HB 367-DIESEL FUEL STORAGE TAX CREDIT  1:58:44 PM CO-CHAIR SADDLER announced that the final order of business is HOUSE BILL NO. 367, "An Act creating a diesel fuel storage facility tax credit for public utilities; and providing for an effective date." 1:59:01 PM REPRESENTATIVE DOUG ISAACSON, Alaska State Legislature, offered some of the history to the introduction of the bill, its need, and its broader application. He reported that the closure announcement by Flint Hills Refinery revealed an adverse effect to the consumer as the availability of fuel storage, specifically HAGO (heavy atmospheric gas oil) and LAGO (light atmospheric gas oil), to Golden Valley Power for electricity generation would now be limited. He explained that an agreeable, competitive lease price between Golden Valley Power and Flint Hills would be necessary to forego the necessity of building new tanks for the storage of five to ten days of fuel. He shared that the Alaska Village Electric Cooperative, Incorporated (AVEC) had submitted a letter, dated March 17, 2014, detailing its needs and its support of the proposed bill [Included in members' packets]. He reported that AVEC owned and operated 47 bulk fuel tank farms, about half of which had benefited from the Denali Commission funding for improvements. He declared that it was necessary to address the "woeful need of upgrades and expansion." He noted that it was not his intention to keep Alaska indentured to diesel fuel, although it was clear that diesel would be around for decades to come as its infrastructure was already in place. He explained that HB 367 would offer a tax credit similar to the previously offered gas storage credits. Although the proposed bill would allow for up to $15 million in credit, it was more likely to be about $5 million, or 50 percent of the cost. He declared that the proposed bill was not trying to incentivize other refined products to Alaska, but to offer the lowest delivered cost to the consumer in Alaska. Therefore, the beneficiaries were restricted to Alaska regulated utilities, and he noted that the attached fiscal note [Included in members' packets] revealed there were not a lot of these. He declared that the proposed bill would offer the possibility for substantial relief to the affected communities in the service districts and minimize the economic impact on communities dependent on Flint Hills fuel. He said that encouraging industry and affordable power should be of great importance to the state. 2:05:29 PM REPRESENTATIVE P. WILSON noted that these tax credits had originally been intended for small communities throughout Alaska, but this proposed bill would now offer this credit to much larger communities and would set a different precedent. REPRESENTATIVE ISAACSON, in response, said that AVEC had not been a past recipient and its 55 community members had not received storage credits of this nature. He pointed out that the proposed bill restricted this to Alaska regulated utilities. He said that the Golden Valley Electric Association region would continue to need HAGO and LAGO fuel until an alternative fuel could be found for its antiquated diesel driven turbines in North Pole. He described the maximum usage from the other electric generation in the area. He stated that the proposed bill would allow the opportunity for fuel storage to the Fairbanks and North Pole area in addition to the other small communities. REPRESENTATIVE P. WILSON pointed out that her community "is in the same boat certain times of the year." She relayed that the community paid extra when it was necessary to use diesel fuel. REPRESENTATIVE ISAACSON replied that there was currently a fuel surcharge on each monthly bill in his region, and it was always in excess of the cost to generate power. He declared that there was not a firm supply of hydro power or natural gas in the Fairbanks region. REPRESENTATIVE P. WILSON said that she still had concerns for the proposed bill. REPRESENTATIVE ISAACSON explained that there were Golden Valley Electric Association representatives to specifically address any of her concerns. 2:10:53 PM REPRESENTATIVE ISAACSON, in response to Co-Chair Saddler, explained that HAGO and LAGO were specific cuts in the refining tower, as different products were distilled at different temperatures. CO-CHAIR SADDLER asked what HAGO stood for. REPRESENTATIVE ISAACSON said that he would report back to its meaning. REPRESENTATIVE OLSON offered his understanding that the Healy Coal plant would be coming on line in the near future, and he asked for clarification that this excess capacity would not be sufficient to replace the aforementioned generators. REPRESENTATIVE ISAACSON replied that this was his understanding, and he deferred to Golden Valley Electric Association for more information. 