HOUSE BILL NO. 236 "An Act relating to the contracting and financing authority of the Alaska Industrial Development and Export Authority; authorizing the authority to issue bonds in a principal amount not to exceed $76,000,000 to finance the acquisition, design, construction, inventory, and operation of natural gas, propane air, or manufactured gas public utility facilities; and providing for an effective date." RANDY RUARO, STAFF, REPRESENTATIVE WILLIAMS testified in support of the legislation. He explained that the legislation would provide the legislative approval necessary for the Alaska Industrial Development and Export Authority (AIDEA) to review the Southeast and Gulf of Alaska gas project for bond funding, required under AS 44.88.095(g) for projects over $10 million dollars. Approval does not mean that the project would be funded as there are other statutory requirements. There is a zero fiscal note. Co-Chair Williams noted that it was not his intention to move the bill from committee at that time. PAUL RUSANOWSKI, SENIOR VICE PRESIDENT OPERATIONS, ALASKA INTRASTATE GAS COMPANY, ANCHORAGE spoke in support of HB 236. He noted that the project would bring utility gas utility service to Southeast and Gulf of Alaska communities. The project is based on the production, transportation and storage of liquid natural gas, liquid petroleum gas and manufactured gases. The company is approved by the Alaska Public Utilities Commission in 17 communities and is involved in long-term operations and maintenance of local gas distribution systems. They contract with communities to provide gas supplies and marine transportation. The communities involved include: 4 in the Gulf of Alaska and 13 in Southeast Alaska. The legislation would allow them to expand to include five more communities in Southeast Alaska. Juneau, Ketchikan, Sitka and Kodiak would be the largest communities served. He projected a residential load of 5 billion cubic feet annually (for all four communities combined) within 5 years of startup. He estimated that an additional 3.7 billion cubic feet of commercial and industrial loads would be available. He stated that there would be 10 to 12 billion cubic feet annually, about 10 years out in the project. Mr. Rusanowski provided members with a handout of slides that were projected during his presentation(copy on file). He reviewed the slides. He noted that gases move through pipes to a processing facility and are stored and transported. They are then re-injected into storage fields and stored as liquids. Supplies would come from Prince Rupert, which is the closest point. Mr. reviewed major components of the project: acquisition of gas supplies, transportation, storage and distribution. Gas would come from Northern British Columbia and Southern Yukon Alberta and Prince Rupert Canada have active gas fields. Marine transportation involves three different modes: a barge (1 million gallon capacity), railcar aqua train (180,000 and 500,000 existing capacity) and existing small bulk gas carriers (500,000 to 2 million capacity). Representative Croft questioned what would happen in the event of a collision or spill of a liquefied gases. Mr. Rusanowski explained that they would float out on the water and vaporize. Some would dissolve in the water but most would be vaporized. There would not be an expulsion. The double haul is designed to prevent damage to the internal tanks. It is easier to repair the hull than to repair the tanks. The purpose is not containment. Mr. Rusanowski showed slides of existing facilities (copy on file.) He stressed that the residential and small business service is their focus. Residential service is expected at $7.25 dollars per cubic feet and $7.95 dollars monthly service charge. He compared the proposed rate with other states. The rate would be about .40 cents above the national average, but competitive to Northeastern states. Once gas comes to the communities operations and management costs would be under the control of the company. Debt service is 30 percent. Fuel represents 62 percent of the cost structure and transportation represents 32 percent. He emphasized that efficiency would impact costs. Wholesale liquid petroleum prices from Canada during the last 4 years have ranged from .20 to .40 cents. He estimated their cost at .25 to .30 cents a gallon. Representative Croft noted that prices have increased in the last years. Mr. Rusanowski agreed that prices had gone up, but explained that the higher prices are not holding. He explained that natural gas is a single carbon methane molecular. Liquid petroleum gases are gases at near normal temperature such as ethane, propane, and butanes. He explained that liquid petroleum gases are now being put into the natural gas stream in pipelines throughout North America. The natural gas stream had been previously returned to oilfields to maintain pressure or used to create specialty products such as bottled propane. Propane stores well and indefinitely. All the gases that go into the pipeline are indistinguishable at the burner tip. Each one provides a different amount of energy. Gases are balanced to provide a stable energy content. Mr. Rusanowski compared petroleum gases to crude oil. He noted that their prices are linked. When there are peaks in crude oil prices, petroleum gases do not follow as sharply. Mr. Rusanowski referred to community energy surveys. He noted that the annual energy consumption in Southeast Alaska is 165 million BTU per year. The average cost of fuel oil in rural Southeast Alaska was $1.74 dollars per gallon in 1999. The average annual cost of fuel is $2,700 dollars a year in small communities. TAPE HFC 01 - 85, Side B  Mr. Rusanowski discussed savings for rural homeowners. He estimated that there would be a 15 to 40 percent savings. Those with the highest electric rates have the best savings. Representative John Davies questioned what assumptions were made regarding amortization of infrastructure costs. Mr. Rusanowski noted that those cost were not included. An incentive program was built in to allow cost recovery of those modifications in 5 years or less. Mr. Rusanowski reviewed a slide that compared the gas and electric cost to operate a clothes dryer in Anchorage and their service area (page 7 of handout). He concluded that the stable pricing structure makes it advantageous to convert to gas. Mr. Rusanowski explained that their estimates use a 9-year build out scenario. He added that they expect the actual build out to be only 6 to 7 years. He anticipated a bump in the fourth year as the first three communities come on line and then steady growth from that point. Mr. Rusanowski discussed marketing incentives, which would make it in the interest of the public to convert. Juneau, Ketchikan and Sitka would be the first communities to receive services. Klawock and Craig would most likely be the next two served. Representative Croft noted that Angoon and Kake have the lowest percent benefit and questioned why they would be among the first served. Mr. Rusanowski noted that the scenario is based on