SB 31-GEOTHERMAL ELEC. PROD. TAX CREDIT  CHAIR WIELECHOWSKI announced the consideration of SB 31. 3:38:06 PM SENATOR MCGUIRE said SB 31 is a production tax credit bill; it mirrors many other tax credits like the recent one for film production. It will offer a 2.1-cent per kilowatt hour incentive to invest in hydro, wave, biomass, in-river, solar, wind, geothermal, and tidal energy projects. The bill allows public utilities and co-ops to earn tax credit certificates that can be traded on the open market. Many utilities are publicly owned, and Senator McGuire wants to incentivize their investments as well. The bill has received widespread support in Alaska and even outside of Alaska. Energy producers from as far away as Israel are looking to use this tax credit to reduce the risks of investing. Wind can be costly and isn't predictable. One company said this is one of the more costly areas in the world. Alaska doesn't have a lot of the geological data that other jurisdictions have. She is hoping the tax credit will attract new projects to Alaska and provide an incentive for current utility companies. 3:41:54 PM SENATOR HUGGINS moved to adopt the committee substitute (CS) to SB 31, labeled 26-LS0217\N [Version N]. CHAIR WIELECHOWSKI objected for the purpose of discussion. TREVOR FULTON, Staff to Senator Lesil McGuire, Alaska State Legislature, said the biggest difference in the CS from the bill that passed out of the Senate Energy Committee is to limit the tax credit to projects or expansions that come on line after January 1, 2010. Senator Stedman was concerned that expansion projects were excluded from the tax credit, and they are important "so we changed the language that would accommodate expansion projects while excluding existing projects that are already on line." The CS also changes the definition of an energy producer to require independent power producers to hold an RCA [Regulatory Commission of Alaska] certification. "We wanted to make sure that the bill applied to not just anybody who sticks a windmill or wind generator on their house. We want there to be a certain level of power production involved." 3:44:32 PM MR. FULTON said the third set of changes in the CS are based on suggestions from the reviser and are not substantive. SENATOR STEVENS asked if an electric association that puts up wind turbines before 2010 will be excluded from this tax credit. MR. FULTON said yes. The bill is to incentivize taking a harder look at the resources that are available in Alaska to determine if there can be a viable project. In Senator Stevens' example, the association has already decided it is a viable project, and the project won't need an incentive. CHAIR WIELECHOWSKI asked what the tax credit would cost if it were made retroactive. MR. FULTON said he doesn't know. 3:46:42 PM DAN STICKEL, Economist, Tax Division, Department of Revenue, Juneau, said according to the U.S. Department of Energy there are 1.3 billion kilowatt hours of alternative energy used annually in Alaska. If it all qualified for the credit it would cost $27 million per year for four years. MR. FULTON said the director of the Alaska Energy Authority (AEA) said if the bill had no exclusions it would cost $133 million in credits just for the Bradley Lake hydro project. SENATOR HUGGINS noted the mention of unused tax credits on both page 2 and 3. "Are those two correlated to one another?" 3:48:53 PM SENATOR HUGGINS said the bill mentions carrying the credits forward for 20 years. MR. FULTON said that is correct, and he asked if Senator Huggins was seeing a redundancy. SENATOR HUGGINS said he doesn't know what sum of money is being considered "when you start carrying tax credits forward for 20 years potentially." 3:50:03 PM MR. FULTON said there is an indeterminate fiscal note because it is difficult to predict. He doesn't think anyone would stockpile the tax credits for 20 years and then cash them in all at once. The vast majority of tax credits issued through this program would be sold or traded on an open market at a lower cost than their face value. SENATOR HUGGINS said it seems like a long time until 2028. It appears to be a pretty dark hole. MR. FULTON said that date was chosen because the bill sunsets in 2025, which is the governor's goal of when to have 50 percent renewable energy. Then there are four years to use the credit. SENATOR FRENCH wanted clarification that the credit given to expansions of existing systems would be applied only to the expansion and not to the whole system that it is part of. 3:52:16 PM MR. FULTON said that is correct. SENATOR FRENCH said Fire Island is noted in the fiscal note. The state will participate in that, so will the state provide a tax credit against investments that are funded by the state? The bill may be over-stimulating certain projects. MR. FULTON said that was just brought to the sponsor's attention and she may need to revisit that. 3:53:17 PM TOM LAKOSH, Anchorage, said he recognized the problem with double funding, and he submitted language to preclude projects with a subsidy of more than 50 percent of prior funding. Other amendments he suggested is applying the subsidy to