2:12:30 PM REPRESENTATIVE SEATON requested a spreadsheet to the breakdown in price per kilowatt from Golden Valley Electric Association versus the remote villages included in the proposed bill. REPRESENTATIVE ISAACSON offered his belief that AVEC and Golden Valley could each supply this to the committee. CO-CHAIR FEIGE shared that the power company in his district was Matanuska Electric, a public utility and a non-profit corporation. He questioned whether the public utility paid taxes, and asked what tax liability the public utilities would write this refundable credit against, as most of them were non- profits. REPRESENTATIVE ISAACSON, in response, directed attention to Section 1, lines 8-9, which covered both scenarios and allowed for a payment in lieu of a tax credit. CO-CHAIR FEIGE asked for clarification that if there was not a tax liability there would be a payment. REPRESENTATIVE ISAACSON expressed his agreement. REPRESENTATIVE SEATON requested an explanation to the uses of the oil and gas tax credit fund mentioned on page 2 of the fiscal note analysis [Included in members' packets] and asked if this could deplete that fund. REPRESENTATIVE ISAACSON replied that he would get back with an answer. REPRESENTATIVE TARR said that she would hold her questions regarding the fiscal note until someone from DNR could answer them. 2:15:32 PM CO-CHAIR SADDLER opened public testimony. 2:15:51 PM MEERA KOHLER, President and CEO, Alaska Village Electric Cooperative, noted that AVEC served 55 villages which were very dependent on diesel fuel for energy. She said that most of the tank farms were a little bigger than 100,000 gallons, with about 22 of the tank farms still in need of upgrades. She said that this opportunity for a tax credit for half of the cost for refurbishing the tank farms was "extremely attractive and very important because otherwise the only opportunity we would have is to take out loans that simply adds costs to very, very high cost of electricity already." REPRESENTATIVE TARR asked if the 22 tank farms in need of upgrades were each a separate entity to apply for the proposed tax credit. MS. KOHLER, in response, said that the 22 tank farms all belonged to the Alaska Village Electric Cooperative, although there may be other public utilities that were looking to improve diesel fuel storage facilities. She said that the State of Alaska was making an updated assessment of tank farms, as it had not been done since the late 1990s, and that this would give an idea of the continuing need. She explained that the local utility in a small village could be run by the local city government or the local tribal corporation, which often did not have a lot of borrowing capacity. She stated that even with this credit, it would still be necessary for them to find outside financing to supplement the remainder of the cost. She questioned the demand from these small villages because of this cost. She reported that utilities similar to AVEC which were funded through loans from the Rural Utility Collaborative or private lenders had the ability to leverage the money from this tax fund. She stated that AVEC did pay a gross receipts tax as a cooperative, which was a modest tax back to the state. She said that the tax break was not a significant component for AVEC. CO-CHAIR SADDLER asked if there was an estimate to the cost of the upgrade to the aforementioned 22 tank farms. MS. KOHLER, in response, explained that a small tank farm in a village scenario would cost about $12-$13 per gallon for a capacity of about 150,000 to 200,000 gallons; however, in a larger tank farm, 500,000 gallons to a few million gallons, it would cost about $2-$2.50 per gallon. She said that a major refurbishment of the existing tank farms, salvaging whatever tanks possible, would cost about $1 million for a 150,000 gallon tank farm. She estimated a total investment of about $70-$75 million to refurbish all 22 tank farms. REPRESENTATIVE TARR asked if AVEC could apply for the credit from all the projects it was working on. MS. KOHLER offered her belief that this would be the case, although she opined that the intent of the bill was to support facilities which began work after the effective date of the bill. She said that AVEC did not work on more than 2-3 tank farms each year, which would be an investment of about $5-$7 million each year for tank farm upgrades and refurbishments. 2:24:53 PM REPRESENTATIVE SEATON, referring to page 2, line 4 of the proposed bill, read that a storage facility would not qualify if it had been in operation as a diesel fuel storage facility before the effective date of the proposed bill. He offered his belief that the proposed bill was only referencing new tank farms and new tanks, and not refurbishments or upgrades. MS. KOHLER offered her understanding that the intent was to not include facilities which were completed prior to the effective date, but that an existing tank farm of more than 100,000 gallons would qualify for funding toward a substantial refurbishment. CO-CHAIR SADDLER offered his belief that the proposed language said that if the facility, and not a specific tank, were used as a diesel facility, it would not qualify. REPRESENTATIVE ISAACSON replied "that's one of the tweaks we'll bring back to you." MS. KOHLER, in response to Co-Chair Feige, said that AVEC tank farms were under US Coast Guard and EPA jurisdiction, and were inspected two to three times each year, with minor maintenance performed throughout the year. She reported that EPA requirements would necessitate stricter testing to ensure tank integrity. She acknowledged that it was an ongoing struggle to add extra cost to an already expensive bill to pay for upgrade projects. She said that AVEC spent about $1 million annually on tank farm operations, and that there was not very much money left. She called it "a hand to mouth existence." CO-CHAIR FEIGE asked how much money did AVEC set aside for programmed replacement of tanks, or were they simply looking to the State of Alaska for capital money for replacements. MS. KOHLER replied that AVEC had never looked