ALASKA STATE LEGISLATURE  HOUSE SPECIAL COMMITTEE ON ENERGY  April 1, 2010 3:10 p.m.   MEMBERS PRESENT Representative Bryce Edgmon, Co-Chair Representative Charisse Millett, Co-Chair Representative Nancy Dahlstrom Representative Kyle Johansen Representative Jay Ramras Representative Pete Petersen Representative Chris Tuck MEMBERS ABSENT  All members present OTHER LEGISLATORS PRESENT    Senator Linda Menard COMMITTEE CALENDAR  OVERVIEW(S): RAILBELT ENERGY STUDY BY COMMONWEALTH NORTH, "ENERGY FOR A SUSTAINABLE ALASKA" - HEARD HOUSE BILL NO. 182 "An Act establishing the Greater Railbelt Energy and Transmission Corporation and relating to the corporation; relating to transition, financial plan, and reporting requirements regarding planning for the initial business operations of the Greater Railbelt Energy and Transmission Corporation; relating to a report on legislation regarding the Regulatory Commission of Alaska and the Greater Railbelt Energy and Transmission Corporation; authorizing the Alaska Energy Authority to convey the Bradley Lake Hydroelectric Project and the Alaska Intertie to the Greater Railbelt Energy and Transmission Corporation; and providing for an effective date." - HEARD & HELD PREVIOUS COMMITTEE ACTION  BILL: HB 182 SHORT TITLE: RAILBELT ENERGY & TRANSMISSION CORP. SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR 03/12/09 (H) READ THE FIRST TIME - REFERRALS 03/12/09 (H) ENE, L&C, FIN 03/26/09 (H) ENE AT 3:00 PM BARNES 124 03/26/09 (H) Heard & Held 03/26/09 (H) MINUTE(ENE) 04/09/09 (H) ENE AT 3:00 PM BARNES 124 04/09/09 (H) Heard & Held 04/09/09 (H) MINUTE(ENE) 03/18/10 (H) ENE AT 3:00 PM BARNES 124 03/18/10 (H) Heard & Held 03/18/10 (H) MINUTE(ENE) 03/23/10 (H) ENE AT 3:00 PM BARNES 124 03/23/10 (H) -- MEETING CANCELED -- 03/25/10 (H) ENE AT 3:00 PM BARNES 124 03/25/10 (H) Heard & Held 03/25/10 (H) MINUTE(ENE) 03/30/10 (H) ENE AT 3:00 PM BARNES 124 03/30/10 (H) Heard & Held 03/30/10 (H) MINUTE(ENE) 03/31/10 (H) ENE AT 5:00 PM BARNES 124 03/31/10 (H) -- Continued from 03/30/10 Meeting 04/01/10 (H) ENE AT 3:00 PM BARNES 124 WITNESS REGISTER MARY ANN PEASE, Consultant MAP Consulting; Co-Chair Commonwealth North Energy Study Group Anchorage, Alaska POSITION STATEMENT: Gave a PowerPoint presentation by Commonwealth North titled "Energy for a Sustainable Alaska: the Railbelt Predicament." BRUCE TANGEMAN, Chief Financial Officer Doyon Utilities (DU) Fairbanks, Alaska POSITION STATEMENT: Testified during the hearing on HB 182. MIKE O'MEARA, Homer Spokesman HEA Member's Forum Homer, Alaska POSITION STATEMENT: Testified during the hearing on HB 182. CHRISTINE VECCHIO, Board Member MEA Ratepayers Alliance Palmer, Alaska POSITION STATEMENT: Testified during the hearing on HB 182. JIM SYKES, Consumer Representative AEA Stakeholder Advisory Group; Representative Alaska Public Interest Research Group; Mat-Su Energy Issues Coordinator Alaska Center for the Environment Palmer, Alaska POSITION STATEMENT: Testified during the hearing on HB 182. MARY KVALHEIM Wasilla, Alaska POSITION STATEMENT: Testified during the hearing on HB 182. ACTION NARRATIVE 3:10:40 PM CO-CHAIR CHARISSE MILLETT called the House Special Committee on Energy meeting to order at 3:10 p.m. Present at the call to order were Representatives Millett, Dahlstrom, Johansen, Petersen, Tuck, and Edgmon. Representative Ramras arrived as the meeting was in progress. ^Overview(s): Railbelt Energy Study by Commonwealth North, "Energy for a Sustainable Alaska" OVERVIEW(S):    Railbelt Energy Study by Commonwealth North, "Energy for a  Sustainable Alaska"   3:10:53 PM CO-CHAIR MILLETT announced that the first order of business would be an overview on the Railbelt Energy Study by Commonwealth North titled, "Energy for a Sustainable Alaska: The Railbelt Predicament." 3:12:45 PM MARY ANN PEASE, Consultant, MAP Consulting; Co-Chair, Commonwealth North Energy Study Group, informed the committee that Commonwealth North's report on energy is a culmination of over one year's work by a diverse study group, including contributions on energy policy from legislators. She noted that the study group heard comprehensive presentations representing every aspect of energy, while focusing on Southcentral and also looking at renewables in the Interior and beyond. Ms. Pease announced that volume 2 of the report will be available next year. Slide 1 was a chart of the historic and projected natural gas production in the Cook Inlet showing the decline in production beginning in 2006 and continuing through 2030. Slide 2 was a chart that showed the Cook Inlet demand and deliverability forecast, and she pointed out that in order to sustain the projected demand of 90 billion cubic feet (Bcf) per year beginning in 