HB 74-AIDEA: LNG PROJECT; DIVIDENDS; FINANCING  3:46:59 PM CHAIR OLSON announced that the next order of business would be HOUSE BILL NO. 74, "An Act relating to development project financing by the Alaska Industrial Development and Export Authority; relating to the dividends from the Alaska Industrial and Export Authority; authorizing the Alaska Industrial Development and Export Authority to provide financing and issue bonds for a liquefied natural gas production system and natural gas distribution system; and providing for an effective date." 3:47:05 PM REPRESENTATIVE JOSEPHSON referred to a letter from a Dalton Highway trucker who expressed concern about traffic and safety issues. He asked whether AIDEA has a response to this concern. SARA FISHER-GOAD, Executive Director, Alaska Energy Authority (AEA), Department of Commerce, Community & Economic Development (DCCED), stated that AEA has consulted with the Department of Transportation & Public Facilities (DOT&PF) with respect to the Dalton Highway and has every indication that the anticipated traffic is manageable with respect to the project. 3:48:07 PM CHAIR OLSON asked whether the AEA could provide estimates on the amount of traffic for the first roll out and again once Fairbanks reaches 18,000 LNG customers. MS. FISHER-GOAD replied that the initial traffic is anticipated to be 25 trucks each way on the Dalton Highway. She offered to provide an estimate on the further build out by the next hearing. 3:48:45 PM REPRESENTATIVE SADDLER asked how AIDEA calculated the $50 million in general fund funding necessary for the project to reduce the cost of providing LNG to Fairbanks. 3:49:02 PM MARK DAVIS, Deputy Director, Alaska Industrial Development and Export Authority (AIDEA), Department of Commerce, Community & Economic Development (DCCED), answered that AIDEA performed modeling to determine impacts and determined $50 million would be sufficient to reach the target of $10.33 Mcf in Fairbanks. He explained that AIDEA estimated the cost of the potential LNG plant at $200 million. He stated that AIDEA determined the $50 million plus the $125 million in the Sustainable Energy Transmission and Supply Development Fund (SETS) loan with some private capital could achieve that rate. He clarified the figure represented the minimum amount of general funds to accomplish the target rate. 3:50:18 PM REPRESENTATIVE SADDLER asked for confirmation that the capitalization for the SETS fund is $125 million. MR. DAVIS replied that AIDEA is requesting to transfer to AIDEA $125 million in addition to the existing $125 million appropriated to the SETS fund last year. REPRESENTATIVE SADDLER assumed last year's appropriation was for the potential LNG project. He asked for the purpose of the additional $125 million in SETS funding. MR. DAVIS responded that the additional transfer of funds to AIDEA from the Alaska Housing Finance Corporation (AHFC) with passage of this bill would be used for a loan, as stated in Section 10 of HB 74, at approximately three percent for this project. In other words, the $125 million the legislature appropriated last year in Senate Bill 25 would remain in the fund. He clarified that AIDEA has divided the $125 million into two segments: $100 million has been invested in long-term instruments available for loan and bond guarantees that are essentially credit back stops and $25 million has been invested in shorter term instruments, which is available for loans that could be made under the current SETS program. 3:51:49 PM REPRESENTATIVE CHENAULT, referring to the fiscal note, related that the bonds will be secured by a capital reserve fund. He asked whether this refers to the SETS fund, such that the bonds will be secured through the SETS fund. MR. DAVIS responded that the $150 million in bonds AIDEA would be authorized to issue under the bill will have a backup of $30 million based on the $100 million already in the SETS fund available for credit back stops. These funds would only be used in the event of a defalcation of the bonds, he said. In further response to Representative Chenault, Mr. Davis explained the $30 million is currently in the SETS fund and the $125 million transferred from AHFC would be used in total for the loan. 3:52:57 PM REPRESENTATIVE CHENAULT asked for further clarification that AIDEA does not intend to use more than $125 million of the SETS fund to bring this project forward. MR. DAVIS answered that the $125 million under HB 74 would only be used if the proposed LNG project moves forward. The current SETS fund would remain; however, the SETS fund might be used as a credit backstop for the issuance of bonds, if bond were issued. In further response to Representative Chenault, he agreed [that such a credit backstop] would