SB 136-IN-STATE PIPELINES: LEASES; CERTIFICATION  CHAIR MCGUIRE announced the consideration of SB 136. 12:13:05 PM JOE BALASH, Special Assistant to the Governor for Energy and Natural Resource Issues, said SB 136 is part of the Governor's three-part plan to initiate an instate natural gas pipeline project. The first part is to secure funding in the current legislative budget cycle to initiate work to define the need for and timing of a pipeline to deliver natural gas to Alaskans, particularly in areas where it's needed most. That includes conducting an alternatives analysis, selecting a route, applying for major permits including rights-of-way, identifying the source of gas and customers, and bringing all the technical and commercial pieces together to create an opportunity to sanction a project as early as 2011. The Governor has appointed Harry Noah, a former DNR commissioner, as project manager for this first part. The second part of the plan is a separate piece of legislation to change the statutory missions of the Alaska Natural Gas Development Authority. The notion is to broaden the horizon. The third part, which is contained in SB 136, makes changes to the Right-of-Way Leasing Act and the Pipeline Act for the purpose of facilitating the commercial and business arrangements between shippers of gas, a pipeline project, and the customers that will be necessary for a commercial project to move forward. 12:15:11 PM MR. BALASH explained that in late 2008 and early 2009 the administration began discussions with the parties that were interested in pursuing a bullet pipeline project, specifically Enstar and Anadarko, and identified some things that could be smoothed out to make the process flow easier. The biggest potential roadblock they identified was that under current law state right of way leases require that a pipeline and lessee commit to providing common carrier service on that pipeline. Describing common carrier service as the gold standard of access for shippers of gas, he explained that, in general, a common carrier pipeline has to provide service to any and all comers when requested. If shippers' requests for service reach the maximum capacity of that pipeline, the pipeline must pro-rate the existing shippers and make room for the new entrant. MR. BALASH pointed out that a 24 inch pipeline from the North Slope to Southcentral is certainly a world-class project that would require some significant financial commitments on the part of the players in order to secure the financing necessary to construct the project. The shipper, in this case Anadarko, would like contractual certainty that they won't be pro-rated if they make the financial commitments to develop a gas field and then want to get that gas to market. They want certainty that they won't lose any of their capacity in the pipe so that they'll be able to follow through on contractual commitments they've made to customers in terms of delivery. 12:17:31 PM MR. BALASH said that as the administration moved forward to introduce the bill and was taking into consideration other dynamics with regard to the role and scope of ANGDA and the need to get gas to more than just Southcentral Alaska, the Governor asked why the kind of provisions they were asking the Legislature to make for a bullet line aren't good enough for any other pipeline. Thus SB 136 is drafted in a manner that would apply to all instate pipelines. MR. BALASH said he would throw out one caveat before getting into the sectional analysis. That is that because the administration did its homework with parties interested in the bullet line, they did not do the homework necessary to understand how these changes might impact the operations of existing pipelines in Cook Inlet and in particular the potential impact to future pipelines in Cook Inlet. CHAIR MCGUIRE said the bill is not retroactive in nature. MR. BALASH said that's correct. CHAIR MCGUIRE asked if there are any pipelines that are in early stages that this may impact. MR. BALASH replied he isn't aware of any but the bill is a fairly complicated body of law, particularly in the Pipeline Act. With the Chair's indulgence he said he may defer some questions to the attorneys who are online representing the Department of Law and the Regulatory Commission of Alaska. 12:20:00 PM CHAIR MCGUIRE noted that page 10, line 11, says that the Act is effective immediately. She asked Mr. Ostrovsky and Mr. Stoller if they see any impact to existing pipelines in Cook Inlet. Existing pipelines would probably argue that they shouldn't be forced to be common carriers when, looking forward, other pipelines have the opportunity to be contract carriers, she added. LARRY OSTROVSKY, Civil Division, Oil, Gas & Mining Section, Department of Law, Anchorage, agreed with Mr. Balash that the bill is written to be prospective. It would apply to anybody who is going to apply for a pipeline right-of-way lease so it applies equally to every intrastate pipeline. SENATOR WIELECHOWSKI asked if these provisions would apply if the line were built intrastate from Prudhoe Bay to Valdez. MR. OSTROVSKY replied they would apply. SENATOR WIELECHOWSKI asked if this would apply to a line built under AGIA by TransCanada Alaska to Valdez. MR. OSTROVSKY said this is designed for gas pipelines that originate and terminate within Alaska. He cited Section 3 on page 2, line 19. ROBERT STOLLER, Assistant District Attorney, Civil Division, Commercial/Fair Business Section, Department of Law, Anchorage, stated agreement with Mr. Ostrovsky. CHAIR MCGUIRE said at least one proposal envisions supplying the LNG plant in Kenai for export capacity. Noting that this goes back to the FERC decision on jurisdiction, she asked what would happen if the line meets the requirements under Section 3, but it's envisioned, and it happens, that export of LNG comes out of that line. MR. BALASH said the fundamental question will be whether or not FERC asserts jurisdiction, because in the Pipeline Act RCA more or less concedes federal jurisdiction in cases where that happens. When federal law preempts state regulation, the state does not assert regulation over the facilities or pipelines or assets. Fortunately TransCanada's license terms require them to abide by many of the things that are asked in SB 136. 