HB 289-NATURAL GAS STORAGE TAX CREDIT/REGULATION  1:09:23 PM CO-CHAIR SEATON announced that the first order of business would be HOUSE BILL NO. 289, "An Act relating to a gas storage facility; relating to the tax credit for a gas storage facility; relating to the powers and duties of the Alaska Oil and Gas Conservation Commission; relating to the regulation of natural gas storage as a utility; relating to the powers and duties of the director of the division of lands and to lease fees for a gas storage facility on state land; and providing for an effective date." 1:10:12 PM JANE PIERSON, Staff, Representative Steve Thompson, Alaska State Legislature, introduced HB 289 on behalf of the prime sponsor, Representative Thompson. She said the cost of energy is crippling a good portion of Alaska's residents. The ever increasing expense of heating homes and operating businesses during the long cold winter is hurting the ability of Alaskans to put food on the table and plan for the future. The Fairbanks community alone spends over $600 million per year on space heating and is unable to expand its business district due to a lack of affordable natural gas. An infusion of gas in Fairbanks would reduce the cost to end users and would restore the ability of Fairbanks to grow its economic base. MS. PIERSON said HB 289 would incent the private sector's delivery of lower cost natural gas to Interior Alaska by extending the tax credits for a liquefied natural gas storage facility, which is necessary for a natural gas trucking project and something that Fairbanks is considering. A new credit for construction of above-ground liquefied gas storage tanks would make this program flexible to fit the varying needs of gas delivery in Fairbanks and possibly throughout the state. The bill would apply to a liquefied natural gas storage tank facility with a minimum volume of 1 million gallons and the amount of the credit would be limited to 50 percent of the construction costs up to $15 million. Additionally, HB 289 would allow eligible above-ground liquefied natural gas storage facilities sited on state lands to request an exemption from rental payments. The exemption could extend for up to 10 years following the commencement of commercial operations. The bill defines how credits should be distributed, both as a tax credit and as payments to non-taxable entities. MS. PIERSON pointed out that HB 289 also has safeguards. The liquefied natural gas storage facility would be regulated by the Regulatory Commission of Alaska (RCA) to ensure incentives are passed on to customers. The bill would also set forth how a person receiving a credit or a payment shall repay the credits or payment if the facility ceases commercial operations within the nine calendar years immediately following the calendar year in which the facility commenced commercial operations. Further, HB 289 would define "liquefied natural gas storage facility," "ceases commercial operations," and "commences commercial operations" for a liquefied natural gas facility. 1:12:48 PM CO-CHAIR SEATON noted for the record that before the committee was Version I, the proposed committee substitute (CS) for HB 289 [labeled 27-LS1216\I, Bullock, 2/20/12]. He said this is the first hearing on HB 289 and therefore Version I is the bill before the committee. REPRESENTATIVE HERRON, in regard to the $15 million and 50 percent credit, inquired what the estimated total construction cost would be for a 1 million gallon facility. MS. PIERSON replied that the sponsor has been hearing it would be around $40 million. CO-CHAIR SEATON asked what percentage of daily use, or how many days of use, would 1 million gallons of liquefied natural gas (LNG) represent. MS. PIERSON responded that according to Golden Valley Electric Association (GVEA), 1 million gallons would be approximately one week of use. For the amount of usage by Fairbanks Natural Gas, another company that would like to use this, she deferred to the company's representative online [Dan Britton]. 1:14:18 PM CO-CHAIR SEATON inquired whether 1 million gallons would constrain communities [that are smaller than Fairbanks] from being able to use this proposed credit. He further asked whether Representative Thompson would have a problem if the amount was half a million gallons rather than a million gallons. MS. PIERSON did not believe that that would be a problem, but said she would research what other communities think they might need so that there would be a basis for the number. CO-CHAIR SEATON related that in Norway, small inner-port tankers go from coastal village to coastal village delivering LNG into tanks. He said it seems that this could also be applicable to coastal communities in Alaska provided the quantity is not so large that only the largest communities could use it. [CO-CHAIR SEATON opened public testimony.] 1:16:33 PM GENE THERRIAULT, Vice President, Resource Development, Golden Valley Electric Association (GVEA), noted that GVEA is working on projects that will move the utility away from oil-fired electric generation. He offered appreciation to Representative Thompson for introducing HB 289 on GVEA's behalf. He pointed out that the 2010 [Cook Inlet Recovery Act, House Bill 280,] was related to the need of putting a storage mechanism into the natural gas supply stream in Cook Inlet. In that bill the legislature decided to assist with lowering or controlling the cost of that storage component as it was added to that supply stream. A policy call was made that the state would offer assistance up to $15 million with the construction of that infrastructure. 