be the previously mentioned $30 million. REPRESENTATIVE CHENAULT referred to the fiscal note from AIDEA for $125 million. He asked whether this would be needed since $125 million is in the proposed operating budget for the SETS program. MR. DAVIS replied that he has been informed that the House Finance Committee has approved a transfer; however, he opined that those funds should probably be reflected in the fiscal note. 3:54:44 PM REPRESENTATIVE REINBOLD asked for the conversion costs for each residence. MR. DAVIS answered that two issues arise with the distribution system. First, customers must hook up to the whole system, which is estimated to cost $50 to $500 per customer. He predicted that it would likely cost closer to $300 per customer. Second, customers must convert from oil to gas for heating, but these costs would depend on the age of the oil boiler. Customers with relatively new boilers would need to change their burning system, which would be a modest cost. However, if the residence has an older system, the customer may need to replace the entire boiler and system, which would basically be the cost of a furnace. 3:56:10 PM REPRESENTATIVE REINBOLD recalled that a friend paid $10,000 to replace her boiler. She asked for an estimate of boiler replacement costs, the party who will be responsible to pay for the conversion costs, and whether AIDEA has assessed a willingness from all of its customers to convert to gas. MR. DAVIS, drawing from estimates from contractors in Fairbanks, estimated that the [average] boiler replacement cost would probably be close to $8,000. He said part of the bonds issuance will be to ensure demand from customers. REPRESENTATIVE CHENAULT again referred to AIDEA's fiscal note of $125 million, which he said is in the governor's proposed FY 14 budget as a transfer from the Alaska housing capital corporation fund. However, he recalled that in the operating budget the funding source for the $125 million is the general fund. 3:57:47 PM PAUL GROSSI, Lobbyist, Alaska State Pipe Trades UA Local 375, stated that the plumbers and pipefitters believe this is a good bill. He related that about half of the plumber and pipefitter's membership lives in the Fairbanks area. He asked members for their support and said this will be a great bill. 3:59:08 PM JACK HEBERT, Member, Board of Directors, Alaska State Home Building Association (ASHBA) - Interior; President, Cold Climate Housing Research Center, stated that HB 74 is a fine bill for the community. He said just a little light at the end of the tunnel will change the atmosphere in Fairbanks. He added that the Cold Climate Housing Research Center will look closely at options on conversions and ways to affordably do so. 4:00:28 PM TERRY DIZINSKI echoed Mr. Hebert's comments that this is something that will really help Fairbanks stay alive. Fairbanks needs a break in fuel costs. He predicted that conversion costs from oil to gas will very quickly pay for itself since it will be at such a reasonable cost. He urged members to pass HB 74 out of committee. 4:01:29 PM REPRESENTATIVE STEVE THOMPSON, Alaska State Legislature, stated that this project has taken a number of years, but the project will cut heating costs by approximately 50 percent or more. He predicted the bill would also help Bush and rural Alaska, including lots of industrial projects that will start up with reduction in energy costs. He said the community is excited about this, as it has been a long time in coming and he would appreciate the committee's support for HB 74. 4:02:18 PM REPRESENTATIVE JOSEPHSON, in the event that HB 4 passes and a pipeline project occurs with a spur to the Fairbanks North Star Borough, asked whether the retrofitting and conversion would still need to happen. He understood Fairbanks would move to natural gas. REPRESENTATIVE THOMPSON answered that trucking natural gas will give Fairbanksans more immediate relief. He anticipated a pipeline being built by 2020, which would bring less expensive gas than trucking to the region; however, the community needs immediate relief. He predicted that a five-year wait would adversely impact the community since most of the people will move from Fairbanks. He concluded that it is all natural gas, the distribution system will be built out once the trucking happens, and it will also enhance the pipeline project since the distribution system will be built out and the community will be ready to receive gas. 4:03:36 PM RICHARD GREEN, Member, Board of Directors, Alaska State Home Building Association (ASHBA) - Interior, stated he works for Spenard Builders Supply in Fairbanks. He said he hadn't planned on speaking but understood [the committee needed to hear from Fairbanks]. He said Fairbanks is excited to get gas. He also said that Fairbanks is not excited about having to truck the gas; however, it is a band aid that will help the community and give it a reprieve. He likened it to taking the best way a person could take home if he/she was stranded. He reiterated that the folks in Fairbanks want this [bill.] CHAIR OLSON said he was pleased with an article that ran [not specified] in the community. REPRESENTATIVE HERRON offered his belief that the article [not specified] energized people. 