CS FOR SPONSOR SUBSTITUTE FOR SENATE BILL NO. 25(FIN) "An Act establishing the sustainable energy transmission and supply development program in the Alaska Industrial Development and Export Authority; relating to the interest rates of the Alaska Industrial Development and Export Authority; and relating to taxes paid on interests in property owned by the Alaska Industrial Development and Export Authority and to the local contribution for public education funding related to that property." MICHAEL PAWLOWSKI, STAFF, SENATOR LESIL MCGUIRE, addressed the legislation. He pointed to numerous letters of support included in members' packets (copy on file). He explained that the bill represented a piece of the legislature's ongoing work related to energy infrastructure. In 2010 the sponsor had identified a major gap in the need for financing and access to capital. He discussed that the legislature had done an excellent job of developing grant programs and support for energy and infrastructure, but no real mechanism existed to provide capital for projects to move forward on their own. Mr. Pawlowski walked the committee through the legislation. Section 1 included the short title "the Alaska Sustainable Strategy for Energy Transmission and Supply." Section 2 (pages 1 through 3) included conforming language that added the word "energy" into the findings section that established the Alaska Industrial Development and Export Authority (AIDEA) within the state's public laws. Section 3 added conforming language related to AIDEA in the duties section. He accentuated the importance of Section 4 that established a separate fund within AIDEA and empowered the fund to finance energy infrastructure projects with the private sector. The sponsor did not want to displace efforts of the private sector; therefore, Section 4 included amendments to AIDEA's existing loan participation program adding qualified energy developments. The authority could work with banks to provide credit backstops if commercial lending institutions were interested in financing energy projects. Mr. Palowski moved to Section 6 (pages 5 through 7), outlining that AIDEA was not allowed to give away money and was required to earn a rate of interest that exceeded the cost of its funds when making loans. The sections required AIDEA to achieve an interest rate similar to existing requirements; it had to exceed the minimum cost of funds. Section 11 (page 7) allowed AIDEA to provide an incentive interest rebate of up to 1 percent under certain circumstances; page 7, line 24 allowed the rebate for renewable energy and rural and economic development. Section 12 created the fund separately within AIDEA in order to protect the authority's existing credit rating on its existing programs. The authority's powers were expanded on page 9 in two material ways: (1) the ability to defer principal payments or capitalize interest on qualified energy developments, which would help to drive project economics down and (2) the ability to guarantee loans and bonds to extend out for hydroelectric development to 50 years. Mr. Palowski addressed that page 10, lines 9 through 12 included a limitation specifying that AIDEA could only finance one-third of a project's costs without additional approval by the legislature. He detailed that the fund was intended to be co-invested capital along with the private sector; the goal was not to have AIDEA go "whole into projects." The goal was to leverage investment that utilities, mineral development companies, and developers were making around the state. The fund was limited to qualified energy developments (defined on page 10, line 23) including transmission, generation, conservation, storage, or distribution of heat or electricity, natural gas (except large pipelines in Cook Inlet or the North Slope), and refined petroleum products. 11:08:32 AM Vice-chair Fairclough MOVED the bill before the committee. Representative Neuman asked for a definition of the term "rural development" included on page 7, line 23. He had many areas of his district that were without electricity transmission lines. Mr. Pawlowski deferred the question to the department. MARK DAVIS, DEPUTY DIRECTOR, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, replied that AIDEA was in the process of adopting regulations underneath an existing rural provision. The agency intended to adopt a broad definition that would encompass small communities; the distinction made between "roadless" and "road" was not effective from an economic standpoint. He expounded that AIDEA looked at economic data on how each community was doing, the amount of capital in each community, and census data on poverty levels. Representative Neuman explained that Houston, Alaska only had 1,500 residents and that there were areas three blocks from his house that were without electricity. He asked whether the bill would allow the Matanuska Electric Association (MEA) to get loans to expand the community's current system through AIDEA loans. He stressed that "rural" did not just encompass off the road-system areas. Mr. Davis responded that the bill would allow for MEA to work with AIDEA to expand the area's grid. Representative Edgmon discussed a bill that had passed the prior day related to new tax credits. He wondered whether an applicant would be able to utilize both programs established in the bills. Mr. Davis responded in the affirmative. Co-Chair Thomas CLOSED public testimony. Representative Wilson asked whether the liquid natural gas plant on the North Slope would qualify under the program. Mr. Pawlowski pointed to language on page 10, lines 27 through 29 that specifically excluded a gas pipeline project for the transportation of gas from the North Slope or Cook Inlet to market; however, liquefaction regasification distribution was included; the bill had been designed specifically to work with the project. 11:12:47 AM Representative Doogan discussed that AIDEA had a history of projects going bankrupt. He wondered how AIDEA's policies had changed in order to prevent the issue from happening. Mr. Davis replied that AIDEA had issued a strategic plan in 2008 in which underwriting standards had been changed. The bill was consistent with board policy that allowed the authority to only invest up to one-third without legislative approval. The change had been implemented to reduce risk and to work with partners who did their due diligence. He relayed that the agency would probably aim for a 1.25 to 1.34 debt service ratio on a revolving fund such as the one included in the legislation and would establish the guideline in regulation. Vice-chair Fairclough directed attention to the two fiscal notes. The first fiscal note was fund capitalization with an allocation to the Sustainable Energy Transmission and Supply Development Fund in the amount of $1.25 million. The second fiscal note had zero fiscal impact and affected the Department of Commerce, Community and Economic Development related to AIDEA. Co-Chair Thomas asked whether there would be a regional spread required to prevent all of the money from going to one region. Mr. Davis responded that the AIDEA board wanted to achieve a geographic disbursement of investment and included related requirements. The board was provided with statistics about how each loan in the Loan Participation Program affected each region; the same thing would be done for the program under the bill. Representative Neuman asked why the language on page 10, line 29 was limited to the North Slope and Cook Inlet. He wondered why language did not just read "within Alaska." He detailed that there was a significant amount of industry including Native corporations looking at non-conventional gas plays and exploration within the state that could probably take advantage of the legislation. Mr. Pawlowski clarified that the North Slope language was an exclusion. He detailed that the other areas be acceptable under the bill including the Nenana Basin Pipeline and other. The only items excluded under the bill were related to specific pipeline projects from the North Slope or Cook Inlet to market. 11:16:26 AM Co-Chair Thomas noted that the operating budget conference committee had closed out with the bill funding in its fiscal notes. He explained that the fiscal note needed to travel with the bill. Vice-chair Fairclough MOVED to report HCS CSSSSB 25(L&C) out of committee with individual recommendations and the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. HCS CSSSSB 25(L&C) was REPORTED out of committee with a "do pass" recommendation and with one previously published zero fiscal note: FN2 (CED); and one previously published fiscal impact note: FN3 (SFIN/CED). 11:17:25 AM AT EASE 11:22:55 AM RECONVENED