SB 23-AIDEA: LNG PROJECT; DIVIDENDS; FINANCING  [Contains discussion of HB 74.] 3:48:30 PM CHAIR OLSON announced that the next order of business would be the CS FOR SENATE BILL NO. 23(FIN) "An Act relating to development project financing by the Alaska Industrial Development and Export Authority; relating to the dividends from the Alaska Industrial Development 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." CHAIR OLSON noted that SB 23 is the companion bill to HB 74, which has been hears several times in this committee with much public testimony. Therefore, public testimony for SB 23 will be brief as it's virtually the same bill as HB 74. 3:49:11 PM CHAIR OLSON explained that SB 23 contains the financing for the Fairbanks liquefied natural gas (LNG) project and the AIDEA [direct financing provisions remain] in HB 74. He explained that it is easier to manage these projects in two separate bills. He noted that he is awaiting the final draft of HB 74. 3:50:32 PM REPRESENTATIVE REINBOLD moved to adopt the proposed committee substitute, the HCS CS for SB 23, labeled 28-GS1738\O, Bailey, 3/15/13, as the working document. CHAIR OLSON objected for the purpose of discussion. 3:50:55 PM TED LEONARD, Executive Director, Alaska Industrial Development & Export Authority (AIDEA) and Alaska Energy Authority (AEA), Department of Commerce, Community, & Economic Development (DCCED), introduced himself. SARA FISHER-GOAD, Executive Director, Alaska Energy Authority (AEA), Department of Commerce, Community & Economic Development (DCCED), introduced herself. 3:51:10 PM MR. LEONARD explained that Version O would remove the direct financing language leaving in the bill the language for the dividend calculation for AIDEA and the liquefied natural gas (LNG) project. The fiscal note has been revised to show the reduction from the committee substitute, the direct language, leaving the fiscal note that relates to the dividend and the LNG project. He further explained that there isn't any change to the dividend language [from the revolving fund and the Sustainable Energy Transmission and Supply Development (SETS) fund] or the LNG language that was in HB 74, which remains the same in SB 23. CHAIR OLSON remarked the fastest way to expedite the LNG project is to use a bill that has passed the other body. 3:52:50 PM REPRESENTATIVE REINBOLD expressed compassion about the energy issues in Fairbanks; however, said she has questions since she is interested in the long-term fiscal health of the state. Referring to charts she distributed to members entitled, "DHHS Public Assistance Non-Formula Comparisons by Allocation" and "Division of Public Assistance Benefits by Census Areas," she pointed out that for FY 13 the state Division of Public Assistance (DPA) spent $3,389,944 in Fairbanks. She acknowledged that the state needs a comprehensive and sustainable energy plan, but questioned when - with the implementation of the LNG trucking to Fairbanks - the legislature could expect to see these state subsidies decline since Fairbanks receives substantial subsidies through the [Low Income Home Energy Assistance Program] LIHEAP. 3:55:01 PM REPRESENTATIVE REINBOLD then asked whether the project sponsors can secure long-term gas contracts with industrial users and utilities to ensure that this investment is recouped. She offered that her goal is to ensure that the Sustainable Energy Transmission and Supply Development fund (SETS) loan will not be jeopardized by not securing long-term gas contracts. MR. LEONARD answered yes; that part of the process AIDEA will go through in completing its feasibility study and prior to the SETS loan will be to secure long-term contracts with the utilities that would use the gas from this project. He reiterated that part of the loan process will necessitate that the contracts are in place. 3:55:59 PM REPRESENTATIVE REINBOLD asked for clarification on the length of the long-term contract, specifically whether it would be 5, 10, or 20 years in length. MR. LEONARD recalled that Fairbanks Natural Gas (FNG) is considering a 15-year contract, but until the process is completed the contract terms of the SETS and LNG contracts is not definite. He assured her that AIDEA will have customers to guarantee the project. 