SB 50-ROYALTY GAS CONTRACTS  CHAIR OGAN informed members that a proposed committee substitute had been prepared, Version I, which is essentially the same as the House Finance Committee substitute to HB 57. SENATOR WAGONER moved to adopt Version I as the working document of the committee. CHAIR OGAN objected for the purpose of discussion. He then informed participants that he did not intend to move the legislation from committee today because Version I makes substantive changes to the last version of the bill. In addition, an amendment has been proposed. MS. MARY JACKSON, staff to Senator Wagoner, sponsor of SB 50, verified that Version I is the companion legislation to CSHB 57(FIN), which is in the House Rules Committee. She explained the differences in Version I as follows: · On page 2, the merged utility and manufacturing language was separated into two subsections, (1)(A) and (1)(B). New language was added to line 23 that reads, "for a contract entered into for a circumstance described in (1)(A) of this subsection." Section (1)(A) is specific to the utilities and is existing language in statute. Section 1(B) is new and contains the requirements for manufacturers of agricultural chemicals. She told members that separating the requirements of utilities and manufacturers into two sections reads more clearly. · On page 3, line 9, the word "and" was changed to "or"; the net result being that any one of the exceptions would come into play, rather than all of them. That change was recommended by the Administration. MS. JACKSON said Chair Ogan previously asked whether the legislation contains a mechanism to allow the commissioner to negotiate a contract so that the State of Alaska would share in the profit as well as the risk. She said such a provision would lead to a better fiscal note and told members the sponsor has provided a proposed amendment on that subject for the committee's consideration. SENATOR STEVENS referred to Section 2(B)(ii) on lines 5, 6 and 7 of page 3 and asked why it contains the words "tangible benefits to the state" and differs from Section (2)(A)(ii) on page 2. MS. JACKSON explained that Section (2)(A) applies to the utilities. Section (2)(B) is new [and applies to value-added manufacturers]. Those words were added so that if the commissioner determined that a royalty reduction would lead to certain benefits related to employment opportunities or some other unknown tangible benefit, the commissioner could go forward with a contract. SENATOR STEVENS said he thought tangible benefits were included in respect to the manufacturer, not just the utility. MS. JACKSON said that is correct. SENATOR STEVENS said the two sections seem to be contradictory in terms of tangible benefits. MS. JACKSON referred Senator Stevens to subsection (A) on page 2, regarding the utilities contracts. She pointed out the language that begins on line 26 is the same as the language on page 3, line 5, however it is specific to the manufacturer of agricultural chemicals. SENATOR STEVENS asked if that language is more aligned with subsection (A) than it was in the last version. MS. JACKSON said it is essentially the same; it has just been separated into two sections. SENATOR STEVENS said he thought the commissioner could consider royalty reductions by offsetting other tangible benefits in the last version. Now, Version I says the royalty reduction receipts would not be balanced, which is contradictory. He said the word "not" should not be included. TAPE 03-27, SIDE B SENATOR ELTON clarified that the list of items on page 3 contains the reasons the commissioner could deny a contract based on a written finding, one being that the royalty reduction would not be balanced by employment opportunities or any other tangible benefit to the state. He asked why this language is more specific for the manufacturers, as it further defines benefits as employment opportunities or other tangible benefits. CHAIR OGAN commented that if the state lets a utility lock into a certain price and the state loses some money, Alaskan consumers will benefit with cheaper electricity. With manufacturers, the public benefit is not as tangible. In the original bill, the manufacturers asked to be treated like a utility. However, Agrium and its employees might have benefitted but at an expense to the state. MS. JACKSON said that is a fair analysis. She pointed out that language on page 2, line 27, of Version I includes a bar that the utilities must reach. The language on page 3 includes the bar the manufacturers must meet. SENATOR ELTON commented that in the case of the manufacturer, the consumers who benefit could be overseas and not Alaskan consumers. SENATOR WAGONER remarked that one benefit is jobs in Kenai. Right now, Agrium is operating at 75 percent capacity and may be losing money everyday it operates. If this bill helps Agrium operate at 100 percent capacity, it will maintain and increase jobs. He noted if one of Kenai's petrochemical plants shuts down, the chances of it ever reopening is very low. He pointed out that Agrium is a big part of the economy on the Kenai Peninsula. CHAIR OGAN expressed concern that this legislation singles out one type of industry and sets a precedent for other industries, such as the LNG plant at Pt. Mackenzie that ships LNG to Fairbanks. MR. MARK MYERS, Director of the Division