HOUSE BILL NO. 87 "An Act extending the liquefied natural gas storage facility tax credit; and providing for an effective date." 1:30:39 PM REPRESENTATIVE STEVE THOMPSON, BILL SPONSOR, introduced himself and thanked the committee for hearing his bill. He read a prepared statement: This bill came about through conversations with stakeholders in the Interior about our progress on efforts to mitigate high energy costs and improve our air quality. A key theme in these conversations has been the importance of ensuring that we're doing everything we can to stay on track with the Interior Energy Project. In 2015, the Legislature passed HB 105 to renew and advance the Interior Energy Project, a project designed to bring low cost energy to as many residents and businesses of Interior Alaska as quickly as possible. It has resulted in the creation of the Interior Gas Utility a not-for-profit public utility serving the Interior. In 2012, the Legislature passed legislation to incentivize the development of liquid natural gas storage, a key component in achieving the economy of scale that will enable widespread use of natural gas in Fairbanks and North Pole. This legislation provided credits for the construction of above ground LNG storage facilities with a capacity of 25,000 gallons or more. There are currently two projects underway, one in Fairbanks and one in North Pole, that will benefit from these credits. HB 87 will extend the sunset date of the original legislation by 18 months in order to ensure that the projects underway will be able to capitalize on the existing credits. This is a bill that can help to lower energy costs and improve air quality in an area of the State that desperately needs to do both. Representative Thompson relayed that the general manager of the Interior Gas Utility, Dan Britton, would be giving a slide presentation. He noted there were several people online who wanted to testify to the bill. 1:33:38 PM DAN BRITTON, GENERAL MANAGER, INTERIOR GAS UTILITY, introduced himself and the PowerPoint Presentation: "Fueling the Future." He thanked the committee for the opportunity to speak to them about important storage tax credits for the community of Fairbanks. He began with slide 2: "Interior Energy Project Purpose and Goals: Interior Alaska." He relayed that the purpose of the Interior Energy Project was to bring low-cost energy to as many residents and businesses of Interior Alaska as possible in a timely fashion. Other goals of the project were to stabilize the economy and to help improve air quality. Mr. Britton discussed slide 3: "History": • Fairbanks Natural Gas, LLC(FNG) began operating in Fairbanks in Spring of 1998 giving Interior residents a natural gas heating option. Over 1100 residential and commercial customers are currently able to enjoy the benefits of natural gas. • In November 2012, the Fairbanks North Star Borough(FNSB) acquired its natural gas utility power via transfers from the City of Fairbanks and the City of North Pole and established the Interior Alaska Natural Gas Utility(IGU). • May 2018, the IGU consolidated with FNG and now operates as an integrated, not-for-profit public utility. Mr. Britton continued to slide 4: "Energy Costs and Air Quality." He indicated that some of the reasons the project was so important to the community were listed on the slide. He read the slide contents: • According to the Council for Community and Economic Research, the FNSB typically has the highest utility costs in the nation for the 300-plus urban areas regularly surveyed. • In September 2006, the EPA lowered the National Ambient Air Quality Standards for fine particulate matter less than 2.5 micrometer in diameter (PM 2.5) a human health hazard. • In 2009, the EPA designated the more populated portions of the FNSB as a non-attainment area relating to PM2.5. The eastern portion of the non-attainment area (North Pole) has the worst air pollution in the nation, three and a half times the legal limit and almost two times worse than the next worse area in the U.S. • The FNSB's long-term efforts for clean air are focused on bringing clean, affordable natural gas to the Fairbanks area for space heating. Mr. Britton moved to the chart on slide 5: "Heating Cost Comparison: U.S. Natural Gas vs. Anchorage Natural Gas vs. Fairbanks Heating Fuel Equivalent." He explained that the slide showed a comparison of the price of heating fuel in Fairbanks to the price of natural gas in Anchorage and in the United States. He pointed out that the cost of heating in Fairbanks was higher than most places in Alaska with natural gas service. Mr. Britton reviewed the chart on slide 6: "Heating Cost Comparison: Fairbanks Heating Fuel vs. Fairbanks Natural Gas Equivalent." He noted the slide showed the historical heating costs in Fairbanks to heating oil. He indicated the green line represented stably priced energy. The blue line represented the cost of heating oil. For the most part, the price of natural gas was less costly than heating oil, but at times of low oil costs, heating oil could be slightly less. Mr. Britton continued to slide 7: "Fairbanks Large LNG Storage Tank." There were 2 projects he would discuss with the committee. The first project was the Fairbanks large liquified natural gas (LNG) storage tank. The tank had a capacity of 5.25 million gallons and was a full-containment, double-wall design - the safest available. He noted that construction started in January 2018 and was advancing on schedule. The estimated completion date was Fall 2019, and the total construction cost of the project was $58.4 million. The tank had been termed, "The heart of the interior project." The tank allowed for new customers and would begin to alleviate poor air quality. Mr. Britton turned to the picture on slide 8: "9th (Last) Row Welding." The picture showed the inside of the LNG tank. He pointed out the suspended deck and the aluminum ceiling. He reported that the steel inside tank was made of 9 percent nickel. Liquified natural gas was stored at -260 degrees Fahrenheit. The specialty alloys could handle the cold temperatures. Mr. Britton discussed the picture of the outer tank stairs on slide 9. He reported that the tank was almost complete, and stairs were being added to the tank. The piping and venting were also being worked on currently. Good progress was being made on the facility. 