conservation and to make the subsidy applicable to anyone who produces alternative fuel, instead of just limiting it to those who get the RCA certificate. It is important to encourage all folks to provide alternatives. He suggested the following change: on page 2, line 1, after "for each kilowatt-hour" add "or per each 15,000 BTUs of heat value". MR. LAKOSH suggested a change in the definition on page 3, line 6, by adding "conservation". Rural Alaska is having issues with sustaining cultures and communities because of heating fuel costs - not just electricity costs. If they could produce biogas or liquid biofuels, "then we should be encouraging that type of sustainable community instead of them having to pay out for imported fuel." And they should be encouraged to conserve. 3:56:51 PM MR. LAKOSH said it is important that the subsidy is applied to all alternative energy producers. It discounts Alaska ingenuity to limit it to those who get an RCA certificate. He suggested a two-tiered system that takes environmental impacts into account. There is an air quality problem in Fairbanks and in Juneau's Mendenhall Valley. He suggested a base subsidy and a supplemental subsidy. The supplemental subsidy could be adjusted depending on adverse impacts to the environment, such as particulate pollution or wildlife impacts, so that unclean biomass or wood burning could have the subsidy cut off in specific places. There could be an adjustment for locally produced fuels that lead to a sustainable community. If you're going through this process of social engineering, this bill could ... provide for those things that we know are beneficial, like improved air quality and sustainability. He encouraged the committee members to look at his prior recommendations. 3:59:38 PM SENATOR HUGGINS asked about the certificate of public convenience on Page 3, line 9. MR. LAKOSH said that should be stricken because all independent power producers who are producing alternative energy or conserving should be allowed to collect that 2.1 cents based on kilowatt hours or BTUs. It would help bring down energy use and produce alternative energy. 4:01:17 PM SENATOR HUGGINS asked if a small energy producer would not be eligible for the credit without the certificate. MR. LAKOSH said that is the way he sees it. It is gross discrimination and cuts out Alaskans with ingenuity who can help us get down this road. SENATOR HUGGINS asked Mr. Fulton if this was discussed in the Senate Energy Committee. MR. FULTON said that wasn't discussed in the committee, but it came up later. The sponsor is trying to target projects that will generate substantial amounts of energy. "We certainly understand the value of smaller projects ... but we think there needs to be some sort of threshold there so this program doesn't get too unwieldy." He doesn't want to put too much burden on the tax division. He didn't look into how the program would be structured for a person who sells power to a neighbor. "We didn't explore that route." 4:03:41 PM SENATOR HUGGINS said a certificate of need in health care is rather burdensome. It may be the right answer, but he hates to get into the same challenge as is in the health field "and suits and all those sorts of things over who can and who cannot." He would like to discuss it with the sponsor. SENATOR MCGUIRE said she would be happy to consider that. CHRIS ROSE, Executive Director, Renewable Energy Alaska Project, Anchorage, said his group includes 61 Alaska organizations, including small and large utility companies, consumer groups, environmental groups, Native organizations, government agencies, and businesses. There is a policy committee that meets regularly and it supports the bill. At the federal level the production tax has been probably the most important incentive to get renewable energy projects built around the country. It has made a huge difference, despite its shortcomings, to incentivize industry to build these projects. He has potential amendments. 4:05:55 PM MR. ROSE said the credit should be a tiered system based on the population the project serves. In the Railbelt it may cost 7 cents to produce a kilowatt hour, so a 2.1-cent incentive is huge - almost 32 percent of the cost of producing that energy. The cost of producing energy in a village may be 30 cents, even without the overhead, so the 2.1-cent credit is small. A four- tiered system would incentivize projects across the state. Projects serving communities under 1,200 people should get a 10- cent per kilowatt hour credit. The co-op would probably sell the tax credits at a discount. This tax credit won't add up to a lot of lost revenue because it won't include that many total people. 4:08:09 PM MR. ROSE said the second tier would be for projects that serve 1,500 to 7,000 people, such as hub villages and communities with a smaller population than Sitka. The credit could be 7 cents per kilowatt hour. The third tier would include projects that serve communities between 7,000 and 40,000 people. That will capture the rest of Alaska except for the Railbelt. The credit could be 4 cents. The last tier would include the grid that serves all of the Railbelt communities, from Homer to Fairbanks. The tiered system will provide incentives to all the different communities. He also suggested extending the credit for more than four years. The federal production tax credit is ten years. There is a concern of what this may cost the state in lost revenues, and he said estimates can be done, but ten years gives more certainty to the folks who are taking the risk to build these projects. 