12:24:05 PM SENATOR WIELECHOWSKI asked if this would apply to a spur line off the main line as is being contemplated by ANGDA. MR. BALASH replied he believes the answer is yes, but it will depend on where federal jurisdiction begins and where it ends. CHAIR MCGUIRE asked if the FERC mandates common carrier status. MR. BALASH explained that under the Natural Gas Act FERC provides for contract service in the regulation of pipelines. Firm service contracts are contemplated, but then all the provisions in the Natural Gas Act are designed to prevent discriminatory behavior by pipelines. CHAIR MCGUIRE observed that if an intrastate pipeline contemplated export it would be a contract pipeline, so it wouldn't matter if it was under federal or state regulation. MR. BALASH replied we would hope so but if federal jurisdiction is not asserted over the pipeline, the state right of way leases require the lessee to covenant that they will provide common carrier access. The Pipeline Act allows for firm transportation service to be offered and regulated by the RCA, but it's an incongruity between the Right-of-Way Leasing Act and the Pipeline Act. It's a brain teaser to try to marry the two and make sure that when the state enters into a lease arrangement with a pipeline that it is getting the kind of commitments from the pipeline that will protect the public interest. The Right- of-Way Leasing Act in intended to do that. SENATOR WIELECHOWSKI asked the value of the lease for state land on TAPS. MR. BALASH said he doesn't have that information but he'd be happy to find out. 12:27:29 PM SENATOR WIELECHOWSKI noted that he had mentioned $1 million, and asked if he has a sense of what the lease would run from Gubik to Southcentral. MR. BALASH said the $1 million threshold in bill Section 3, mimics language in AS 38.35.120 regarding covenants that a lessee is required to make for pipelines valued at $1 million or more. He isn't certain in what year the $1 million was put into law, but the decision was to use the amount that's in statute for purposes of consistency. SENATOR WIELECHOWSKI said if he reads this correctly "these covenants are triggered when you have a noncompetitive lease of state land for rights-of-way for natural gas pipeline valued at a million dollars or more." MR. BALASH said it's for a pipeline that is valued at $1 million or more. SENATOR WIELECHOWSKI said he isn't sure that it says that and asked if he's saying that the million dollars applies to the value of the natural gas pipeline and not to the value of the rights-of-way. MR. BALASH said that's his understanding. SENATOR WIELECHOWSKI asked for legal clarification because he reads it differently. MR. OSTROVSKY said he reads the statute to mean a natural gas pipeline valued at a million dollars or more. He conceded that he can see how it could be read both ways and he'll verify his answer. 12:29:27 PM SENATOR WIELECHOWSKI said if there's uncertainty he'd argue that it should be clarified. CHAIR MCGUIRE suggested some modifying language. She asked what pipelines would be valued at less than $1 million and who the state might want to keep out of this new statutory framework. MR. BALASH said he believes the provision was put into AS 38.35.120 in 1972 or 1974, but the question is at what point a pipeline becomes big enough to affect the public interest such that these kinds of protections and requirements should apply. CHAIR MCGUIRE asked him to clarify that before the next hearing. She understands that this is incorporates an existing statute to marry philosophical concepts, but it reflects a policy decision. Either the policy decision is good today and the dollar amount needs to coincide or the policy decision is no longer relevant and all pipelines should be regulated under this structure. 12:31:20 PM MR. BALASH continued the bill overview and said that sections 1 and 2 make corrective references in statute sections of Title 38. Section 3 adds a new section 38.35.121 to the Right-of-Way Leasing Act. Section 120 requires a lessee to make certain covenants to the state and section 121 would put into place an additional set of covenants that a lessee would make when applying for a state right-of-way lease. The additional covenants are contained on pages 2-6 and are built on the must- haves in the Alaska Gasline Inducement Act. They are the things that were requested of applicants under AGIA that are intended to ensure that benefits of a project accrue to the citizens, businesses and workers in Alaska. In addition they provide the predictability of access to a pipeline that is important for additional exploration and development to occur. The first is the commitment to solicit demand every two years for additional pipelines. Next are the terms under which they would solicit that demand. Item three is the commitment to seek the approvals to make the expansion happen. Item four is the commitment to reasonable engineering increments, and identifying what those increments might be based on the design of the pipe when it's first constructed. Item five is the commitment to expand on those increments on commercially reasonable terms. Item six is the commitment to treat the expansions on a rolled- in basis with a cap up to 115 percent of the day-one rate. Item seven is the commitment to offer distance sensitive rates. The administration asked for that under AGIA for the big pipe and believes it is applicable here as well. Item eight relates to Alaska hire to make sure that the citizens are benefited in the construction of a project such as this. Item nine is the commitment to negotiate, prior