3:57:03 PM REPRESENTATIVE REINBOLD recalled AIDEA testimony relating that if the gasline is constructed the LNG can be repurposed to supply industrial users and serve rural Alaska. She asked whether any feasibility study has been done to assure it is viable to do so. MR. LEONARD answered that AIDEA is in the process of doing so. He offered that AIDEA has hired Northern Economics to begin this work; however, this will be part of the process AIDEA will undergo prior to submitting the project to AIDEA's Board of Directors for project approval. In any case, looking at that long-term demand is very important in terms of timing for the pipeline. MS. FISHER-GOAD suggested that Mr. Leonard has covered this quite well. The expectation is that after the pipeline is built, additional industrial customers would continue to be able to utilize this [LNG], in particular, some of the mining districts will need electrical generation as well as liquid fuel for trucks. Additionally, AEA has been working on the rural energy programs to ensure that the project and components can be used to produce liquid fuel for areas on the river system and rural road system. In essence, AIDEA anticipates this [LNG] project would be used in areas not served by a pipeline. 3:59:08 PM REPRESENTATIVE REINBOLD, summarizing her concerns, expressed her desire for assurance that if this project moves forward the state can anticipate a decrease in the LIHEAP. Second, she expressed the need to be sure the long-term contracts will be in place so the state can recoup a good investment on the SETS loan. Third, she expressed interest in ensuring that a feasibility study will be conducted so the project can be repurposed. In brief, Representative Reinbold related that her goal is to have a long-term energy plan for the entire state and to ensure the state maintains its good bond rating. MS. FISHER-GOAD answered that the AEA has been working closely with all the regions of the state to develop regional energy plans to address energy needs in the state. She cautioned that what will work in the Railbelt area or even in the Fairbanks area isn't necessarily what will work in Southeast Alaska. In fact, AEA reviews these issues regionally. Ms. Fisher-Goad clarified that the LIHEAP program, a statewide program based on income not necessarily the cost of energy in an area, is not an AEA program. She suggested that the LIHEAP should perhaps be addressed through the HSS. Although the Power Cost Equalization Program (PCE) is an AEA program, it does not serve the Fairbanks area since the GVEA is not eligible utility. 4:01:07 PM REPRESENTATIVE REINBOLD clarified that her point is that if the legislature is going to provide relief in Fairbanks, it seems to follow that energy costs will be lowered. MS. FISHER-GOAD answered that is correct. REPRESENTATIVE REINBOLD said she also assumed the [LNG or propane] would provide more affordable energy for residents. She explained she could provide substantial detail about public assistance, including adjustments made [in the HSS committee]. CHAIR OLSON remarked this is not the forum to discuss [the health and social services aspects]. 4:01:54 PM REPRESENTATIVE CHENAULT asked whether Version O has any negative effects on AIDEA moving forward on the Fairbanks [LNG/propane] trucking project. MR. LEONARD replied no. 4:02:31 PM REPRESENTATIVE CHENAULT characterized this project as an opportunity to assist residents in Fairbanks. He noted he has questions that AIDEA can't currently answer, such as the location and the costs of the LNG plant, which won't be available until the feasibility study is completed at which point the project could move forward if it is deemed feasible. He said he is fairly comfortable with AIDEA moving forward with this bill since it would allow AIDEA to examine costs and perhaps move forward with a project that will assist Fairbanks as soon as possible. He offered his belief that this project is not in competition with other energy projects, such as an in- state gasline or a big natural gas pipeline. He reiterated his support for the LNG trucking project to assist the community of Fairbanks, and in turn create opportunities in other areas in the state that do not currently have lower-cost energy. He noted his agreement with Representative Reinbold that the public assistance funding is high and although it isn't under AIDEA's purview, some of the assistance provided to individuals is for energy assistance. If that funding were available for [energy] projects, it might be possible to have a long-term energy supply for most areas of the state, he said. He acknowledged that it is a tough battle to offer the cheapest energy to everyone in a state the size of Alaska. However, without projects like this no opportunities will exist and residents will continue to pay high prices for fuel. Therefore, he offered his willingness to move forward with SB 23 to help the Interior residents. 