2011, about 185 new wells need to be drilled. The cost of drilling these new wells to meet the utility demand is estimated to be between $1.9 billion and $2.8 billion, and does not include increased demand due to industrial growth. Slide 3 indicated that there are about 863 Bcf of remaining reserves, and additional probable reserves of 279 Bcf. Ms. Pease related that most of the reserves are located in the Beluga River, North Cook Inlet, Ninilchik, and McArthur River gas fields. She said, "2013 is the problem ... you've heard it from other entities that 2013 is kind of that point where we're really going be in a problem." Although there were no deliverability shortages last winter, she warned that in the case of a compressor failure during a cold snap, there is cause for concern. Ms. Pease then displayed Slide 4, and noted the deliverability situation in 2006 when the heat and electrical loads were constant, and Agrium, Inc. and the Phillips/Marathon Kenai Liquefied Natural Gas (LNG) export plant loads were known. However, slide 4 also indicated that in the future, the industrial load will be undefined, and the Southcentral power demand remains less than 5 percent of a 4.5 Bcf main line. She remarked, "The days of cheap gas in Cook Inlet are over, and it's time that we want the deliverability issues to be resolved." Slide 5 was a graph that projected future industrial demand of 280 million cubic feet per day (MMcf/d) from a yet to be identified industry, and that residential, commercial, and power demands will be relatively constant. Slides 6 and 7 indicated ENSTAR Natural Gas Company and Chugach Electric Association gas supplies begin to run into shortages in 2011. Slide 8 was the "needle peak chart" and she noted the gas peak demand is on a 20:1 ratio, but the electric load is more stable. Ms. Pease related Commonwealth North feels legislators have a unique opportunity to make progress in energy resources for the state; however, there needs to be a clear, concise policy that optimizes resources and encourages economic development, growth, and capital investment in the state's infrastructure. 3:19:20 PM MS. PEASE referred to an energy study by the Alaska Energy Authority, Department of Commerce, Community, & Economic Development (AEA) and displayed slide 10 that was a chart of energy by resource type. She questioned the conclusions of the study because coal is not included as one of the sources of energy and, as a matter of fact, Cook Inlet Region Inc. (CIRI) is investing in a coal gasification installation. Also, the chart shows a steep decline in the production of natural gas between [2023] and [2026], with an increase in energy provided by hydroelectric power. She said this is significant as at this time natural gas or fuel oil is filling this need. She said, "If [hydroelectric power] is indeed the assumption that is being made for the integrated resource plan that's going to be the baseline for the utilities ... there needs to be some sort of policy guidance.... Are we still going to continue to have thoughts of gas coming from the North Slope, or additional drilling and development in Cook Inlet?" Ms. Pease acknowledged that in any case, huge capital investments are needed, as is consideration of the end-user costs and sustainability. She continued to explain that Commonwealth North divided the timeframe for policy decisions into three periods: now--being prepared, having a plan, conservation, and the ability to use diesel for some electrical generation; intermediate--gas storage, import liquefied natural gas (LNG), drill more wells, in-state gas line, and renewable energy; long-term--most options, main line, North Slope gas into Southcentral, large scale renewable projects, and large price tags. She said she was very pleased to note that the intermediate-term propane project solution would greatly benefit Fairbanks and the Interior; in fact, the Alaska Natural Gas Development Authority (ANGDA), Office of the Commissioner, Department of Revenue, proposes having the private sector build a gas extraction plant, trucking propane to Fairbanks, and barging propane to river communities. All three of the North Slope producers have expressed interest in this proposal. On the subject of long- term future solutions, she advised that there are a great number of options, albeit all at a high price. She urged the committee to consider that the best model for energy projects is a private-public partnership mix that keeps the cost semi- sustainable for the economy, while encouraging investment by the private sector. Slide 20 was a map indicating the regional energy demands across Alaska. Ms. Pease spoke of the in-state bullet gas line, and relayed that the cost of a bullet line is greatly reduced by the construction of a main line; however, without that alternative the cost of 250 million standard cubic feet per day (MMscf/d) results in a tariff of $6-$7 in addition to the price of gas. She re-stated that the capital costs of the development of hydroelectric energy are very high, and there is a need to realize that an over-arching energy policy must define the "renewable energy mix that we want going forward." 