4:05:56 PM AARON WELTERLEN, President, Alaska State Home Building Association (ASHBA) - Interior, offered his total support of a short-term solution to bring natural gas to Fairbanks since the community needs it to alleviate high energy costs. He understood [trucking gas from the North Slope] is a short-term solution, but the long-term solution will be a natural gas pipeline. He said he is completely in favor of HB 74. 4:06:41 PM REPRESENTATIVE PETE HIGGINS, Alaska State Legislature, spoke in support of the LNG project. He urged members to pass HB 74 out of committee. 4:07:14 PM BRICE WARD, Mayor, City of North Pole, asked to point out several things. First, he referred to HB 74 as providing a step project. The [LNG Plant and proposed trucking of gas to Fairbanks] is not the end goal, but is a step in the right direction. Second, this bill will allow the Fairbanks and North Pole areas to build out their distribution network to allow a larger diameter pipeline sufficient volume to not only make the project viable, but also provide natural gas to residents. Third, HB 74 would aid development of natural resources in the state by providing North Slope stranded natural gas anywhere in the state with truck access. Additionally, the LNG plant would allow propane to travel throughout the state's river system to rural villages, which is important since rural Alaska has much higher energy costs. This approach [HB 74] contains a broader approach than to just address Fairbank's needs since it can address rural Alaska's needs, too. He emphasized that this clean burning gas will be available statewide. While LNG would be transported to Fairbanks, this gas could also be transported to Tok, Cantwell, Delta Junction and other communities outside Interior Alaska. Finally, he hoped this will be the catalyst to build the distribution system. He stated that the North Pole City Council recently passed a resolution in support of HB 74. He encouraged the committee to pass the bill. 4:10:01 PM JERRY CLEWORTH, Mayor, City of Fairbanks, said for the first time since he could remember the community of Fairbanks feels that the problems Fairbanks has been facing will be addressed and he appreciated the effort taken on energy projects. He explained that the package [in HB 74] is a series of loans that will be repaid. He acknowledged lots of capital and equity will be necessary for the build out of the distribution system to serve residences [and businesses]. He predicted a huge participation would be undertaken by Interior Alaska's residents. He thanked the governor for requesting HB 74 and its companion bill. He offered his appreciation for the work the governor and AIDEA have taken on these measures. 4:11:24 PM LUKE HOPKINS, Mayor, Fairbanks North Star Borough (FNSB), stated that this bill is very critical to Fairbanks's economy. He pointed out that the Interior is being hammered by high space heating costs. Additionally, he reported that energy costs are even higher in rural Alaska. He said these loans will be repaid by ratepayers, as indicated by AIDEA. He noted earlier questions arose about conversion of residential and commercial structures to gas. He acknowledged this is important due to market penetration, but more importantly, the U.S. Environmental Protection Agency (EPA)'s fine particle, PM2.5 designation for air quality is still present. The air quality can be addressed by the natural gas distribution, which will alleviate and remedy the air quality problem in Fairbanks. He suggested the market penetration anticipated at 90 percent will resolve the problems with air quality without having the EPA take steps to enforce air quality. Further, this bill would also encourage development. He related that he often hears businesses state they would be willing to operate in the community if cheaper energy is available, but their business models are based on much cheaper energy costs. In conclusion, he asked members to consider the importance of HB 74 to the community and for Alaska. 