HOUSE BILL NO. 445 "An Act relating to the alternative energy grant fund and to alternative energy grants." 2:40:54 PM Representative Stoltze MOVED to ADOPT Work DRAFT 24- LS1311\X, Cook, 3/31/06. There being NO OBJECTIONS the Committee Substitute (FIN) was ADOPTED. 2:42:00 PM REPRESENTATIVE BILL THOMAS, Sponsor, introduced his staff, Kaci Schroeder and testified regarding the bill. He explained that the bill proposed to take ten cents per barrel from oil price revenue sharing and place it into an alternative energy fund, to be administered by the Alternative Energy Authority (AEA). He noted that AEA already had the infrastructure necessary to administer grants. He estimated that the fund would generate approximately $30 million per year. The program funding mechanism could be in place only if the price of oil was $35 per barrel or higher. The program funding could sustain itself if left alone. He explained that the AEA would direct the funding to support alternative and efficient energy projects. Grants may not exceed $20 million, but grantees may be eligible for more than one grant over time. Projects are to be submitted to the AEA, who would use their existing criterion to determine project viability. Grantees must match funding at 25 percent. He defined an alternative energy project as "a project that produces energy for the production of electricity, heat or medical power, derived from renewable or local resources other than liquid petroleum, primarily diesel." He went on to define energy efficiency project as one that "improves the efficiency of energy generation, transmission or use at facilities across the state". This includes facility installation, energy efficient lighting, and improved use of diesel fuel. He defined an electric utility as "an entity that provides power for public consumption and has been certified by the Regulatory Commission of Alaska (RCA)". 2:46:42 PM Representative Thomas noted that the legislation was crafted following a trip to Yakutat, where the cost of fuel was an issue, and residents expressed a desire to utilize nearby natural gas, but lacked the financial resources to create a system. He pointed out that when Haines converted to hydro- electric power, although some were skeptical, it has provided steady rates in the current climate of rising costs. He expressed the desire for the State to plan for the future. Representative Thomas proposed that the bill would benefit urban as well as rural communities. He noted that in South Central Alaska, natural gas was running low. He stressed that using current resources to solve these problems would save money in the future. He stated that some communities in his district use over a million gallons of diesel per year. He suggested that with a grant program, a community could bond their share and recoup the funds over a six or eight year period, using technologies such as wind and tidal surge. He also proposed that it could free up some PCE funds. Additionally, Representative Thomas noted that decreasing energy costs to consumers puts money back into the Alaskan economy. He referenced the Fire Island project, and Chugiac Electric that sought to harness geothermal power at a nearby hotsprings, as well as some southeast communities looking into using wood fire to heat swimming pools and cut down on wood waste. He concluded his presentation by pointing out that projects would be screened by the AEA rather than approaching the legislature directly, thereby streamlining the funding process. 2:50:23 PM Representative Thomas expressed his usual stance as a pro- industry legislator, and conceded that a new environmental focus was novel for his office. Co-Chair Meyer observed that using hydro energy seemed wise for Representative Thomas' district and asked if there was reference to nuclear energy in the bill. Representative Thomas stated that, although there was allowance for nuclear projects in the bill, the AEA did not currently allow such projects. 2:51:46 PM Representative Holm asked about the criterion that would be adopted to determine economic viability of a project. He maintained caution in giving authority to regulatory agencies, and asked for assurances of fair and unbiased decision making. 2:52:35 PM Representative Thomas reiterated that AEA already had established criteria in place, as well as a process for reviewing projects. He cited several communities that would benefit from the proposed program. Representative Hawker referred to earlier comments, and asked for clarification of the idea of the State having "extra" wealth. Representative Thomas referred to the vote to reserve $600 million and proposed that if the State used $20 to $30 million to support alternative energy projects, communities could be weaned from dependence on diesel fuel. He referred to several communities that were being helped with small grants to retire debt and go forward with energy projects. He observed that oil prices were not expected to decline, and suggested it would be wise to use reserves for pro-active programs. Responding to another comment by Representative Hawker, Representative Thomas mentioned the PPT bill and the perception that $1 billion to $2.3 billion in revenue would be raised by the State. He suggested that some of the monies should be used to make the State more energy independent. He maintained that the funding for his bill would be generated by the State's royalties, if they were at a level over $35 per barrel. He proposed that, if adopted, the program would use ten cents per barrel for energy projects. He stressed that he did not believe that the entire $20 to $30 million per year would be spent on projects. 2:56:38 PM Representative Hawker insisted upon clarifying the notion of "extra" wealth. He referenced the "prevailing price", or West Coast price, of $35 per barrel. He proposed that more than $45 per barrel was needed to balance the State's budget, and maintained that by taking ten cents from the amount it increased the State's deficit. He stated that there was not currently adequate funding for social services, and proposed that taking $100 million out of the budget would result in deficit spending for the State. Representative Thomas replied that projects would ultimately be channeled through the legislative budget process, giving legislators the opportunity not to fund them if funds were not available. He emphasized that since his district was dependant upon diesel, it was a priority for him to see them replace this with alternative energy. Representative Hawker expressed concern that even with a large increase in taxes on the oil industry, the funding was already spent. He debated the idea that the State was in the position of having "extra" wealth. 