3:30:07 PM MS. PEASE presented Commonwealth North's recommendations: continued customer awareness, educational conservation, and curtailment plans; support for gas storage to help utilities meet deliverability challenges; establish a clear regulatory standard for review of gas supply contracts; implement a policy of fuel diversification including other energy alternatives such as hydroelectric, coal, propane, wind, and geo-thermal, with the long-term goal of reduced dependence on diesel for much of rural Alaska; encourage development of oil and natural gas potential and the construction of a natural gas pipeline. 3:33:22 PM MS. PEASE suggested that the action to be taken now is for the state to continue the energy dialogue and establish a pro-active approach and reasoned policy action on energy issues in Alaska. She advised that the policy direction developed by the legislature will ensure there is economic development, the investment of capital in the economy, and sustainable opportunities for growth. 3:34:30 PM CO-CHAIR MILLETT observed that Commonwealth North's recommendations are in alignment with the energy policy developed by the stakeholders group. Alaskans are in agreement. 3:35:03 PM CO-CHAIR EDGMON appreciated the reference to rural Alaska and its need for the diversification of fuel sources. Energy issues have manifested an inter-dependence between business flowing into Anchorage from rural Alaska and the availability of affordable power in Southcentral. REPRESENTATIVE RAMRAS spoke of a proposed $250 million development in the Interior involving the Alaska Gasline Port Authority (AGPA), Golden Valley Electric Association (GVEA), Fairbanks Natural Gas, and ENSTAR to install millions of dollars of gas fittings to accept trucked natural gas. He asked Commonwealth North to provide an addendum to its report analyzing the proposed project. 3:37:18 PM MS. PEASE responded that Commonwealth North will immediately begin looking at rural and Interior LNG issues. 3:37:42 PM REPRESENTATIVE PETERSEN asked whether using methane from the Anchorage landfill to generate electricity will become a reality. 3:38:10 PM MS. PEASE said this resource will become available at the beginning of 2012. 3:38:31 PM CO-CHAIR MILLETT asked for a re-statement of comments made at the Regulatory Commission of Alaska (RCA), Department of Commerce, Community, & Economic Development, meeting regarding pending legislation. 3:39:28 PM MS. PEASE clarified that Commonwealth North has not passed a resolution or made recommendations on proposed legislation; however, the report states Commonwealth North is highly supportive of the effort, and calls for a policy direction of all of the best components of the proposed legislation. She said the public process and consumers' interests must be kept at the forefront of any discussion on jointly operated power generation. Ms. Pease gave the example of Ontario, Canada, where the utilities have integrated the private sector with a traditional public-type cooperative. However, merging all of the utilities requires an organization, such as the RCA, to monitor the entity at the outset, and then deregulate after protecting consumers' interests. 3:42:08 PM REPRESENTATIVE RAMRAS supported deregulation. 3:42:25 PM REPRESENTATIVE JOHANSEN stated that with great power comes great responsibility. The proposed legislation must be analyzed and understood by legislators. He appreciated the fact that the information supplied was helpful, but stressed the necessity of consumer protection and oversight. He said he has not been satisfied with the utilities' responses in the past, and emphasized that he will not support the proposed legislation without regulation for consumer protection. 3:45:00 PM MS. PEASE opined that a level of investment in Cook Inlet must be maintained. She said she would urge deregulated gas storage and less regulatory oversight over gas supply contracts; however, at the beginning of this new model, the state must "get it right." 3:45:57 PM REPRESENTATIVE JOHANSEN also appreciated Commonwealth North's support of getting the private sector market involved. 3:46:34 PM CO-CHAIR EDGMON asked whether supply-side mega-projects, such as an in-state gas line and the Susitna Hydroelectric Project, can proceed concurrently. 