4:14:33 PM JOE BEEDLE, President and CEO, Northrim Bank; Member, Alaska Bankers Association (ABA), spoke in favor of HB 74 to allow AIDEA to provide financing for a LNG production and distribution system. He said from an atmospheric perspective, the Alaska Bankers Association also supports the in-state gasline development. He offered his belief that these projects are complementary as is the enabling legislation. During the past year, the banks have collectively and individually supported AIDEA's Sustainable Energy Transmission and Supply Development (SETS) funds. Additionally, he reported that the banks have been working closely with AIDEA on the SETS program, which also includes commercial buildings energy efficiency financing. MR. BEEDLE said specifically, with respect to HB 74, the bankers believe inherent manageable risks are associated with the LNG project; however, many financial tools are needed to bring this to fruition and attract investors and lenders. With respect to the fiscal notes, as Representative Chenault discussed, the bankers also want to ensure that Alaska retains the SETS program, which was funded last year. He pointed out that the SETS program addresses a different and more holistic need than a single project. Thus, Alaska's bankers do not wish to see HB 74 detract from the SETS program. Alaska's bankers believe it is possible for AIDEA to set aside the $100 to $125 million, which can be leveraged four to five times. He detailed that the funds are set aside in the form of a trust to get called upon in case of a default for credit enhancement or guaranteed issues to banks; however, it's not dollar for dollar. In fact, that amount can accommodate $400 to $500 million in loans for SETS and it could similarly help with other project development such as the LNG project. He expressed caution on fiscal notes, noting the banks are ready to work with the SETS program, this program, and other programs such as the Brooks Range Petroleum Corporation (BRPC) Mustang Oil Field Development Program. He said Alaska's bankers are comfortable with AIDEA's roles and promulgated regulations. In conclusion, he offered support for HB 74 and asked the committee to ensure the fiscal notes can accommodate both the SETS and project financing. 4:18:44 PM BILL BAILEY, Director, Public Relations, Fairbanks North Star Borough School District (FNSBSD), stated this bill is paramount to the economic health of Interior Alaska and rural communities. The FNSB School District provides heat and power to 34 buildings, of which 23 buildings use fuel oil. During the 2011- 2012 school year, the district burned 478,517 gallons of fuel oil and spent approximately $4 million on electricity, he reported. The school district supports the legislature's effort to secure and supply affordable natural gas to the greatest number of Interior residences and businesses in the shortest amount of time possible. This bill would help expedite that process. He recalled questions on the cost for conversion. He reported that one elementary school in the district used 22,000 gallons of fuel oil last year. He estimated cost of that fuel to be $39,000, based on the fuel equivalent of $2.67 per gallon. The district estimates that the conversion from fuel oil to gas would pay for itself in two years or less. 4:20:37 PM HANK BARTOS, Member, Lowell Group, stated the Lowell Group has worked for five years to try to develop a low cost energy program for Fairbanks. He said that HB 74 is the way to go. He asked members to consider this as a project that would bridge to a pipeline. Currently, the cost of heating oil and gasoline is over $4 per gallon. The cost of transportation diesel is $4.30 per gallon and a kWh is over 20 cents. Fairbanks energy costs are some of the highest in the nation and have driven homeowners to heat their homes with wood burning appliances. If fact, the community has had record sales in wood burning appliances since wood is the cheapest energy source for heating. However, the use of wood for heating fuel has caused air quality issues. During November through March, North Pole and Fairbanks had significant numbers of unhealthy air days, with highs reaching 19-25 days for some months. He emphasized the only way to solve the air quality issue is to switch to natural gas and such a transition could reduce emissions by 90 percent. He cautioned that the EPA can cut federal highway funding in Alaska due to non-compliance with air quality. He urged members to solve the problem by passing HB 74. 