of Oil and Gas, DNR, told members that in regard to the previous discussion about Sections (2)(A) and (2)(B), Senator Elton was correct when he pointed out that the royalty reduction is granted unless one of those four conditions exists, in which case the commissioner can deny it. SENATOR STEVENS asked if the commissioner will have to prove that the royalty reduction would not be balanced and not have a positive impact on the economy. SENATOR ELTON said he did not understand Mr. Myers' explanation because if the commissioner can deny the royalty reduction based on the first factor listed, the commissioner would not consider the second factor, that the royalty reduction would not be balanced by employment opportunities or other tangible benefits. MR. MYERS said that is correct as the four variables are independent. The commissioner can deny the reduction if any one of the four variables exists. CHAIR OGAN asked Mr. Myers if he anticipates that this legislation will set a precedent for other industries. MR. MYERS said the petrochemical industry could argue, as Agrium has, that it adds a lot of value to the state based on gas-to- liquids (GTL) projects, for example. CHAIR OGAN asked if, under the Stranded Gas Act, the commissioner of revenue was given the ability to negotiate royalty payments for the petrochemical and GTL industries. MR. MYERS answered the commissioner cannot change the rate but valuation methodologies can be negotiated. The producers proposed similar treatment to the previous administration in terms of their gas leases. CHAIR OGAN felt justification could be made that this incentive should be given to other industries. MR. MYERS agreed and said DNR understands Agrium's concern that it needs a good supply of gas to get up to 100 percent capacity. CHAIR OGAN asked if more gas is available but not at the price Agrium needs to be profitable. MR. MYERS said supply and demand is balanced at this time but, at current rates of consumption without additional exploration success, Cook Inlet will begin to squeeze out those who are willing to pay less for the gas. Typically, the utility market pays a higher value, followed by LNG, followed by the agricultural manufacturer. That will put Agrium in a tight spot when deliverability is less. He noted that a good deal of exploration is going on in Cook Inlet at this time. SENATOR STEVENS expressed concern about the differences between Section (2)(A) and Section (2)(B) [the four factors the commissioner can use to deny a reduction], and pointed out that Section (2)(A) contains the word "and" while Section (2)(B) contains the word "or". Therefore, all variables must exist in Section (2)(A) while only one variable must exist in Section (2)(B) for the commissioner to deny a royalty reduction. MR. MYERS indicated the original bill contained the word "and" and he does not know why this version was changed to "or". He said Version I in its current form sets a different standard for agricultural manufacturers than it does for the utilities. All four conditions must exist for the commissioner to deny an application from a utility. SENATOR STEVENS said he believes the statement on page 2, lines 21-22, should be changed because he reads it to mean that (A) and (B) fall under that statement. MS. JACKSON said the issue is that the standards for the new manufacturer are more restrictive. For a utility, the commissioner must enter into a contract unless all four conditions are met. For a manufacturer, the commissioner shall enter into a contract unless any one condition is met. She repeated the provision is more restrictive for the manufacturer than it is for the utility. SENATOR STEVENS said he understands the intent but he does not read those sections that way because both (A) and (B) are subsections of Section (1)(aa)(2). SENATOR ELTON said the bill makes it easier for the commissioner to deny a contract with a manufacturer than with a utility. MR. MYERS told committee members the Administration has taken no position on the bill but said he supports the proposed amendment. CHAIR OGAN removed his objection to adopting the work draft, therefore the motion to adopt Version I as the working document before the committee carried. SENATOR WAGONER moved to adopt Amendment 1, which reads as follows: Page 3, after line 11, insert "(C) in granting an application under this section, the commissioner may use or accept an amount in excess of the price for the gas established in the contract but less than would otherwise be due under the lease when it is in the best interest of the state." CHAIR OGAN objected for the purpose of discussion. He told members he intended to adjourn the meeting without adopting the amendment to give members a few days to consider it. CHAIR OGAN said Amendment 1 is a profit sharing amendment that will allow the state to share in any upside. SENATOR WAGONER told members Amendment 1 was written in consultation with Division of Oil and Gas staff, who said it is necessary to allow the commissioner to negotiate profit sharing. SENATOR ELTON pointed out that Amendment 1 will cause a change in the fiscal note. SENATOR WAGONER agreed Amendment 1 will make the fiscal note much more powerful. CHAIR OGAN told members the committee would take up SB 50 and the proposed amendment on Monday and adjourned the meeting at 4:45 p.m. ##