4:10:04 PM MR. ROSE said his group is not quite sure about the provision that allows for the tax credit to be given to producers whether they are using the power or selling it. The sponsor's intention is to incentivize the production of power for industrial and other uses. "We see the merit in that; we're concerned about actually tracking the kilowatt hours produced." It may be difficult to track the kilowatt hours of a company within its own system. One way around that is to have the producer obtain a certificate from the RCA and sell the power back to themselves. He is not sure that the RCA will allow that. The committee will have to wrestle with the idea of the tax credit going to projects that get other forms of state funding. The last suggestion is to call it renewable energy, not alternative energy. That definition is consistent with the Renewable Energy Grant Fund that was passed last year. The definition in the bill does relate to renewable energy, but it is good to make a distinction between the two. So the title will need to change. 4:12:08 PM SENATOR HUGGINS said the Legislative Budget and Audit committee approved $100 million worth of projects. He asked how many of those would be eligible. MR. ROSE said they would all be eligible unless they are in before 2010. The CS may give some incentive to wait. The credits are tradable - which is a very good thing because most of these entities don't pay taxes. By setting a period of time, like ten years, the bill could say that every project gets that many years. The Bradley Lake project has been in existence for over ten years and would not benefit because its ten years are up. 4:13:59 PM SENATOR HUGGINS said the RCA is made up good people and some are his friends. He asked about "their task management and efficiency and ultimately being able to satisfy the public." MR. ROSE said it is the same with other agencies that deal with energy in the state. This is big and Alaska needs to get more people, and perhaps the RCA needs more resources. SENATOR STEDMAN asked what tax credit Sitka projects would get. MR. ROSE said his group came up with the tier idea this morning. The intent was to include Sitka in the second tier at 7 cents. SENATOR STEDMAN said Sitka, Ketchikan, Wrangell, Petersburg, and Juneau are all in the 10 or 11-cent range in kilowatts, so he is curious why Mr. Rose is using a population category. 4:16:13 PM MR. ROSE said different ideas were discussed, and everyone wanted to use a percentage of the cost of energy, but that might be politically and administratively difficult. His group also talked about the size of projects, but a small project could be built in Anchorage. He is not wedded to the idea of population parameters. The cost of energy is really the issue, and he wants incentives for communities where costs are high. SENATOR STEVENS asked how tax credits are traded. MR. ROSE said there are big corporations in Alaska that have high tax bills, and they would be able to buy the credits. The nature of the market may create competition that would bring down the price. The federal tax credit doesn't have the same provision, and that has hurt the co-ops in Alaska. 4:18:30 PM SENATOR STEVENS asked if there would be a clearinghouse. MR. ROSE said there are already provisions for trading tax credits, but he isn't that familiar with them himself. SENATOR HUGGINS said oil and gas production tax credits were debated for hours. He believes the legislature put in a provision where the state could buy them so that smaller companies wouldn't get gouged by larger ones. The state would then be a leveling mechanism. MR. ROSE said he needs to look into it, but there may be a disadvantage to smaller, less sophisticated entities trying to sell their credits to larger, more sophisticated ones. SENATOR HUGGINS asked about the RCA certificate. 4:20:20 PM MR. ROSE said there is a lot of concern about net metering in Alaska. "If you don't require the certificate, then you're doing backdoor net metering because you're giving some kind of credit back to producers." It is not true net metering where someone gets paid the retail price, but it will open up that whole debate about it. "We felt it was a good idea to have either a minimum amount of production ... or go to an independent power producer level and have the RCA regulate it." He doesn't have a huge preference one way or the other, whether it is a limit like 400 kilowatts or if it's an IPP [independent power producer]. "If it looks like it's going to be very difficult for all these folks to apply for IPPs, maybe that's too much. If you allow it to everybody, then essentially you're getting all the way into that other issue of net metering." CHAIR WIELECHOWSKI set SB 31 aside.