SB 153-NATURAL GAS STORAGE TAX CREDIT/REGULATION  3:33:34 PM CO-CHAIR PASKVAN announced SB 153 to be up for consideration. 3:33:38 PM SENATOR JOE THOMAS, sponsor of SB 153, said the cost of energy in much of Alaska is crippling communities' economies. It's still the middle of winter in Alaska, and more specifically Fairbanks pays $4/gallon for heating oil; they are spending approximately $666 million annually on energy costs. This averages out to about $6,667 for every man, woman and child annually. Much of this money leaves the community. Fairbanks is currently paying $23.35 for 1000 cubic feet of natural gas and $.23/kilowatt hour. Individual bills run $1,000 to $1,500 a month during the heating season (September through April generally). Natural gas is the lowest cost fuel, but it's three times the price of gas in Southcentral and only available to approximately 1,100 customers. No more gas is available for Fairbanks Natural Gas, the local distributor, due to Cook Inlet contracts that provide for Cook Inlet towns being taken care of first. He said that lines that have been built to various parts of the town in Fairbanks, but have not been able to be distributed because gas isn't contemplated being available. SB 153 addresses this problem by incenting the private sector to deliver additional trucked natural gas to Fairbanks in the next two to three years. SB 153 would also extend up to $15 million of tax credits to an LNG trucking project such as the one proposed by partnerships between Golden Valley Electric Association (GVEA) and Flint Hills Resources. This is the same $15 million tax credit that is applicable to Cook Inlet's gas storage projects (CINGSA), but in Fairbanks it would be above-ground storage rather than filling depleted wells (because they don't have any). He said GVEA and Flint Hills are the two largest Interior tenants for gas and it makes sense for them to buy the gas to make use of it, but they may also be willing to accept someone's delivery. 3:38:22 PM SENATOR THOMAS said the credits are limited to regulated utilities, so the savings will be passed through to consumers as the RCA looks at their business plans. GVEA and Flints are still narrowing down their cost estimates and once they get to a plus or minus 30 percent estimate, their board will make a decision when to go forward and that is expected this spring or summer. If that doesn't happen, it's possible that an entity such as Fairbanks Natural Gas or Enstar and/or their Canadian parent company, AltaGas, might move on the project. He said negotiations between Foot Hills and GVEA are ongoing and are positive, and that is another reason that the timing of SB 153 is important. He said this will also ensure that the North Slope producers or LNG export facilities that are not regulated utilities and do not provide for consumption of gas in state will not be able to access these credits. Further, with the gas line still years away, it appears the only project that could bring gas into the Interior in a quick manner is trucking projects such as this one that would be an expansion of an existing trucking project. CO-CHAIR WAGONER moved CSSB 153( ), 27-LS1187\I, for discussion purposes. CO-CHAIR PASKVAN objected for discussion purposes. 3:41:56 PM GRIER HOPKINS, Legislative Aide to Senator Thomas, said there is a fundamental difference between storing natural gas in its gaseous form and storing it in its liquid form; the volumes don't match. He explained that the credits in HB 280 had a floor of 500 mmcf because Cook Inlet has underground reservoirs, but Fairbanks is looking at storing approximately 240 mmcf/gas in two separate tanks. The sponsor found a way to apply the same $15 million in gas storage tax credits that Cook Inlet has to a Fairbanks project or 50 percent of construction costs for a storage facility, whichever is less. Storage facilities have been estimated to cost about $30 million. He said the changes between version M and version I are rather simple. The project is still up in the air, but they want to make sure that any project bringing gas to Fairbanks would receive those credits. Therefore, language was included allowing for the expansion of an existing facility that was in business before 2011. It removes the date restrictions that a facility must start commercial operations for the same reason. A new subsection in AS 42.05.990 says only regulated utilities can take advantage of the tax credits so their benefits get passed on to the customers, but it currently doesn't include LNG, and that language is being worked on now. CO-CHAIR PASKVAN asked him to go through the bill by section. MR. HOPKINS said section 1 establishes that the AOGCC must certify the 1 million gallon threshold for a project to be eligible to receive the credits. Section 2 addresses the lease exemption and makes it the same as Cook Inlet provisions. It might be applied differently for the North Slope, but GVEA has been in contact with the administration and they understand how it is moving forward. 3:46:55 PM Section 3 amends the definition of "natural gas storage facility" and "facility" in AS 42.05.990(3) to assure that tank storage or storage in a depleted or nearly depleted well can apply for this tax credit (as opposed to Cook Inlet Natural Gas Storage Association's project). 3:47:27 PM Section 4 amends the existing gas storage facility tax credit by bifurcating it into two separate credits: a nontank storage facility and a tank storage facility. The nontank storage uses a volumetric equation that is necessary for the underground storage, but the tank storage uses $15 million or 50 percent of the cost of building an LNG storage facility of at least 1 million gallons, whichever is less. Section 5 amends the terms of what storage qualifies as a tax credit by adding the 1 million gallon threshold similar to section 1. Sections 6 and 7 added "or payment" to the language as opposed to just a tax refund in order to make it easier and clearer within statute that GVEA, a non-profit that does not pay any taxes to the state, could have access to that credit. 