SB 151-REGULATION OF NATURAL GAS PIPELINES  CHAIR BUNDE announced SB 151 to be up for consideration. MS. MARY JACKSON, staff to Senator Wagoner, sponsor, said SB 151 is a housekeeping measure. In 2000, the legislature amended the Alaska Pipeline Act. One of the provisions of that legislation allowed for two classes of pipeline service: firm and interruptible. Those services applied to the North Slope gas pipeline because it was the only pipeline at that time. Since then, the Kenai Kachemak (KKPL) pipeline has come on line. The KKPL was initially intended to run from the southern end of the Kenai Peninsula back to Kenai as the oil reserves were in the south. The KKPL wrote to the Regulatory Commission of Alaska (RCA) requesting that it be allowed to offer both firm and interruptible services. The RCA replied that the 2000 legislation governing classes of service to pipelines was only specific to the North Slope. This bill deletes "North Slope" and adds a section that defines a natural gas pipeline facility and a natural gas pipeline carrier. MS. JACKSON told members the bill should contain an immediate effective date as the pipeline is under construction. She pointed out the Department of Natural Resources submitted a zero fiscal note, but included some concerns on page 2. [Senator Wagoner] disagrees with the assertion that this could potentially be used to impede pipeline access for non- affiliated producers and could hinder natural gas exploration. She told members that representatives of Marathon Oil were present to speak to that. She noted the function of the RCA is to insure fairness. MR. BEN SCHOFFMANN, Marathon Oil, said he is the project manager for the Kenai Kachemak Pipeline project known as KKPL. SB 151 would provide the RCA with a tool to offer two types of service to pipelines, firm and interruptible, that it currently applies to the North Slope gas line. FERC has used the same policy often in the Lower 48 over the past two decades by FERC. This bill would clarify that the RCA has the authority to grant other pipelines the authority to grant those two classes of service, otherwise known as contract carriage, to regulated gas pipelines elsewhere in the state. He explained that firm service is a commitment between the pipeline owner and its customers to provide a designated amount of throughput on a set daily basis. The shipper agrees to pay for that capacity whether or not it is utilized. It is a risk decision the shipper makes to reserve capacity. The shipper pays what is known as a reservation charge for that privilege. Interruptible service is offered on an as available basis. The pipeline would offer to transport volumes and the shipper would only have to pay for services actually used. The parties have no long-term commitment as to promised throughputs, deliveries or payments for gas that is not rendered for delivery. SB 151 is important to investors because when you put money on the line, it's good to know that people are actually going to be interested in using the pipeline capacity you're building. Offering firm transportation is a way for pipeline investors to make sure they will have customers and to understand what the level of interest is and how serious that interest is. With firm transportation, shippers are asked to commit in advance and make payments for capacity whether it's used or not. It sets a minimum standard for how large the pipeline must be. He stated. "Without that, it's a wild guess...It helps them reduce their risk and manage their expectations." MR. SCHOFFMANN said SB 151 is important for shippers because they want to be sure that they're going to be able to ship gas on that line. Shippers generally have two types of gas sales contracts and those are firm or interruptible. If a pipeline is then placed between a gas supplier and their end customer, like Enstar, Chugach Electric, industrial users and residents, but it doesn't have the capability to offer the same type of service, then it almost undermines the contractual relationship between a supplier and a customer. The supplier needs the ability not only to produce the gas with certainty, but also to ship that gas to the customer with certainty. This helps the shipper align its transportation services with its gas contracts. If it has firm gas contracts, it more than likely will want firm transportation services. CHAIR BUNDE asked if this bill would only allow the smaller gas pipeline the same flexibility that TAPS has currently. MR. SCHOFFMANN replied that current law deals with natural gas pipelines and the TAPS. CHAIR BUNDE asked him to address DNR's concern that the fiscal note might discourage gas development. MR. SCHOFFMANN replied that the situation with the fiscal note seems to imply that unaffiliated shippers would not be able to have certainty with which to conduct their