transportation logistics. The plan takes advantage of the fact that the route would go by these communities, because of the size they could be engineered quickly. Savings would be less in these smaller communities due to the cost for waterfront storage and send out facilities. The infrastructure is the same in every community. There is a small population to serve, but a large volume of gas still needs to be available. There are fewer people to amortize against. Mr. Rusanowski noted that there would be 200 or more jobs created during construction. There would be 15 permanent full time jobs created in Juneau, another 35 jobs throughout other areas of Southeast Alaska and 50 or more related secondary industry jobs. Mr. Rusanowski observed that there would be an equity investment of $11.5 million dollars and loans of $45 million dollars. There would be internally generated revenues of $13 million dollars. Infrastructure costs in the communities would be $45 million dollars. Mr. Rusanowski pointed out that HB 239 would provide legislative approval for a utility project of over $10 million dollars and authorizes a bond limit of $76 million dollars. There would be a sunset date of July 1, 2006 for issuance of bonds. This would allow focus on the development and finance program in AIDEA, which would target development, ownership and operation of facilities like road, ports and utilities. These projects would need to be essential to the economic well being of the area, financially feasible and supported by local communities. The project would move into the due diligence and economic feasibility review with AIDEA when the legislation is passed. Representative Whitaker asked if there is a downside to the project. Mr. Rusanowski did not think there would be a downside to introducing gas utilities to the communities. The service would enhance infrastructure and provide different opportunities. Some employees could be displaced as the use of fuel oil is decreased but there would be an increase in gas related jobs. He maintained that communities would be more attractive for development and acknowledged that some could view this negatively. Gas provides a clean fuel source with environmental benefits. He discussed the benefits, such as a reduction in pollution. Representative Whitaker concluded that the project would bring economic growth and opportunity. He questioned the gas source. Mr. Rusanowski noted that they have agreements with Amoco Canada (the largest holder of gas reserves in Canada). He stressed that Alaskan gas would be used when available and Cook Inlet gas would be used if additional reserves are discovered. Mr. Rusanowski noted that average household consumption is 165 million BTU per year. The American Gas Association estimates 170 million BTU per year. Representative Whitaker questioned if the high price of gas in the market was an anomaly and what factors could lower the price. Mr. Rusanowski pointed out that gas and oil have generally been coupled. They were decoupled during the last excursion in prices. This has only happened one other time in the past 30 - 40 years. Wholesale gas prices rose from $2.50 - $3.50 per million BTU's to $13 dollars. The federal government cost projection is $4.00 dollars by next year. The current cost is $5.00 dollars per BTU. There has been an increase in gas exploration. Representative Whitaker disagreed that there would be a significant reduction of the value of gas. Supply is still out stripping demand. The futures market indicates that the prices will remain high. He expressed support for the project. Mr. Rusanowski noted that the competition is with fuel oil prices. As long as fuel oil prices remain high (they are currently at $28 dollars) it doesn't matter what gas is. Representative Lancaster noted that the project was originally to bring gas from Alaska. Mr. Rusanowski explained that the Cook Inlet reserves were in question. A 10-year reliable gas source is needed. They were unable to secure a long-term commitment for gas from Cook Inlet. He noted the intent to return to Alaskan gas when it is available. Representative Lancaster clarified that it is not their intent to generate power. Mr. Rusanowski noted that they would need certificates from the Regulatory Commission [in order to generate power]. They could not sell gas for power generation without approval. Representative Lancaster questioned the cost of the feasibility study. Co-Chair Williams explained that it would go before AIDEA and that AIDEA would incorporate the cost. The legislation only puts the project before AIDEA for consideration. Mr. Rusanowski added that it would be a year or two out before bonding would take place. Representative John Davies asked if the AIDEA proposal would come before the legislature. KATELYN MARKLEY, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY (AIDEA) testified via teleconference. She clarified that the once the legislature provides the bond authorization a due diligence process by AIDEA would have to be completed. This includes a feasibility study to determine that the project is advantageous to the state of Alaska. Sources and uses of funds would then be reviewed. Sufficient revenues for debt and operation would have to be demonstrated. The Alaska Industrial Development and Export Authority would do a risk analysis and market review. They would also review the credit strength of participants, demand on public facilities, and adverse affects on communities. They would also assess job creation and determine if it is consistent with bonding authorization. The projects would also have to be approved by the communities. The project would not come before the legislature again. Once the feasibility study is completed the AIDEA board would approve or disapprove the project. Representative Harris noted that the project would provide possibilities to reduce rural utility costs. He asked the process involved to gain approval from the Alaska Regulatory Commission to sell gas to a utility system. Mr. Rusanowski stated that it would make sense for some communities to consider [the use of gas to generate power]. There would have to be a fully operational and functioning gas utility in the community with an alternative fuel source readily available for the electric utility. The electric utility could approached the gas company. The gas utility would have to assess their reserves to see if there are sufficient reserves and how it would affect their customers. The analysis would then be used to approach the Regulatory Commission with the electric utility to apply for the right to sell gas for the purpose of generating electricity. If it is determined to be in the public's interest they would determine the rate and conditions for sale. It would be initiated by the electric utility. The Regulatory Commission could determine that the rate should be higher or lower depending on cost and the service being provided by the gas utility. The regulatory prices would determine the legitimate charges for the service. HB 236 was heard and HELD in Committee for further consideration.