SB 31-GEOTHERMAL ELEC. PROD. TAX CREDIT  3:48:02 PM CO-CHAIR WIELECHOWSKI announced SB 31 to be up for consideration. CO-CHAIR MCGUIRE, sponsor of SB 31, moved to adopt CS for SB 31, labeled 26-LS0217\D, as the working document. There was no objection and version D was before the committee. CO-CHAIR MCGUIRE explained that version D is a result of testimony from the last meeting. The amount of the production tax credit to a graduation system that ties the tax credit to the retail cost of power for a community in Sec. 2(a) was changed to equal 15 percent of the retail electricity rate for a given community. The tax credit is a minimum of 2.1 and a maximum of 5 cents per kWh. She explained that the change ties the amount of the production tax credit to the cost of power rather than the power plant capacities or community populations. It has the advantages of a tiered system without the arbitrary thresholds. The original bill had a flat rate of 2.1 cents per kWh irrespective of the utility rate in any given community and population. Sec. 2(a)(2) was removed; it allowed power producers to claim the tax credit if they used the electricity they produced for their own commercial purposes. CO-CHAIR MCGUIRE said the intent of the bill is to encourage the production and distribution of electricity to communities that need it the most. This ensures that the power being incentivized by the tax credit makes it onto the grid and into the homes of Alaskans and it addresses the industry concern of power producers claiming the tax credit by simply selling the electricity to themselves in a cyclical fashion. Sec. 2(b) changes the number of years the credit could be claimed from 4 to 5 years. The concern was that 10 years would add up to massive subsidies; 4 to 5 years was a middle ground. They don't have a figure for the amount of the subsidy, because they don't know what kind of energy production will be incentivized. Sec. 2(g) caps the aggregate amount of tax credit plus state grants at 10 percent of the capital cost of a given project can be claimed. This prevents over-subsidization of projects that are eligible for both the production tax credit (PTC) and the Renewable Energy Fund grants. Sec. 2(k)(2) changes the definition of "energy producer" so that independent power producers are not required to obtain a Certificate of Public Convenience and Necessity from the RCA. Senator Huggins' concern was that they would be limiting the eligibility of projects to power plants with the production capacity of 100 kWh or more. 3:52:54 PM Sec. 2(k)(3) changes all occurrences of "alternative energy" to "renewable energy". This is moving toward a more federal definition of renewables and they want to be sure that the PTC program reflects the change to renewable energy. All sections moved the tax credit language from AS 43.98, which is revenue, taxation and miscellaneous provisions to AS 43.20, which is revenue and taxation, but under the Alaska Net Income Tax. This was recommended by the Tax Division because it ensures that the credit is applicable only against the corporate income tax and not any other state taxes that might accrue. 3:54:53 PM MERRA KOHLER, President/CEO, Alaska Village Electric Cooperative (AVEC), said they are a non-profit electric utility that serves 53 villages. They are also proud to take the lead in the state to develop renewable energy projects to serve their small communities. They now have wind projects serving seven communities. Two more are going on line this year and two or three more again next year. She supported the intent of this bill. She pointed out that their most difficult project in the last couple of years has been a 300 kW project, which consists of three 100 kW machines. They have achieved as high as a 25-30 percent penetration of renewable energy into their conventional systems. A project that is 300 kW in size in a remote rural village costs approximately $4 million - including the control equipment that is needed to interface with the diesel system. She said a 5 cent kWh production tax credit over a five-year period would translate into a total credit of $197,000, a modest percentage of the total cost of the project. So, she urged them to keep a 10 cent kWh limit. Otherwise, a lot fewer large projects would consume a much larger chunk of the production tax credit. 3:57:53 PM She also said an immediate effective date would be very beneficial because of two AVEC projects that will go on line this year including a small hydro project in Southeast Alaska. 3:58:39 PM SENATOR STEVENS asked if the January 1 effective date would delay the starting date for the projects. MS. KOHLER replied that she didn't think so, but if delaying a project for three would net another $200,000, they might be inclined to put it off. They could absorb operating costs from the system for another three or four years. CO-CHAIR WIELECHOWSKI said he has concluded that "the 2 cents is pretty generous; the 5 cents is extremely generous; the 10 cents was a lot." He and Mr. Fulton tried to figure out what the subsidy would be for 1 mgW hydro plant and they came up with a half million dollars a year in tax credit. TREVOR FULTON, staff to Senator McGuire, added that it depends on the size of the project, but it could amount to several millions of dollars. 4:01:51 PM CHRIS ROSE supported Ms. Kohler's comments on SB 31. He supported an immediate effective date and suggested middle ground between 5 and 10 cents. DAN STICKEL, Petroleum Economist, Department of Revenue, was available to answer fiscal note questions. 4:03:49 PM TOM LAKOSH thanked them for adopting the 15 percent that he recommended. However, he said they made a miscalculation in how it would be applied and that would cause them to reconsider the 5-cent and 5-year limit. He explained that what happens when you have a 15 percent of the retail rate subsidy is that as soon as the renewable energy comes on line, it lowers the rate at which the utility is charging for its per kilowatt. So, the rate falls precipitously immediately. So the second year when the retail rate is recalculated, the subsidy goes way down, because they are now taking 15 percent of a much cheaper cost. So this isn't as large a subsidy as they assume. He advised: 4:06:34 PM In order to give enough incentive to move to the renewable resource, you need to have this heavily front loaded so that because as soon as they produce cheap energy, their subsidy essentially goes away. The same situation happens with the five-year recovery period. Because the utility cost is recalculated every year, the subsidy goes way down as soon as it comes on line. This is a real problem, and he suggested upping the limit on capital costs to a maximum total subsidy of 20 percent, because it's extremely expensive to develop these projects in rural communities. If they get the subsidy upfront, companies will be competing with each other to fully replace the diesel so they can get the full 10 cents the first year. 4:10:04 PM DOMINIC LEE, CEO, Little Susitna Engineering and Construction Company, said two kinds of people want to use the tax credit. The non profits want to sell the credit to somebody else, but the private for profit companies would like to keep it to reduce their tax. His private for profit project organization would like the state to give them longer term, like 10 years, but at half the rate - 2.5 cents. 4:11:50 PM Another concern, he said, is their project has funding available right now, but they will lose the $2.8 billion from their Asian investor if they can't find money for the $10 million AEA feasibility study. CO-CHAIR WIELECHOWSKI closed public testimony. 4:13:01 PM SENATOR STEVENS asked how many households 100 kW serves. MR. ROSE replied roughly 100 households. SENATOR STEVENS said he was concerned that the subsidy only applies to projects placed into service on or after January 1, 2010. The Kodiak Electrical Association has been planning a wind project for five years and this summer installed the concrete foundations for three wind mills on Pillar Mountain and will install the towers next year. This effective date would make them miss the opportunity to receive a tax credit by three months. The credit for Kodiak would amount to $1.2 million. He said their goal is not to retard the use of wind power, and it would make sense to change the effective date to July 1. 4:16:44 PM SENATOR STEVENS moved to change the effective date to July 1, 2009 on page 2, lines 14 and 16. There were no objections and it was so ordered. 4:18:19 PM CO-CHAIR MCGUIRE moved to report CS for SB 31, version D as amended, from committee with individual recommendations and attached fiscal note(s). There being no objection, CSSB 31(RES) moved from committee.