3:47:45 PM MS. PEASE opined there will be difficulties doing mega-projects concurrently due to capacity and financial constraints. HB 182-RAILBELT ENERGY & TRANSMISSION CORP.  3:48:20 PM CO-CHAIR MILLETT announced that the next order of business would be HOUSE BILL NO. 182, "An Act establishing the Greater Railbelt Energy and Transmission Corporation and relating to the corporation; relating to transition, financial plan, and reporting requirements regarding planning for the initial business operations of the Greater Railbelt Energy and Transmission Corporation; relating to a report on legislation regarding the Regulatory Commission of Alaska and the Greater Railbelt Energy and Transmission Corporation; authorizing the Alaska Energy Authority to convey the Bradley Lake Hydroelectric Project and the Alaska Intertie to the Greater Railbelt Energy and Transmission Corporation; and providing for an effective date." She identified the working document as Committee Substitute (CS) for HB 182, version 26-GH1041\S, Chenoweth/Bailey, dated 3/24/10. 3:49:54 PM BRUCE TANGEMAN, Chief Financial Officer, Doyon Utilities (DU), informed the committee his testimony intends to familiarize the committee with his company, and to request "equal participation in the GRETC process currently under consideration by this legislature." Mr. Tangeman explained that DU is not included as a member of the joint utility taskforce or the work group because it is not a municipal or cooperative electric utility. However, DU owns and operates three Railbelt electric utilities located at Fort Wainwright in Fairbanks, Fort Greely in Delta, and Fort Richardson in Anchorage. In 2007, DU was awarded three 50-year contracts with the Army to privatize twelve utility systems on the Army posts including electric generation and distribution, heat distribution, water distribution, and wastewater collection, thus saving the Army an estimated $950 million. Doyon Utilities is responsible to maintain, repair, replace, and construct new assets as needed to provide services to approximately 45,000 soldiers, family members, and civilians. Mr. Tangeman noted that investments in the utilities occur through DU shareholders, which has totaled $135 million during the past two years, and by the investment of federal funds through the Army. He said DU is concerned about its lack of participation in the GRETC process for two main reasons: (1) withholding the wholesale rate from the Army may negatively influence the Base Realignment and Closure (BRAC) process that keeps the posts open; (2) the proposed legislation presumes that funding for capital projects will come from the state, and from a funding perspective, there should be more diversity in investment. Mr. Tangeman advised that DU should have an equal seat at the table and not as a non-voting member without a role in management or investment. In fact, by precluding meaningful involvement by DU and the Army in GRETC, the state would prevent private or federal investment in capital projects, and the efficiencies gained from a joint utility effort would be limited by the exclusion of three electric utilities. He urged the committee to consider whether the present structure of the legislation serves the best interests of the Railbelt residents. 3:56:36 PM REPRESENTATIVE TUCK asked about the three power utilities and the source of their power generation. 3:56:59 PM MR. TANGEMAN answered that DU owns and operates a coal-fired power plant for Fort Wainwright, the Army purchases power from Golden Valley Electric Association (GVEA) for Fort Wainwright and Fort Greely, and it has a contract with Anchorage Municipal Light & Power (ML&P) for Fort Richardson. Doyon Utilities owns the infrastructure. 3:57:30 PM CO-CHAIR MILLETT invited Mr. Tangeman to explain the changes proposed by DU. 3:57:55 PM MR. TANGEMAN suggested the most important change to the bill is to strike "municipal" and "cooperatives," and replace this language with "public utilities." Also, the CS authorizes his company to invest, but not to address "where that funding is going to go and how it is going to be used." In addition, the Army should not be charged retail rates. His said another concern is over the requirement of a two-thirds vote by the GRETC board to allow participation in capital projects. 4:00:19 PM CO-CHAIR EDGMON asked whether a profit-driven entity can "mix" in a not-for-profit structure. 4:00:53 PM MR. TANGEMAN clarified that 50 percent of DU is owned by Fairbanks Sewer Water Inc. (FSW), and 50 percent is owned by Doyon Properties, Inc. 4:01:26 PM CO-CHAIR EDGMON re-stated his question. 