1:38:51 PM Mr. Britton advanced to slide 10: "North Pole Storage." He reported that in addition to the Fairbanks storage facility, there was a storage facility under design for North Pole. Distribution systems had been installed in Fairbanks and North Pole. The North Pole storage facility was designed to serve the previously installed distribution system. He read the slide: • Design of the $12.1 Million LNG storage facility in North Pole is complete and a Request for Proposals was issued February 14, 2019. Proposals are due March 21, 2019. • The targeted completion of construction is November 15, 2019 with operational startup and commissioning by December 31, 2019. • The storage facility will have two 75,000 Gallon storage tanks and a multi-purpose building and will be connected to the previously constructed 73 miles of pipe infrastructure in the North Pole area. Mr. Britton expounded that the two tanks that were part of the facility would be relocated from the existing storage facility, currently providing service in Fairbanks, once the new 5.25 million gallon tank came online. Mr. Britton continued to the North Pole Storage site plan on slide 11. He pointed to the two 75,000 tanks. There was an area where the trucks could offload. He noted the vaporization equipment that would bring the gas from -260 degrees Fahrenheit to 50 degrees Fahrenheit to be injected into the distribution pipe. The facility was located across from what was historically the Flint Hills Refinery and from one of Golden Valley Electric's power plants. Golden Valley Electric would be a potential consumer of natural gas in the future. Mr. Britton reviewed the benefits of storage on slide 12. He read from the slide: • The development of expanded LNG storage facilities in the Fairbanks and North Pole areas is a critical component of the IEP as they will increase the security of supply and provide capacity to serve a greater number of new customers. • These storage facilities, with current liquefaction infrastructure, enable IGU the ability to serve approximately 3000 new residential customers beginning the summer 2020. • The state's LNG storage tax credits are vital in helping to bring down the cost of providing natural gas to Interior residents. • All money from tax credits for tanked storage will be under the oversight of the Regulatory Commission of Alaska, the IGU Board and the FNSB Assembly to ensure these savings are passed along to the rate payers. Mr. Britton reviewed the estimated impact on rates on slide 13. The Fairbanks facility would qualify for the maximum available credit of $15 million. The alternative was 50 percent of the total capital costs. The North Pole facility, with a $12 million capital investment, would qualify for an approximate $6 million credit. The total credits for the two facilities would equal $21 million. The range of the rate benefit to consumers based on the current demand was almost $2 per 1,000 cubic feet. Under the best case demand, the amount was about $0.72 per 1,000 cubic feet. As demand grew, the cost would be spread over more volume. If the Interior Gas Utility was unsuccessful with storage tax credits, it would need to incur approximately $21 million in additional debt directly impacting customer costs. Mr. Britton advanced to the map of installed piping in Fairbanks on slide 14 which included approximately 140 miles of distribution pipe network. A significant portion of Fairbanks had access to Natural Gas. On the South side of the map there was a small red square showing the location of the storage facilities from which the gas would be sent out into the distribution system. 1:43:28 PM Mr. Britton turned to slide 15 showing the map of the 72- mile installed piping network in North Pole. It was South of Hurst Road in one of the higher areas of non-attainment for poor air quality. He offered that expanding gas into the area was extremely important. Co-Chair Wilson commented that she did not have a conflict of interest because the pipe did not run to her house. Vice-Chair Ortiz clarified that without granting credits to North Pole and Fairbanks the borough would take on an additional $21 million in debt. He asked if he was correct. Mr. Britton replied that it would be the rate payers of the Interior Gas Utility who would take on the debt. The borough would not take on the debt, rather it would be the utility. Vice-Chair Ortiz suggested that if the state were to take up the credits, it would be obligated in the initial $21 million. He wondered if he was accurate. Mr. Britton responded in the affirmative. The state would pay the tax credits. Representative LeBon informed the committee that the pipe ran in front of his home in House District 1. He noted that his district contained the heaviest concentration of piping extending to residential and commercial properties. He noted that the community of Fairbanks had been waiting about 50 years for the project to come online. Although service was already available to 1,100 Fairbanks customers since 1998, the concentration for the home owner was significantly greater than under Fairbanks Natural Gas. He was excited about the project and asked committee members to support the extension of the timeline for the credits. They were critical to the energy needs of Fairbanks and to breathing clean air which provided multiple benefits. Representative Josephson commented on the slide reflecting 3,000 customers. He was trying to determine if more storage facilities would be needed with a population of about 90,000 in the Fairbanks area. Mr. Britton responded that the facilities under development represented the first step for the Interior Energy Project. The storage facilities allowed the utility to add new customers. The next step would be additional liquefaction capacity. The utility was currently designing to expand liquefaction from 50,000 gallons per day to 100,000 gallons per day with an additional 100,000 gallons per day. The board of directors approved the utility moving forward with the front end engineering and design work for the project. The Storage facility allowed the utility to use its existing production assets running them 365 days per year. The utility would fill the storage in the summer and draw it down during the winter to meet peak needs of the first group of 3,000 new customers. The additional liquefaction capacity allowed the utility to go beyond 3,000 customers and to begin adding the following several thousand. The storage facilities were meant to satisfy the Interior Energy Project's storage needs well into the future. 