4:05:35 PM REPRESENTATIVE HERRON referred to Section 4 and the change on page 3, line 12. MR. LEONARD explained that this language sets up the capital reserve for the state's moral obligation. The change on line 12 would replace "chairman" with "chair" and "no" with "not," which are technical changes; however, the whole section relates to the moral obligation of the state and allows AIDEA to set up a capital reserve to provide the state's backing for this credit. He explained that this language is estimated to change the investment grade to a high investment grade and the amount of basis points from 175 to 200 basis points will lower the cost of the bond. CHAIR OLSON asked whether AIDEA would have an AAA rating. MR. LEONARD answered it could be one or two ratings below. He clarified that the state has an AAA rating, and the moral obligation requires considering the bond, but this language would give it a boost it would not otherwise have if it was based on revenue bonds for a utility. Thus the language [in Section 4] would bring it up to an AA or AA plus rating, he said. 4:07:39 PM REPRESENTATIVE HERRON said he supports this bill in order to do something to address energy costs as the legislature has discussed gas projects and reductions in energy costs for a long time. In broader terms, the state is huge and there have been various [energy] subsidies including the Four Dam Pool and the Cook Inlet gas project. Passage of SB 23 will also be a huge subsidy and, perhaps, in the future other parts of the state will also receive subsidies. In short, Representative Herron said it does make sense to do something and he hoped the bill will work out and if not, the [legislature] will just need to try something else. 4:08:43 PM REPRESENTATIVE MILLETT, referring to the fiscal note and the language Interior Energy Plan, asked whether AIDEA will prepare an energy plan specifically for Fairbanks with the liquefaction project in mind. MS. FISHER-GOAD responded that the Interior Energy Plan has been the term used for the financing package in the proposed FY capital budget and the authorizations provided to AIDEA in SB 23. REPRESENTATIVE MILLETT said the House Special Committee on Energy is often criticized for not having an energy plan for the entire state. However, no one solution fits the entire state, which has been the fundamental barrier to creating a statewide plan. Therefore, she opined that it is good for the Interior to move forward with this project, even if it may not be palatable for Anchorage or Southeast Alaska residents. The state has historically funded large-scale energy programs in the state as there has been no private sector provider. Further, the state has subsidized electric utilities and Interior Alaska has waited for a solution. She viewed this as a start and once energy is provided to Fairbanks it will open up more job opportunities, which would offer the opportunity for people to get off [LIHEAP]. She offered to support this to make sure this energy rich state is not anemic in providing sustainable energy for its citizens. MS. FISHER-GOAD, in response to Representative Josephson, stated that she first reviewed [Version O] this weekend. In further response, Ms. Fisher-Goad explained that when the committee removed the direct financing program a number of conforming amendments were necessary. 4:12:50 PM REPRESENTATIVE JOSEPHSON referred to page 2 of the fiscal note, which specifies that the Interior Energy Plan will receive $125 million from the SETS direct financing. He asked whether that was removed since the funding for this project is in the operating budget. MS. FISHER-GOAD answered that what changed was the AIDEA fiscal note shows $750,000 in services request. She offered her belief the other fiscal note stands since it does not need to change. She reiterated that the direct financing program does not impact the Interior Energy Plan, so removing that from the bill does not impact the $125 million. Again, that fiscal note stands as is and is informational. In further response, Ms. Fisher-Goad agreed that the AIDEA adjustment that will remain in HB 74. 