to construction, a project labor agreement (PLA) that the lessee will commit to. Item ten is the commitment to be regulation by the RCA under AS 42.06, the Pipeline Act. 12:34:30 PM Section 4 sets out the definitions for "commercially reasonable terms" and "reasonable engineering increments" in the Right-of- Way Leasing Act to make sure everyone is talking about the same thing in section 121. Section 5 amends the Pipeline Act and spells out that the covenants in Title 38 under the Right-of-Way Leasing Act are applicable to the lessee, and that the RCA has jurisdiction to enforce the covenants as a matter of its regulation of the pipeline provider. Section 6 allows an additional certificate to be provided by the RCA. Mr. Balash continued as follows: This goes back to the bigger picture in terms of what it is we're hoping to achieve in the next two and a half years in terms of getting all of the major permits under way and basically accumulated and put together for a project to be sanctioned as early as 2011. What this would allow the RCA to do is grant a conditional certificate and identify the conditions that need to be met. If for instance, we had an application for a certificate on a particular project that didn't necessarily have a gas supply committed yet. We want them to be able to go through the steps at the RCA to be able to get their certificate - much like we do for conditional rights-of-way at DNR. You can get a conditional right-of-way granted that spells out the conditions that must be satisfied to make that right-of-way firm. So this would take that same concept and apply it to a certificate that's required by the Regulatory Commission of Alaska and allow that same kind of head start, as it were, on the regulatory process to take place. Section 7 sets out the enforcement authority of the RCA. Section 8 changes the definition of firm transportation service in the Pipeline Act to make it clear that firm service means that a shipper on a pipeline can not be prorated. Section 9 adds the definition for "common carrier" that allows somebody who has an existing right-of-way lease - where they made the commitment to common carrier service - to be able to then offer firm transportation service and interruptible transportation service on that pipeline. 12:37:48 PM SENATOR WIELECHOWSKI asked the status of ANGDA's work on the spur line. MR. BALASH replied his understanding is that ANGDA very recently entered into a reimbursable arrangement and paid funds to BLM to continue with the EIS for the Richardson Highway route on the spur line work. SENATOR WIELECHOWSKI asked if the administration supports ANGDA's efforts to build the spur line. MR. BALASH replied: We have been supporting ANGDA since day one of the Palin administration. And the question is, fundamentally, how to evaluate what opportunities and needs there are for pipeline service in Alaska in terms of the spur line project that has been under pursuit here for the last 15 to 16 months by ANGDA. Certainly it is complementary to a large diameter project that would be going across the border and similar to that pursued by TransCanada and Denali. And in that regard is very helpful to the overall delivery of gas to Alaskans. But, whether or not that's going to be the right vehicle - whether or not we need to see a bullet line constructed sooner than a large diameter pipeline may come into service - is something that we're attempting to spell out, flesh out and understand more fully. It may be that Cook Inlet gas supplies reach a critical point here, whether it be due to deliverability or any number of other reasons, and because a bullet line requires such a long lead time to plan and construct, we want to get started now. And so that's been the focus here lately from the Governor. 12:41:00 PM SENATOR WIELECHOWSKI asked if the administration has to sign off on ANGDA expenditures. MR. BALASH said he'd be happy to find out. SENATOR WIELECHOWSKI asked if the administration has refused to sign off on expenditures that ANGDA has requested. MR. BALASH said his understanding is that the most recent request for the work with BLM was delayed somewhat, but it did go through. They have been scrutinizing whether or not requests by ANGDA for contracting and expenditures are consistent with the statutory mission of the authority and the appropriations made by the Legislature. SENATOR WIELECHOWSKI asked if he knows if any requests for expenditures by ANGDA have been denied. MR. BALASH replied he isn't aware of any outright denials, but he isn't sure about the latest status. SENATOR WIELECHOWSKI said he'd appreciate an update on that and asked if the administration has requested any changes in leadership at ANGDA. MR. BALASH said he understands that there have been conversations about various approaches related to overall direction and willingness to consider additional information, but he hasn't participated in those deliberative conversations. 12:43:20 PM SENATOR WIELECHOWSKI restated the question. MR. BALASH replied he doesn't have an answer. SENATOR WIELECHOWSKI asked him to look into that and get back to him. MR. BALASH said he'd be happy to. CHAIR MCGUIRE asked Mr. Balash find out how companies that are considering a bullet line are reacting to the implementation of the covenants. She noted that sometimes attempts to incentivize make for less incentive to the private sector. A company is considering building a bullet line and Alaska needs that project. She appreciates many of the covenants and she wouldn't want the committee to pass a piece of legislation that might interfere with current business plans and the free market opportunity for a bullet line. MR. BALASH agreed and added that the parties they've had discussions with were aware of the administration's view and position on the need for the must-haves. But, he said he can't speak for them here. CHAIR MCGUIRE announced she would hold SB 136 in committee.