2:59:01 PM Representative Thomas emphasized that this was an appropriation bill, and would come before the Committee yearly for approval. He urged approval. Vice-Chairman Meyer agreed that the bill was timely and had merit, and suggested that the funding source would be worked out in the legislative process. Representative Joule commented on the hope for the gas line. He noted that a benefit of the gas pipeline would be access to that energy for Alaskans in various areas of the State. He stressed that the proposed legislation is to explore alternative energy to areas that will not have access to the gas line reserves. He emphasized the appropriateness of these areas seeking alternative energy methods. He observed that the bill attempted to liberate these communities from dependence on diesel fuel. He encouraged the legislation. 3:01:44 PM Co-Chair Meyer agreed that especially in remote areas like Kotzebue, such alternative sources would be very helpful. 3:02:24 PM RON MILLER, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY (AIDEA) testified regarding the bill. He agreed that the bill did not create a new program, but rather created another source of funding for existing alternative energy programs. He noted that the program was currently funded primarily by federal funds, but was completing an outside solicitation. He stated that they used an established set of guidelines in evaluating potential projects. Their primary focus is on the life cycle savings of a project. He referred to the Alternative Energy Newletter, and described projects such as the Prince of Wales Island hydro electric project, funded by a combination of grant fund and funds from the power project loan fund. He noted that this project would displace over half a million gallons of diesel annually for that area. He expressed support of the bill. 3:04:37 PM Representative Holm asked what criteria were employed to decide which areas and projects would be funded. PETER CRIMP, PROJECT MANGER FOR ALTERNATIVE ENERGY AND ENERGY EFFICIENCY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT responded that they conducted life cycle economic analayses for each project, looking at the overall savings for its life. He noted that for a hydroelectric project with a span of 40 years, the costs were compared over a horizon to an existing project, for example a diesel power project, and then to the present value of savings. He noted that they ranked projects by benefit to costs ratios and allocated resources according to these ratios. 3:06:09 PM Representative Holm asked how various communities would be chosen. Mr. Crimp noted that they would choose the community project with the most savings compared to the least costs. Representative Holm asked if any biases existed, and only strict calculations were used. Mr. Crimp noted that they made every effort to conduct "arms' length" assessments of projects, using a financial analysis as well as an analysis of technical merit. 3:07:27 PM Representative Holm noted a concern expressed about the project at Fire Island, regarding loss of wildlife and other deterrents. He speculated that projects might contain possible problems not addressed from a financial standpoint. He asked how these concerns were taken into account. 3:08:27 PM Mr. Crimp explained that before Alaska Energy Authority provided any funding for projects, they required all necessary permits. He noted that before Fire Island could be approved, it would need permits from Fish and Wildlife service, as well as possibly the FAA, Core of Engineers, etc. Balanced financing for the project is also required. 3:09:21 PM Representative Kerttula observed that the ultimate goal of the bill was not only to provide good sources of energy to various areas Statewide, but also long-term cost savings. Mr. Crimp confirmed that this was the thrust of the Authority's program - to reduce the overall cost of providing energy to the State. 3:10:19 PM Representative Joule asked about the progress of the Ing River project. Mr. Crimp explained that a feasibility analysis was being conducted for the project in Knik Arm, that would use tidal flow turbon technology. He noted that the same technology could be employed in the Yukon River. Although the economics were currently unclear, he stated that the overall effort has been useful in producing common assumptions, and projected 3 to 5 years for completion. 3:11:38 PM Representative Hawker referred to Page 2, Lines 8 to 13, which discusses criterion for grant projects. He asked for clarification of "economically viable" as well as "services of the grantee". He also asked how economically liability was determined if a project proved unviable, as had been the case in some past projects. Mr. Crimp referred to earlier testimony by Mr. Miller about the ranking of proposals. He noted that the services that reduce costs for consumers would receive the focus. He also stressed that the current program required a match, sometimes as much as 60 percent, involving out of pocket match as well as financing. 3:14:17 PM Representative Hawker noted the current bill contained only a 25 percent match, and asked if a performance bond would be required equal to State funding. Mr. Crimp responded that there was no requirement for a performance bond, but emphasized that the recipient's investment in a project was an incentive for project success. Representative Hawker maintained that while providing an incentive for programs, the State remained liable for lost revenue. 