4:14:35 PM REPRESENTATIVE JOSEPHSON asked whether the changes in Version O would change rating from AAA to something less. MS. FISHER-GOAD explained that typically when a moral obligation is placed on a bond, the rating would be one or two notches below the entity providing the moral obligation since the obligation is not a general obligation, but is a different circumstance. REPRESENTATIVE JOSEPHSON asked whether AIDEA and AEA is content with [Version O]. MS. FISHER-GOAD answered yes; [Version O] will fulfill the needs of the Interior Energy Plan as testified. She explained that the impacts of the direct financing program and the benefits will be discussed by Mr. Leonard. She said the AEA would not be involved in a bill [regarding the direct financing program]. In further response, Ms. Fisher Goad agreed [Version O] is a stand- alone bill. 4:16:07 PM REPRESENTATIVE SADDLER referred to page 3, lines 18-19, of Version O, and asked the size of the capital reserve fund. MR. LEONARD explained that the capital reserve fund will be set up for this specific bond. Thus there isn't any money until the bond is issued. Typically, a capital reserve fund usually equates to one year of debt service so it will depend on the size of the bond issued. He suggested this bond may be issued in a series in conjunction with the build out of the distribution system and a portion of the $150 million would be for the first series. He also explained that this language states that AIDEA will set up a capital reserve fund for the debt service for this bond. In the event insufficient revenue is not available to repay the bond, AIDEA's Chair would ask the legislature to appropriate money to replenish the capital reserve. He assured members that AIDEA would ensure that this would not happen, but again, that is the purpose of a reserve account. He explained that the aforementioned language creates a moral obligation and although the legislature does not have to appropriate the money, the state would not want to impinge on its moral obligation so it would likely replenish the reserve account. He pointed out that AIDEA is currently considering ways to have a second layer of credit to back up the moral obligation. 4:18:28 PM REPRESENTATIVE SADDLER inquired as to whether as each series of bonds is issued the size of the capital reserve account would also increase. MR. LEONARD answered yes; it would increase up to the annual debt service. REPRESENTATIVE SADDLER inquired as to the original source of the capital reserve account. MR. LEONARD answered that it would be bond proceeds itself. In further response, he explained the remainder would be used to make the last bond payment. 4:19:08 PM CHAIR OLSON, after first determining no one else wished to testify, closed public testimony on SB 23. CHAIR OLSON removed his objection. There being no further objection, Version was before the committee. 4:20:03 PM REPRESENTATIVE CHENAULT remarked that SB 23 will give AIDEA an opportunity to truck LNG to Fairbanks and other opportunities that it might bring to other communities in the state. REPRESENTATIVE JOSEPHSON remarked that if these types of prices Fairbanks is experiencing occurred in Southcentral Alaska the prices would not be tolerated. He stated that the prices for fuel oil are so high because the price of oil is at $120 per barrel. Combined with the non-attainment issues for air quality and that compared to other large projects, such as a dam or a pipeline, this project is quite inexpensive. Representative Josephson offered his belief that SB 23 is a good investment and the people of the FNSB are worthy of this. He offered his support for the bill. REPRESENTATIVE HERRON related he has listened to the testimony given by Interior residents and found the comments to be sincere, in fact, many residents are scared and need help, and the legislature is ready to give them help. He hoped when people in other communities in the state need help that Fairbanksans will remember 2013. REPRESENTATIVE CHENAULT said that energy prices are not only high in Fairbanks or in rural Alaska. In fact, the price per gallon for diesel fuel on the Kenai Peninsula is higher than it is in Fairbanks. He said the anticipated effect of the LNG project ranges from $13-15, but this year short-term contracts were let in the Cook Inlet for $15 Mcf gas. While Cook Inlet residents receive a break on natural gas, over 50 percent of the Cook Inlet residents are not on a gas distribution grid and heat with propane, diesel, coal, and wood, he said. Fortunately, there is more wind in Cook Inlet than in Fairbanks, he pointed out. 4:23:35 PM REPRESENTATIVE CHENAULT moved to report the proposed House committee substitute, (HCS) for SB 23, labeled 28-GS1738\O, Bailey, 3/15/13, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, HCS CSSB 23(L&C) was reported from the House Labor and Commerce Standing Committee.