1:18:11 PM MR. THERRIAULT explained that, at the time, the language talked about storage of gas in a depleted reservoir or pool as well as a tank, a tank denoting a mechanical storage facility on top of the ground. Because the focus at that time was on the needs of Cook Inlet, the threshold for what size tank would qualify was geared toward geologic storage and storage in a gaseous state rather than a liquid state. Because gas needs to come to Interior communities in a liquid state, that section of [House Bill 280] was looked at for applicability to the Interior and, if so, determining any needed modifications. One potential problem is that threshold for how big the tank needs to be for storing liquid methane; therefore, primary for HB 289, is defining how big the liquid tank needs to be. He explained that concern has been expressed by the backers of [House Bill 280] about modifying that section of statute. They have requested that the problem be addressed by creating a separate, almost identical, section of statute that is geared towards natural gas in a liquefied state. The difference between the two is that when LNG is turned into gas its volume multiplies by 600-620 times, so the difference in quantity that is being dealt with is tremendous. Expressing GVEA's thanks for the policy call to provide some state assistance for putting a storage component into the supply stream, he said GVEA is now trying to ensure that it is workable for the anticipated project in the Interior. 1:20:26 PM MR. THERRIAULT outlined the four major components of HB 289 [Version I]. One component would provide a 10-year waiver of lease payments for qualifying storage facilities on state land, as was done in the Cook Inlet Recovery Act and which would help reduce the cost to consumers. A second component would create a separate mechanism for providing a tax credit for the storage of methane in a liquefied form. In response to Co-Chair Seaton, he elaborated that Section 3 of HB 289 deals with an above-ground natural gas storage facility tax credit patterned after the storage tax credit that was granted in the Cook Inlet for gaseous methane. This part of the bill would create a new section [in statute] that mirrors the Cook Inlet mechanism, but is for methane in a liquid form. 1:22:24 PM MR. THERRIAULT said a third component would add the word payment. Testimony at the time [of House Bill 280] said the credit would be available for utilities, but it may not have been anticipated that the utility constructing the storage facility would be a not-for-profit, and a not-for-profit utility does not pay tax. In regard to the use of tax credit or refund in the existing language, legislative drafters pointed out that use of the word refund does not fit for an entity that does not pay tax and said that also including the word payment would solve that problem. This way, a non-taxpaying entity building a storage facility would qualify for repayment of a portion of the expense rather than a tax refund. The fourth component would establish mechanisms for the state to get back a portion of the refund or payment if the storage facility ceases to operate within 10 years. It would also provide for a cessation of the waiver of the lease payments for utilization of the state land. He specified that, primarily, Version I would create a separate section of statute that mimics the structure put in place for geologic storage in the Cook Inlet, but that is workable for above-ground storage as is anticipated in Interior Alaska. 1:24:20 PM MR. THERRIAULT stated that GVEA is partnering with Flint Hills Resources for the project that it is currently working on. The preliminary design anticipates a one million gallon tank located on the North Slope and a two million gallon tank in the North Pole area. A two million gallon tank would supply about 10 days of need for both the Flint Hills refinery and GVEA's 60 megawatt generation plant in North Pole. While it does not supply a huge amount, it takes into account any possible disruptions in trucking operations. In working with the design consultants, it may be possible to decrease the size of the North Pole tank because both the Flint Hills and GVEA industrial operations will have the capability of switching back to a liquid, oil-fired generation; it must be determined how quickly and efficiently that could be done should there be a disruption in the trucking operation. 1:25:31 PM MR. THERRIAULT said GVEA believes that the most immediate way of giving some energy assistance to the largest number of Interior residents is to reduce the cost of the fuel that fires that particular generator. The association serves residents all the way down the Richardson Highway to Delta Junction and residents all the way down the Parks Highways to Cantwell, and GVEA has notified other potential users in this service area that it would like to sign them up as customers once the liquid product is flowing. Product would be delivered to them at cost or as near to cost as possible so that it could be put to use as seen fit to help with energy costs. For example, the LNG could be used for a power generator that is connected on the road system but not part of the GVEA system, or it could be used for industrial use or industrial space heat. If the overall capacity is increased, everybody's per unit cost will go down, but getting the storage in place will be an integral part of that. 1:27:12 PM REPRESENTATIVE P. WILSON asked whether the North Slope tank will be located on state land. MR. THERRIAULT replied that GVEA has not yet decided where to site the tank, but said it would likely be state land because most of the land in that area that would provide access to the gas is state land. In further response, he said GVEA owns outright the property in North Pole that is located next to the Flint Hills refinery and GVEA's generator. The North Pole tank could also be sited on some of the land owned by Flint Hills, but the choice has yet to be made as to which piece of land is the most optimum location. He said GVEA is keeping in mind that both its generation plant and the refinery have a waste heat stream that can be used for re-gasification and GVEA wants to use that as efficiently as possible. REPRESENTATIVE P. WILSON inquired whether the Cook Inlet project is located on state land. MR. THERRIAULT offered his belief that the project is a combination of oil and gas leases that are on state land and possibly some private land. 1:28:43 PM REPRESENTATIVE P. WILSON observed that the proposed fiscal note is zero, but asked how much lease revenue the state would be foregoing if an exemption in lease payments was granted. MR. THERRIAULT answered that the leases are let on a fair market value and it is a fairly modest amount, but deferred to the Department of Natural Resources (DNR) to provide an average rental amount for the North Slope. He noted that GVEA leases land for its Eva Creek wind turbines and pays about $33,000- $40,000 per year for about 40 acres. In further response, he said the Eva Creek turbines are in the Healy area, not the North Slope. 