4:01:32 PM MR. TANGEMAN observed that DU is an economically regulated utility as is ML&P, Alaska Electric Light and Power Company (AEL&P), and GVEA. In addition, like other utilities, DU operates under a certificate of public convenience and necessity (CPCN), has customers, and is supervised by Regulatory Commission of Alaska (RCA), Department of Commerce, Community, & Economic Development, oversight. 4:02:51 PM CO-CHAIR EDGMON gave the example of DU benefitting from public funds as a participant in GRETC. He also asked whether DU has an opinion on RCA oversight of GRETC. 4:03:06 PM MR. TANGEMAN, referring to the RCA oversight of GRETC, explained that DU won its contract as one of the largest utility privatizations with the federal government because of the "bundling aspect" of the 12 utilities, and also because DU proposed a regulated model. Doyon Utilities' business model is transparent, and allows the Army access to its business records. He opined the Army "love[s] the regulatory aspect," and would be a strong supporter of GRETC regulation. In response to Co-Chair Edgmon's first question, Mr. Tangeman said DU is asking to be on the same footing with the other utilities participating in GRETC, and to receive the same benefits. 4:05:08 PM REPRESENTATIVE PETERSEN asked whether DU anticipates regulatory complications because its contracts are with the military. 4:05:38 PM MR. TANGEMAN assured the committee DU will research this question. 4:06:07 PM REPRESENTATIVE TUCK questioned whether state regulation can have jurisdiction over military properties. 4:06:41 PM MR. TANGEMAN explained that in the contract the Army agreed that the RCA would be the independent third party overseeing the contract. 4:07:25 PM REPRESENTATIVE TUCK further asked whether the RCA agreed. 4:07:42 PM MR. TANGEMAN indicated yes. In further response to Representative Tuck, he said a CPCN is the regulated document issued by the RCA that allows DU to operate as a utility. 4:08:15 PM REPRESENTATIVE TUCK asked whether DU obtained its CPCN as part of its contract with the Army. 4:08:30 PM MR. TANGEMAN responded that regulation by the RCA was part of the proposal to the Army by DU. 4:09:09 PM MIKE O'MEARA, Homer Spokesman, HEA Member's Forum, informed the committee he represents "just some of the people who are involved in paying the bills for all of this stuff." Mr. O'Meara said HEA Member's Forum has been in favor of a GRETC- type organization in order to increase Railbelt operational efficiencies through greater collaboration among the utilities. However, his group is concerned that there has not been an opportunity for ratepayers to be involved in drafting the legislation. HEA Member's Forum's recommendations are: regulation by the RCA should be over time and not short-term because the RCA supports ratepayers' interests; better participation by ratepayers in governance of the system; savings in costs by greater efficiency and energy conservation; support for achieving the ultimate goal of renewable energy; state funding should be adequate for the function of GRETC without placing an undue burden on the participating utilities. 4:14:33 PM CHRISTINE VECCHIO, Board Member, MEA Ratepayers Alliance, said she represents a grassroots organization formed to provide more information to the ratepayers in the Matanuska Electric Association (MEA) district on energy issues. Her organization participated in the Alaska Railbelt Electrical Grid Authority (REGA) study in 2007 and the Railbelt Integrated Resource Plan (RIRP), and she offered its perspective on public participation and governance in the proposed legislation. The Alaska Energy Authority (AEA) and its consultants worked diligently to include stakeholders in the aforementioned studies, and she urged the incorporation of public participation in the language of GRETC as well. Furthermore, her organization feels there is a need for an utility advisory group along with the board of directors at the governance level for GRETC. This is important because any organization needs public and diverse involvement to bring "other realities" to those at the governance level. She suggested an IRP review should be done every three years, as is done in Hawaii. Ms. Vecchio expressed her appreciation of the testimony from previous witnesses in support of regulation and public involvement. 4:21:19 PM CO-CHAIR EDGMON referred to the audits, reports, and regulatory oversight that are already required in the bill, and asked whether the stakeholder group would be an addition. 