3:15:14 PM Representative Holm asked if these projects were under the supervision of the Regulatory Commission of Alaska (RCA). Mr. Miller stated that some utilities were not regulated by RCA. 3:16:08 PM Representative Kelly referred to a presentation given about the small, interconnected hydro power plants for exchange into the Northwest. He observed that in major Alaskan communities in Southeast this might be a viable option. He cited personal experience with various experimental energy projects, and noted that hydro-electric power tended to be the most proven resource, as opposed to other projects which were more speculative. He asked if this project focused on hydro power as a solution for Alaska. 3:17:54 PM Mr. Miller responded that they had not been approached with such a proposal, and speculated that, especially as an export project, it would have to prove cost effectiveness for Alaska. Representative Kelly noted that diesel efficiency and hydro projects seemed to have the greatest amount of improvement, but observed that sometimes these projects might be adversely affected by climate and other environmental factors. 3:19:19 PM Mr. Miller noted that they were very active in hydro electric projects, supporting them through grant and financing programs. He noted two successful hydro projects in Juneau, as well as on Prince of Wales Island. He also noted that diesel efficiency has proven successful, particularly with in-use efficiencies such as lighting retrofits. He noted that Juneau had some of the lowest energy rates in the States due to hydro projects. 3:20:33 PM Vice Chairman Stoltze opened the floor to public testimony. CHRIS ROSE, EXECUTIVE DIRECTOR, RENEWABLE ENERGY ALASKA PROJECT, testified via teleconference in support of the bill. He observed that 40 states have incentive policies built in at the state level for energy renewal. He observed that the price of oil was projected to remain high, and that communities that relied solely on this source would face increasing costs. He also noted that there were opportunities for improvements in the rail belt. He explained that his organization was educating the public on the changes in technologies. For example, in some areas of the country, wind was the cheapest form of energy available. He also noted that having a policy like this bill would create a future energy framework for the state. He stated that the renewable energy market was the fastest growing in the country. The "clean energy market" was predicted to quadruple in nine years' time. He concluded that if policies like this were put in place, consumers would benefit from fixed rate power, such as instituting a wind generator in rural areas. He emphasized that efficiency was also part of the overall program needed. He concluded that they believed in the merit of the policy, and encouraged legislators to use the amount of oil as a guidepost in how much was invested into alternative energy. 3:26:14 PM MEERA KOHLER,PRESIDENT AND CEO, ALASKA VILLAGE ELECTRIC CO- OP testified via teleconference in support of the bill. She explained that they were a utility providing energy to 21,000 Alaskans in 52 villages. She observed that the bill provided an opportunity for communities dependent on oil to develop some alternatives to rising oil costs. She applauded the bill's link to the cost of oil, and the high level cap on the grants, as well as the 25 percent cash match. She concluded that the bill brought Alaska closer to energy independence and encouraged its support. 3:28:09 PM Representative Kelly asked if her organization would be amenable to assuming the completion risk of a venture, or converting the 25 percent match to a loan. Ms. Kohler noted that 25 percent of the cost of a project was absorbed by the utility, and the other costs were covered by the granting agency. She noted that the utility would retain the risk of the 25 percent, unless they convinced the granting agency to share any additional costs. 3:30:28 PM Representative Kelly observed that if a project was unsuccessful, a utility would need to take on completion costs for a project that was not generating revenue. Ms. Kohler concurred, and added that if a project was funded at $5 million, and actually cost $6 million, the utility would need to bridge that gap. She stated that they might approach the federal government, but confirmed that the utility would somehow need to come forward. 3:31:38 PM JOSH LAROSE, SOUTHWEST MUNICIPAL CONFERENCE, testified via teleconference in support of the bill. He referred to current newspaper articles about the prices of diesel fuel, as well as the rural energy funding bills, concluding that the funding for rural diesel energy would prove unsustainable. He pointed out that the debate was regarding how to best provide options to these rural areas. He stated that small communities were facing a bleak financial situation, and that the bill presented immediate as well as future relief. 3:33:46 PM KATHIE WASSERMAN, ALASKA MUNICIPAL LEAGUE, testified in support of the legislation. She stated that the bill was forward thinking, encouraging investigation into utilities' future, and cost savings in areas such as educational facilities. She cited her experience as mayor of a small community, and recalled the high rate of energy cost to these areas. She proposed that if more communities had the option to study other means it would provide savings. 3:36:02 PM Co-Chair Meyer asked about the nature of the hydro plant in her area. Ms. Wasserman noted that the was put in place a long time ago by the cold storage company that founded the community of Pelican, and not paid for by the city or State. 3:36:38 PM Representative Hawker pointed out the $7 billion dollar liability to the pension plan by the State. He asked how he could invest in this program without addressing this other legal liability. 3:37:17 PM Ms. Wasserman suggested that there might be other areas where monies could be cut in the budget. She offered to discuss these ideas with legislators. 3:37:59 PM PAUL FUHS, CITY AND BOROUGH OF YAKUTAT, testified about the costs of energy to smaller communities. He recalled the importance of savings measures to these areas. 3:39:48 PM Co-Chair Meyer agreed that the legislation was a good idea. He offered to work with the Sponsor to come up with alternative funding. 3:40:57 PM HB 445 was HELD in Committee for further consideration.