1:30:31 PM REPRESENTATIVE P. WILSON asked what the differences are between the Cook Inlet statute and the provisions being asked for under HB 289 [Version I]. MR. THERRIAULT replied that, primarily, the total volume of gas is different. To contain the threshold of gas that is workable for geologic storage in Cook Inlet, GVEA would have to build a tank that holds in excess of six million gallons of LNG. That would be far bigger than what makes sense for GVEA's economic activity, so any benefit to the consumer would be lost through very inefficient operation. Also, the credit for the Cook Inlet area is calculated on 25 percent of the construction cost or $15 million, whichever is less. [Version I] would provide for 50 percent of the construction cost or $15 million, whichever is less. This takes into consideration that reservoirs in the Cook Inlet can be used as the tankage, but in the Interior a vessel must be built and therefore the construction costs are higher. 1:32:06 PM CO-CHAIR FEIGE observed that Version I, page 3, line 28, states that the liquefied natural gas storage volume must be "not less than 1,000,000 gallons". He surmised that LNG trucked from the North Slope to the Interior could be delivered far cheaper than diesel and therefore communities on their own separate electrical grids, such as Tok, Northway, Valdez, and Glennallen, would benefit from this cheaper energy in the form of LNG. He asked why [a minimum tank size of] 1 million gallons was chosen as the limitation under HB 289. MR. THERRIAULT responded that debate [during House Bill 280] was that the storage be of a certain size to qualify so as to incent big enough storage. He explained that for possible uses down the highway system, a part of the actual North Slope resource production requires some tankage. If GVEA signed up a customer that was down the highway so that the trucks never stopped at GVEA's North Pole plant, those users would get the benefit of the million gallon storage tank constructed on the North Slope. He said he is unsure, however, whether those communities would think that a million gallon tank would be warranted for receiving and utilizing the resource in their own situation. Therefore, GVEA would be open to the committee's consideration of less storage. He said GVEA designed something that would work for it, keeping in mind that when the debate took place two or three years ago a certain threshold was required before the state credit was available. 1:34:36 PM CO-CHAIR FEIGE inquired how many thousand cubic feet (MCF) of gas are in one million gallons of LNG. MR. THERRIAULT answered that it takes 12.1 gallons of LNG to make 1 MCF of gas. REPRESENTATIVE HERRON asked what the life expectancy of the infrastructure would be under the business model being used. MR. THERRIAULT replied that GVEA is going after a life of 20-30 years for the infrastructure and is hoping that an alternative access to natural gas will come along before then. The trucking component, which would not qualify for this, would have to be swapped out because the life of the trucks would be shorter than that. REPRESENTATIVE HERRON inquired how many trucks would be needed for the 10-day supply at the Flint Hills location. MR. THERRIAULT responded that for serving Flint Hills' needs and GVEA's needs in North Pole, the expectation is 40 trucks on the road every day: 20 going north and 20 coming south in a continuous cycle. 1:37:02 PM DAN BRITTON, President/CEO, Fairbanks Natural Gas (FNG), noted that FNG has been serving the Fairbanks market with liquefied natural gas (LNG) since 1998 and currently operates a liquefaction facility in the Cook Inlet and two storage facilities in Fairbanks, with a total capacity of 350,000 gallons of storage. He said FNG supports HB 289 and would look to install additional storage at one of its existing facilities, which could be used as quickly as the tank is built. Fairbanks Natural Gas has excess liquefaction capacity in the summer months that could be used to fill the larger storage volume and this volume could be used for peaking in the winter when higher gas volumes are being sold. This would allow FNG to begin to expand its distribution system as quickly as the tank could be in service. MR. BRITTON added that the tankage would provide for backup in the event a pipeline is built. A pipeline would be a single- source energy supply, so if a large earthquake stopped the flow of supply that tankage could provide a backup source. Based on FNG's current sales in Fairbanks, a million gallons of storage would provide 15 days of LNG. Regarding the limitation that the storage be at least 1 million gallons, he said FNG would favor making that a smaller number for any of the other communities that might benefit. 1:39:05 PM CO-CHAIR SEATON requested Mr. Britton to get back to the committee in regard to the size of tankage that would be needed for smaller communities. CO-CHAIR SEATON held over HB 289 and noted that the public will be able to add further comment when the bill is next brought up.