4:22:01 PM MS. VECCHIO was unsure of the form of the stakeholder group; however, at the governance level there is only one member of the public appointed by the governor. She opined one appointment is insufficient. In further response to Co-Chair Edgmon, she confirmed that the stakeholder group would be additional to the regulation and public participation already included in the bill. 4:23:28 PM REPRESENTATIVE JOHANSEN referred to previous testimony by MEA's general manager, and asked whether the ratepayers' option of petitioning federal entities for relief would suffice. MS. VECCHIO said a petition is a reactive approach to a problem; however, she is interested in a proactive approach to the policy and direction of the corporation in order to avoid distrust. In further response to Representative Johansen, she said her preference would be to appeal to a state agency, rather than a federal agency. 4:25:51 PM REPRESENTATIVE PETERSEN asked whether her concern about public participation would be satisfied if the governor's appointee was a member of a consumer group. 4:26:24 PM MS. VECCHIO observed the appointee would still only be one person. 4:27:24 PM JIM SYKES, Consumer Representative, AEA Stakeholder Advisory Group; Representative, Alaska Public Interest Research Group; Mat-Su Energy Issues Coordinator, Alaska Center for the Environment, expressed appreciation to the committee, the utilities, and stakeholders for their attention to this critical issue. He informed the committee that three years ago, the REGA study showed the benefits of a unified Railbelt energy system even though the stakeholders and the utility working group did not meet together at the beginning of the process, and still are not. However, present testimony supports adding to the proposed legislation the essential ingredients of transparency and public accountability such as financial oversight, publicly involved governance structure, meaningful regulation, public participation, and clear mechanisms for issuing equity or creating subsidiary corporations. He opined financial oversight over investments should be provided by the AEA, rather than just an audit. Regarding regulation, he said the process should be simplified with one set of regulations for the operation of the G&T that is accountable and transparent. Mr. Sykes pointed out that there were 15 members of the RIRP advisory group, and urged the same diversity for the GRETC board of directors; in fact, the current structure calls for a "committee of managers," and invites conflicts of interest. Furthermore, in addition to more consumer representation, representation for renewable energy, the elderly, and other interests is needed. Mr. Sykes acknowledged the need for urgency, but he said public accountability issues should not be left behind. He clarified that he still supports the GRETC concept. 4:33:40 PM CO-CHAIR EDGMON has heard from a variety of groups that there needs to be an additional stakeholder group at the governance level. He asked for information on how utility board members are elected. 4:34:45 PM MR. SYKES explained that in the Railbelt the election of board members is by about 10-15 percent of the shareholders. The elections have become a hybrid between public and corporate elections, because few people vote; in fact, public utility cooperatives have lost their connection to people, resulting in a low response and low accountability. Although he does not envision a separate stakeholder group, he suggested stakeholders should operate on the same governing board. [CO-CHAIR MILLETT passed the gavel to Co-Chair Edgmon.] 4:37:26 PM MARY KVALHEIM informed the committee she is a Mat-Su electric ratepayer and she thanked the committee, the utilities, and stakeholders for their work. She agreed with the concept of Railbelt-wide utilities, but stated that her public service experience leads her to value public participation in public issues. She requested that additional public representation should be included in the structure of the organization. Ms. Kvalheim strongly urged the committee to add language that will bring regulation, and the knowledge and active participation from the general public, to the GRETC concept. [CO-CHAIR EDGMON returned the gavel to Co-Chair Millett.] 4:39:43 PM CO-CHAIR MILLETT advised that there is no reason to rush the bill through the committee process. The utilities have worked on the legislation for nine months, and she said the committee will pass a bill out of committee "that this committee ... is behind ... [and] we are confident that is good public policy.... Consumer protection is in my mind, and I think all of my colleagues that sit on this committee [agree], first and foremost in forming a new utility." 4:41:33 PM CO-CHAIR MILLETT announced that HB 182 was held with public testimony open. 4:43:00 PM ADJOURNMENT  There being no further business before the committee, the House Special Committee on Energy meeting was adjourned at [4:43 p.m.]