr. Eason advised that Ang Lng had accurately reflected their understanding of the Commissioner's authority. He did not foresee the likelihood of disputes coming at that point. The decisions of permitting and certificating, and the terms would be addressed by the Commission. Mr. Eason added that Ang Lng, consequently, does not see the same urgency to establish the ratemaking methodology at this time. Mr. Eason stated that they are opposed to enclosing a utility rate making methodology. He noted that under either statute, the chairman has broad authority to allow or disallow changes. He emphasized that the proposed legislation does not allow anything to happen which the regulatory commissioner can not portray. HB 290 would foreclose any discussion of rates on return and methodology. Mr. Eason commented that the Commissioner pointed out that there are existing pipelines in the State that are regulated under the utilities act. He noted that all of those pipelines requested that inclusion. None of them were required to do that. He reiterated that any project developed to move North Slope natural gas, would be the only pipeline required to file tariffs under the proposed system. Co-Chair Therriault asked Ms. Thompson to respond to the "just and reasonable" reference which would preclude many unjustified expenses. Ms. Thompson agreed with Mr. Eason that all of the current pipelines using the utility tariff making methodology have requested that treatment. She thought that Mr. Eason was suggesting the opposite of her argument which is that the pipeline owners do stand to have less of a recovery. Under either tariffing methodology, the commission is responsible for guaranteeing that the rates are just and reasonable. They would get a fair rate of return under either methodology. It is more likely, because of the uncertainty in the legal field that they stand a chance to make even a little more under a pipeline methodology. She agreed that was something that RCA could control and that the public would have the opportunity to comment. Ms. Thompson noted that her concern was with the potential in state users who are trying to decide even before they see the tariff, if they want to participate in the project. The way that the bill is written, when the pipeline is being designed, the utilities would have to make a decision on how much gas they would want to use in the next several years to insure an adequate capacity to accommodate that. Ms. Thompson stated that it would be easier to make that business decision if there were some certainty in what the shipping rates were going to be. Ms. Thompson continued, the in-state shipper will have a better idea of what they are going to pay in order to make a better business decision regarding whether or not they will want to participate. Ms. Thompson noted that Mr. Eason's initial comments were regarding the settlement. Most of the pipeline tariffs in the State have been settled between the parties. She believed that a settlement would not be likely to occur in the case proposed by Mr. Eason. The concern is that when there are a number of potential users, that group would be too big to make it likely to reach a settlement. The impact is that there is not much case law or precedence in this State regarding what is an acceptable settlement. She stated that it would be easier to make the decision if the shipping rates were known. Representative G. Davis asked if the proposed amendment would address Ms. Thompson's concern. Ms. Thompson replied that the change required to change a utility methodology so to promote the in-state use of gas should be left to the in- State users. Mr. Eason advised that Chairman Thompson is fully committed to the public's interest. He believed that her view was that the public interest is advanced by the utility rate making methodology. (TAPE CHANGE HFC OO - 81, SIDE 1) Mr. Eason noted that they both believe that the majority of the pipeline tariffs settlements are established by settlement. The concern voiced by Ms. Thompson is that there will not be a settlement. Mr. Eason, however, disagreed. He advised that a small group is undertaking this task and that they would want to "sit down and settle". He observed that Mr. Eason spoke to promoting the use of in- State gas. He noted that there have been lengthy discussions with in-State users of gas. In the process of designing the language to determine the threshold, those users suggested that fears expressed by Ms. Thompson were premature and inappropriate. Co-Chair Therriault stated that he wants the gas-line to be developed and that he wants the best price possible for his constituents without jeopardizing the pipeline. He noted that he sympathized with what the price to the consumer would be. Mr. Eason emphasized that the difficulty is that no one knows the answers. Millions of dollars are being spent with uncertainty of whether a market exists and whether or not the cost can be cut significantly to maintain the safety and integrity of the pipeline. Within that mix lays are all the concerns regarding the future prices of gas and he recognized that everyone has valid concerns. Mr. Eason noted that the issue is that they can not define the sensitivities on the fiscal side. Those discussions will happen in public settings when the facts and numbers are on the table. He asked if it made sense to have a pipeline act and a utilities act if enough methodology is not available to use it. The Legislature decided to have both and to have provisions for either party to present their arguments. Mr. Eason reiterated that this would be the first time that a project would be required to file a rate- making methodology. He acknowledged that it would be a large policy step; the final implications are not yet known. This project would be regulated under the pipeline act and tariffed under the other. The situation will be and will establish a one-time deal. Co-Chair Therriault stated that what is allowed under "just and reasonable" would provide more certainty for the in- State user and for Ang Lng. Ms. Eason disagreed. He stated that the commission has the authority to specify what would be disallowed, and could include items that have already been established under existing case law. He noted that Ms. Thompson's concern is that there is and has been litigation over whether or not they have the authority to exclude certain items after they have already been settled. Mr. Eason believed that was a very different scenario than what this case presents. Ms. Thompson countered that the statute states that both the utility and the pipeline tariffing statutes that the Commission will approve just and reasonable rates. The utility has a couple of specific exclusions. There is case law, which defines what is reasonable and just, and the treatment in certain kinds of expenses which are allowable. Ms. Thompson stated that when a party has an economic interest, there is not clear precedent case law, then the lawyers will have a difficult time proceeding with that case. It could end up in an appeal which would then have to go to the Superior Court. She noted that she was troubled that in those situations, the prospective in-State users would not know what they would be required to pay. Co-Chair Therriault requested that Ms. Thompson provide a list of those items which are not allowed, under the utility method. He advised that HB 290 would be HELD in Committee. He advised that there was an amendment, 1-LS1269\K.4, Chenoweth, 3/24/00, in member's packets that addressed the use of the resource. [Copy on File]. Mr. Eason stated that he had concern with the title change recommended by the amendment. Mr. Boyd added that he shared Mr. Eason's concern with the title change in the amendment. He believed that the amendment would place local need above the projected revenue need of the State as a whole. HB 290 was HELD in Committee for further consideration.