4:23:03 PM DENNIS GILLITZER stated he and his wife are senior citizens and have been affected by air quality issues, which has limited their activities. Further, their daughter lives in North Pole with small children in an area that is referred to as the "rectangle of death." He said he can't imagine kids going outside at recess in the elementary school across the street. He offered his belief that natural gas will go a long way to bring clean air to the area. He acknowledged he could leave the state, but he wants to stay in the area. 4:24:19 PM GARY ATWOOD said he is a 60-year resident who spent 20 years driving a truck, and that he has also served as the business manager for the Teamsters Local 959 during the pipeline days. He urged members not to take any action that would slow down the pipeline from the North Slope to Fairbanks. He highlighted that this bill could set up the infrastructure and delivery system [for use with a pipeline.] He predicted the pipeline could be built in a couple years with local hire. He expressed concern about delaying the pipeline and related that he has used all types of energy from wood to electric, but the cost of oil delivery is like picking up a second mortgage since it costs about $1,200 every other month to heat his home. 4:26:50 PM DAVID GARDNER, Vice President of Marketing and Member Services, Golden Valley Electric Association (GVEA), stated that as a major consumer of oil, GVEA strongly supports bringing lower cost fuel such as LNG to the Interior. He said that GVEA provides an essential service to more than 100,000 Interior residents from Cantwell to Delta Junction. Due to the price GVEA pays for fuel for its generators, this essential service - electricity - comes with the highest cost of any utility in the Railbelt. He predicted that burning natural gas in the North Pole expansion power plant could potentially save customers millions of dollars annually. In addition to cost savings, an LNG trucking could reduce space heating costs, lower air pollution levels, provide less expensive propane to villages along the Yukon River, and provide LNG to Anchorage during natural gas shortages. He concluded that GVEA is committed to this project to mitigate costs to the Interior residents, looks forward to working with AIDEA, and sharing its expertise and work products to help facilitate completion of this project as soon as possible. He urged the committee to support HB 74. 4:28:27 PM ROGER BURGGRAF offered his support for HB 74. He stated that the LNG plant and trucking proposal is a short or mid-term proposal designed to bring reasonably priced gas to Fairbanks and Interior Alaska. He said he has been waiting since 1958 for Fairbanks to receive natural gas. When fuel oil costs were lower Interior residents survived; however, times have changed and electricity bills are very high with fuel costs typically even higher. As previously mentioned Fairbanksans have turned to wood to heat their homes, which has created air quality problems. He related that diesel and fuel oil costs are over $4 per gallon, which is killing the community's ability to survive. The cold climate in Fairbanks makes it even more difficult. He said, "EPA is breathing down our necks because of air quality problems and that can only be cured by getting natural gas." He reiterated that he has been waiting 53 years for gas to arrive in Fairbanks. He has not seen progress toward pipeline construction and even if a pipeline is approved it would still have an 8-10 year lag time. He concluded by stating, "We need gas and we need it now." He hoped the committee will look favorably on the proposal since Fairbanks's future is dependent upon this support. He pointed out that Fairbanks has supported other activities throughout the state and is now asking for support [for HB 74] today. 4:31:02 PM WILLIAM MCAMIS agreed with Mr. Burggraf that Fairbanks has been waiting a very long time [for natural gas]. He stated that he will be a 50-year resident this fall and has observed project proposals over time, ranging from various gas pipelines and dams, but nothing has happened. In fact, one project on Chena Hot Springs Road was abandoned and has trees growing up at the site. Since 1998, the cost of oil went from $1 to $4, which means it has quadrupled in 15 years and the cost of electricity has similarly increased, with propane and wood costs also rising. Even though the LNG trucking project may not be perfect, it can be done in the near term and will solve air quality problems, decrease electricity, and space heating. He surmised that due to sequestration, significant reductions may happen at Eielson Air Force Base and Fort Wainwright. He predicted that energy costs will factor into those decisions. He thanked the committee. 4:32:50 PM BYRAN IMUS, Member, Laborers Local 942, said his points have already been made. He said, "Fairbanks is slowly dying on the vine and this would just be a good start to get the momentum rolling ... and improve the long-term outlook for Fairbanks. People are not positive about the long-term viability of Fairbanks. This would be a great step in that direction. Thank you." 4:33:37 PM [HB 74 was held over.] 4:33:59 PM The committee took an at-ease from 4:33 p.m. to 4:35 p.m.