to the state for funds to replace tank farms, as it had never been available. She said that the funding from the Denali Commission had been the first time that any significant money had been put into major upgrades to the tank farms. She shared that the gross revenue from non-fuel sources was about $18 million annually, which paid for generation maintenance, overhauls, tank farm operations and maintenance, spill response, and administration, noting that "there has never been a lot available." There had not been a lot of investment since the initial investments in tank farms 40 years prior. She reported that there would be $100,000 - $150,000 on an individual tank farm for a major refurbishment on a couple of locations on an annual basis. She pointed out that this only addressed the electric utility and did not address the remaining 75 percent of tank storage in a village which was non-utility. CO-CHAIR SADDLER asked that she report back to the committee with "a clear idea of the total cost that what it might take to refurbish the tanks that your co-operatives rely on." REPRESENTATIVE P. WILSON noted that page 2 stated that qualification for the credit in this section required that a diesel fuel storage facility must have a diesel derived fuel volume of at least 100,000 gallons. She pointed out that, as there had been testimony to a need for smaller facilities, this should be adjusted. 2:32:24 PM CO-CHAIR SADDLER opened public testimony on HB 367. 2:32:59 PM LUKE HOPKINS, Mayor, Fairbanks North Star Borough, said that ensuring that the borough and the surrounding region had enough diesel fuel storage for electrical generation was an important piece for financial relief to the electric cooperative association. 2:34:19 PM COREY BORGESON, President and CEO, Golden Valley Electric Association (GVEA), said that the potential closing of the Flint Hills Refinery brought a significant number of issues to GVEA, and that fuel storage was one of them. He acknowledged that Flint Hills had control of a significant amount of storage, on what was considered a very contaminated site. He declared that it was essential for GVEA to have its own storage facilities for HAGO and LAGO from the North Pole refinery. He said that HAGO could not be transported into Alaska, as it needed warmer temperatures for transportation. He remarked that an alternate fuel source, even with the Healy Coal plant and LNG trucking project, would always be needed in the community. He declared that the fuel storage was very important to the utility. REPRESENTATIVE OLSON asked for the approximate price for power generated by the two generators at Flint Hills versus the price for coal at the Healy plant. MR. BORGESON explained that these were measured in different ways. In kilowatt hours when dispatching the power, the generators had a cost of $0.23 per kilowatt hour for HAGO fuel and $0.16 per kilowatt hour for naphtha fuel. He reported that the utility spent about $61 million on naphtha and $13 million for HAGO. CO-CHAIR SADDLER asked about the coal cost. MR. BORGESON replied that the cost was about $0.65 per kilowatt hour for fuel, although including labor would be about $0.12 per kilowatt hour. MR. BORGESON, in response, said that the turbines at Flint Hills generated about 180 megawatts and the coal plant generated an additional 50 megawatts. REPRESENTATIVE P. WILSON asked for the amount of tank storage at the Flint Hills facility. 2:42:12 PM LYNN THOMPSON, Vice President for Power Supply, Golden Valley Electric Association (GVEA), said that GVEA had 50,000 gallon storage tanks each for HAGO and naphtha, and that GVEA relied on the Flint Hills refinery to pipe in product for the turbines when they were being operated. 2:42:52 PM ANNA ATCHISON, Kinross Fort Knox Mine, said that the mine was the largest gold producer in Alaska, and that it was the largest customer to GVEA, as it took a lot of power and fuel to produce gold from a low grade ore body. She relayed that the mine used about 24 million kilowatt hours each month, the second largest non-labor cost. She pointed out that the mine was the fifth largest private employer in the borough, and, as its employees also lived in the area, they were also affected by the uncertainty for the future of energy, especially since the announcement for the closure of the Flint Hills Refinery. She declared support for HB 367 and the efforts of GVEA to reduce and stabilize power costs for all rate payers. MS. ATCHISON, in response to Representative Seaton, offered her belief that the mine paid about $0.19 per kilowatt hour for electricity to the mine, although she could get back to the committee with an exact number. 2:45:00 PM JOMO STEWART, Energy Project Manager, Fairbanks Economic Development Corporation, spoke in support of HB 367, noting that energy was "a big, big deal" when people live in a cold, dark metropolitan area. He said that it was a necessary component of the economy and that its availability, affordability, and reliability impacted all the other aspects of the economy. He directed attention to earlier efforts by the state to recognize this necessity for energy storage. He listed state programs which included participation with the Denali Commission, and various energy and LNG storage tax credits including the Cook Inlet tax incentives and credits. He reiterated support for proposed HB 367. 2:47:04 PM CO-CHAIR SADDLER closed public testimony and held over HB 367.