1:47:55 PM Co-Chair Wilson directed Ms. Glover from the Department of Revenue to review the fiscal note. COLLEEN GLOVER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE, indicated she had visited the storage tank in Fairbanks and was very impressed by it. The fiscal note had a zero fiscal impact to the Tax Division. It was an extension of an existing credit that was already programed into the division's system. The fiscal note was indeterminate because of the division not wanting to forecast tax payer confidential information. The taxpayer had provided new information required for the credit. Also, she relayed that if the credit was extended, it could open up to new entities that the state was not aware of. She reported that no one had received the credits to-date. The period of the extension was 18 months and would only apply to LNG storage facilities with a certain capacity. There were provisions in current statute that if the facilities were to cease operation within a certain amount of time, after 9 years they would have to pay back a portion of the credits. These provisions did not change with the bill. The bill had an immediate effective date. Co-Chair Wilson asked if the credit was a cashable credit or one that could be taken off of their tax liability. Ms. Glover responded that the credit could be handled either way. The tax credit could be paid with cash from the Oil and Gas Tax Credit Fund or it could be taken as a credit against a facility's state corporate income tax. 1:50:05 PM Co-Chair Wilson OPENED Public Testimony. BRYCE WARD, MAYOR, FAIRBANKS NORTH STAR BOROUGH, FAIRBANKS (via teleconference), spoke in support of the bill. He indicated that the Fairbanks North Star Borough (FNSB) had approximately 100,000 residents with about 25,000 homes. The additional 3,000 new customers, made possible with the expansion of the storage tanks, was 3,000 of the 25,000 homes. The project was also a key component in addressing the air quality issues in the Interior by allowing a cleaner source of energy to be used for wood, solid fuel burning heating mechanisms, and for oil fired heating devices within a home. Natural gas was a much cleaner source of fuel than fuel oil or some of the other solid burning appliances currently being used. Currently, the majority of the FNSB was in a non-attainment area. It was critical for the borough to address the current air quality problem. 1:52:07 PM MICHAEL MEEKS, CHIEF OF STAFF, FAIRBANKS NORTH STAR BOROUGH, FAIRBANKS (via teleconference), spoke in favor of the bill. He had been an original board member for the Interior Gas Utility. As chairman and vice chairman of the board, he attested that the Interior needed the gas tax extension for LNG storage facilities. The last financial model he had seen incorporated the tax credits into IGU's calculation for the estimated cost at the meter for the customer. He suggested that without the extension, the price of the meter would increase for the customer, and the number of customers that would convert from fuel oil to natural gas would decrease. The loss of the tax credits would mean that IGU would have to make up the money somehow - most likely through bonds incurring more debt. The loss of the tax credits would incur an additional $21 million in debt and would add an additional $1.93/MCF to the customer using the current demand forecast models. The cost at the meter had to be low enough to attract customers. The project was already challenged with customer density issues and costs. He did not want to make things harder by loosing the credits. The increased costs would do nothing to help the air quality issues and energy security concerns in Fairbanks. He asked members to support the legislation. 1:53:23 PM JOHN COOK, J AND J DEVELOPMENT, FAIRBANKS (via teleconference), spoke in support of HB 87. His company owned and had developed much of the retail land in the Bentley Trust area since about 2006 or 2007. He explained that most of the box stores that came in built off of the same footprint nationwide. They used gas-fired heaters and air conditioners to heat their stores and were not able to heat with other sources. His company had not been able to add uninterruptable supply. For several years it had hampered his company from developing its property and providing jobs and economic development to Fairbanks. Previous legislatures and administrations had been supportive of the legislation to-date. He urged members to support the bill. 1:55:42 PM JOMO STEWART, FAIRBANKS ECONOMIC DEVELOPMENT CORPORATION, FAIRBANKS (via teleconference), spoke in support of the bill and the project. He indicated that the tax credit extension would help with the last portion of state investment. He hoped the state would follow through. The LNG storage project was a follow on to the Cook Inlet Recovery Act of 2010. The bill represented a similar state investment in above-ground natural gas storage for a community in the heart of Alaska that could use the cost of energy assistance as well as help with air quality issues. He hoped the committee would support and help the legislation move forward. 1:57:05 PM Co-Chair Wilson CLOSED public testimony. Co-Chair Wilson indicated the bill would be set aside. HB 87 was HEARD and HELD in committee for further consideration.