3:48:29 PM Section 8 sets forth how a company not subject to tax under this chapter would still be liable to pay back any erroneous payments made by the state. So the state receives some of its money back if the organization stops commercial operation of the storage facility or if an error was made in calculating the construction cost for the facility as determined by the Alaska Oil and Gas Conservation Commission (AOGCC). Section 9 amends AS 43.20.046(i) to clarify that a person that receives the payment under this title must also repay interest to the state as the determined under AS 43.05.225 (under calculation of erroneous payment). Sections 10-13 make a number of conforming language changes, especially including the word "payment" going back to the non-profit status of GVEA. Section 14 establishes an effective date. CO-CHAIR PASKVAN opened public testimony. 3:50:00 PM LUKE HOPKINS, Mayor, Fairbanks North Star Borough, said SB 153 is very important for Fairbanks. Increasing storage capacity for the community would allow more people to take advantage of a resulting increased gas supply. He said cars are lined up at the lowest-priced gas pump for home heating oil and people are buying it 5 gallon cans, because they may not have enough money to make to the next delivery. He said this is one of the fastest short term improvements in space heating fixes that can be seen and that GVEA and Flint Hills are already considering expanding an existing trucking project with Fairbanks Natural Gas. 3:53:20 PM JIM DODSON, Fairbanks Economic Development Council, Fairbanks, said he supported SB 153. It's a crucial component to Fairbanks' infrastructure in moving from staggering home heating fuel costs ($4 gallon) to a natural gas system. He said the high costs are devastating families, homes and businesses and making Fairbanks an economically unsuccessful community. 3:54:45 PM BRIAN NEWTON, President and CEO, Golden Valley Electric Association (GVEA), said it the largest producer of electric power in Interior Alaska and serves roughly 44,000 residential and industrial customers. Their service territory covers greater Fairbanks and the North Pole area, extending down the Richardson Highway to Delta Junction, and down to the Parks Highway to Cantwell. He said the cost of electricity is extremely high in Fairbanks and now it is being exacerbated by the high cost of oil. It produces only 36 percent of their power needs, but in 2011, oil accounted for 60 percent of their fuel bill. Although they secure as much gas fire generation out of the Cook Inlet as possible, and purchase and spin as much power from coal as they can, they still rely on oil for 35-40 percent of their yearly fuel needs. He said that GVEA is aggressively pursuing ways to replace its oil-fired generation with alternative sources of power. In anticipation that affordable natural gas would someday be available in the Interior they installed an "LM6000," basically a 737 jet engine at their North Pole expansion plant. This 60 megawatt unit is currently run on naphtha (Jet A), but it can easily be converted to natural gas and SB 153 may help determine whether such a conversion is economically feasible. MR. NEWTON said GVEA watched as the Cook Inlet Recovery Act was debated and passed in 2010; it established an incentive for creation of natural gas storage around the state to satisfy regional energy needs. At the time of its passage, GVEA was investigating trucking LNG to Fairbanks from the North Slope, but the trucking concept for a large volume of gas was not fully developed at the time. Despite this fact, the Interior relied on statewide provisions in the legislation and hoped that would accommodate future Interior energy needs. As GVEA established a partnership with Flint Hills to advance the development of an LNG project, they reviewed the provisions of the gas storage incentive statutes and determined some slight modifications were needed to be applicable to their proposed project. He explained that at the time HB 280 was passed in 2010, the primary focus was on creating an incentive that would trigger the development of geologic storage in the Cook Inlet to handle seasonal peaks of natural gas demand. The legislation referenced both geologic below ground storage and tank above ground storage. SB 153 clarifies the same level of support for above ground tank storage facilities. 3:58:51 PM MR. NEWTON said GVEA didn't consider the establishment of an LNG trucking project from the North Slope as being in competition with a future pipeline. In fact, they believe that bringing a large volume of natural gas to the community via truck will allow a local distribution and customer base to develop thereby underpinning the economics of the future pipeline. He concluded that GVEA is prepared to work with the committee to make sure that natural gas incentives are available to the Interior as well as to other areas of the state. 3:59:50 PM DOUG ISAACSON, Mayor, City of North Pole, Alaska, said he supported SB 153 for all the reasons already mentioned, but he wanted to add that natural gas do something else for their communities that no one had mentioned. He said that there is a need for clean air; North Pole has been rated the dirtiest air this winter - largely because they have two refineries and GVEA's 180 megawatts of diesel powered generation along with many wood stoves. He said people are paying on average of $1,500 each month for fuel, space heating and electricity during the winter. This is not sustainable; there is pain and they are asking for solutions both immediate and long term. This would show people that something credible was going to happen. MR. ISAACSON said they have been told that the handshake from the municipalities to the legislature looks like a hand out, but this project will mitigate that by allowing them to attract larger stores that presently won't come to North Pole because of the high cost of space heating. Then they would have more of an economy and be able to do more for themselves. 4:04:16 PM DAN BRITTON, President and CEO, Fairbanks Natural Gas, said he supported SB 153 for the reasons already stated. SENATOR STEDMAN said he wasn't sure this wasn't a regular capital appropriation request being coined in a piece of legislation. It sounds similar to conversations with hydros that want help with 50 percent of their costs. He said he would be concerned if they started legislating appropriations and reimbursements on capital projects in legislation in general and that energy issues should be addressed through other processes. CO-CHAIR PASKVAN thanked him for the comments and indicated that SB 153 would be held in committee.