operations, but he disputes that implication because the producers are given two options, one of firm service and the other to wait and see what the development is before they put money on the line. The RCA will be involved in insuring that this is a non-discriminatory process that is fairly transparent. This includes designating expansions of the line. SENATOR FRENCH asked if this legislation would be necessary if the KKPL was proposed as a common carrier pipeline. MR. SCHOFFMANN replied that the common carrier provisions are already in AS 42.06. This is a clarification to the common carrier provisions that allow two classes of service. Now, practically speaking, all common carriers offer interruptible service only, because if the pipelines get oversubscribed, everybody gets curtailed. SENATOR FRENCH said his sense is that this legislation would not be necessary if it just involved common carriers, but that wouldn't satisfy his business plans. MR. SCHOFFMANN agreed and said SB 151 is necessary as a function of the development of the gas transportation and deregulation process that's happened over the past couple of decades. Projects that define what has happened in the industry have not come up during that time frame. SENATOR SEEKINS asked if SB 151 will allow smaller independent producers to find carriers to get their products to market that might not exist under any other scenario unless they built their own pipelines. MR. SCHOFFMANN replied they believe SB 151 will be advantageous to all potential customers, small producers included, because they are not being asked to commit anything in advance over the long-term. However, they will see a pipeline with published and regulated tariffs and the fact that the pipeline is getting built and is getting closer to some of their operations provides a huge incentive to accelerate their plans or drill wells that they wouldn't have if they were 33 miles further away from that infrastructure. SENATOR SEEKINS said that this addresses an overall concern he has about how to encourage smaller independent businesses to get into the energy production business in Alaska. MR. ANTHONY SCOTT, Division of Oil and Gas, DNR, said the contract carriage provisions can reduce producer risk for a non- producer affiliated pipeline, which is the general case outside of Alaska. With a producer-affiliated pipeline, there is the potential for concern that during the open season, the pipeline could decide to either meet the needs of the producers, which he understands is not the case with KKPL, or monopolize capacity before an independent shipper has explored or discovered the gas. This legislation will affect not only KKPL, but future pipelines as well. SENATOR FRENCH asked if this proposed pipeline is going to be owned by an affiliated or non-affiliated pipeline company. MR. SCHOFFMANN responded that KKPL is a joint venture between Marathon and Unocal, who are also committed as shippers. They are an affiliated company. The issues that were raised really do fall under the purview of the RCA to make sure that a fair process is in place. If Marathon and Unocal find gas in other areas of the Kenai Peninsula where they have not yet explored, they would be in the same position as anyone else who has yet to make a commitment to the pipeline. The RCA has the authority to look at the tariffs to make sure they are balanced. SENATOR SEEKINS moved to adopt Amendment 1 to add an immediate effective date. There were no objections and it was so ordered. MR. STRANDBERG, RCA Commissioner, testified that this approach would be a new one in the regulation of pipelines. TAPE 03-16, SIDE B    MR. STRANDBERG said he didn't know how SB 151 would affect preexisting firm transport contracts that can be negotiated under new language and whether the RCA would have the ability to require the parties to those contracts to renegotiate for a pro rata share reduction that would be required under the common carrier provision. SENATOR SEEKINS questioned why this would be considered a new approach if, in effect, SB 151 only removes "North Slope." MR. STRANDBERG replied currently, the RCA is just regulating two gas pipelines in the state. The North Slope pipeline hadn't been constructed yet. The two gas lines are regulated under the state's public utility statutes. He clarified, "We really have no gas pipelines that are regulated under AS 42.06 right now." SENATOR SEEKINS noted that it isn't a new approach in statute, since the statute already exists for North Slope gas. It's just that there isn't one in operation yet. MR. STRANDBERG said he is correct. CHAIR BUNDE asked Mr. Strandberg to submit a written response to the concern expressed by DNR in its fiscal note, and said he would distribute copies to the committee. He announced the committee would hold SB 151 until further notice.