ALASKA STATE LEGISLATURE  HOUSE SPECIAL COMMITTEE ON ENERGY  March 15, 2016 10:17 a.m. MEMBERS PRESENT Representative Jim Colver, Co-Chair Representative Liz Vazquez, Co-Chair Representative Benjamin Nageak Representative David Talerico Representative Cathy Tilton Representative Matt Claman Representative Adam Wool MEMBERS ABSENT  All members present COMMITTEE CALENDAR  PRESENTATION: ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY~ DEPARTMENT OF COMMERCE~ COMMUNITY & ECONOMIC DEVELOPMENT - HEARD PREVIOUS COMMITTEE ACTION  No previous action to record WITNESS REGISTER GENE TERRIAULT, Project Lead Interior Energy Project Alaska Industrial Development and Export Authority Department of Commerce, Community & Economic Development Anchorage, Alaska POSITION STATEMENT: Provided a PowerPoint presentation entitled, "IEP Project Update," dated 3/15/16. BOB SHEFCHIK, Team Lead Interior Energy Project Alaska Industrial Development and Export Authority Department of Commerce, Community & Economic Development Fairbanks, Alaska POSITION STATEMENT: Answered questions during the PowerPoint presentation entitled, "IEP Project Update," dated 3/15/16. ACTION NARRATIVE 10:17:55 AM CO-CHAIR JIM COLVER called the House Special Committee on Energy meeting to order at 10:17 a.m. Representatives Colver, Wool, Nageak, Talerico, Tilton, and Vazquez were present at the call to order. Representative Claman arrived as the meeting was in progress. ^PRESENTATION: ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY & ECONOMIC DEVELOPMENT PRESENTATION: ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT  AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY & ECONOMIC  DEVELOPMENT  10:18:16 AM CO-CHAIR COLVER announced that the only order of business would be a review by the Alaska Industrial Development and Export Authority, Department of Commerce, Community & Economic Development, on the Interior Energy Project. 10:18:49 AM GENE THERRIAULT, Project Lead, Interior Energy Project (IEP), Alaska Industrial Development and Export Authority (AIDEA), Department of Commerce, Community & Economic Development (DCCED), provided a PowerPoint presentation entitled, "IEP Project Update," dated 3/15/16. Mr. Therriault said the presentation would include an update on how the project has progressed subsequent to [House Bill 105, passed in the 29th Alaska State Legislature and signed into law 6/30/15]. In the committee packet was a memorandum and combined documents addressed to John Springsteen, executive director, IEP, dated 3/3/16, related to the source of liquefied natural gas (LNG) for the project. Mr. Therriault said IEP's first goal is to provide a source of cleaner energy for Interior Alaska for the lowest cost possible, to as many customers as possible, as soon as possible. The lowering of the cost of fuel oil in this area - from about $4 per gallon to approximately $2 per gallon - has affected the project, although the poor air quality in the Fairbanks area is a problem not driven by the economics of fuel oil, but by its use, and the project also seeks to lower fine particulate matter (PM2.5) in nonattainment areas of the Interior [slide 2]. The first financing package for the project was [Senate Bill 23, passed in the 28th Alaska State Legislature and signed into law 5/29/13] which offered the following suite of financial tools: source of LNG supply limited to the North Slope; $125 million in the Sustainable Energy Transmission and Supply (SETS) account for loans; $57.5 million in a capital appropriation of direct funds to AIDEA to be used for investment in infrastructure; and authorization for AIDEA to bond up to $150 million. Following the determination that the project was not able to reach its target of $15 per thousand cubic feet of natural gas (Mcf) delivered to a residential customer in the Interior from the North Slope, in 2015, HB 105 reinitiated the project, allowing wider options such as natural gas from the north or south, a smaller diameter pipeline, and propane as an energy source. The new options attracted sixteen proposals from which the Salix Inc., proposal was recommended on 3/3/16 for final consideration on 3/31/16 [slide 3]. Components of the chosen project include: gas supply and liquefaction, storage, transportation by truck and/or railroad, storage, regasification, and distribution [slide 4]. 10:26:06 AM CO-CHAIR COLVER asked how much has been spent of the capital funding on the distribution lines that have been installed in North Pole. MR. THERRIAULT said that $43 million has been funded from the capital appropriation, the distribution system has been funded with loans out of the SETS authorization, and none of the bonds have been accessed. In further response to Co-Chair Colver, he said $72 million has been accessed from the SETS authorization, leaving just under $53 million. REPRESENTATIVE WOOL observed that one of the final proposals included gas sourced from the North Slope, which was already deemed too expensive, and he asked whether there was a major change in the approach of the proposal. MR. THERRIAULT said the proposal was "a smaller plant and just a different way of moving forward." The two finalists under the new request for proposal (RFP) utilized a different approach. CO-CHAIR COLVER asked what assets AIDEA has acquired on the North Slope and their cost. MR. THERRIAULT answered that the major asset on the North Slope is a gravel pad that cost about $14 million. 10:29:08 AM BOB SHEFCHIK, team lead, IEP, AIDEA, DCCED, confirmed that the main asset is a gravel pad on the North Slope; its asset value is between $7 million and $10 million, and the other $4 million was spent to advance the proposed project to a final investment decision. Further, if the Cook Inlet proposal advances, AIDEA will seek to lease or sell the North Slope asset. CO-CHAIR COLVER inquired as to whether any intellectual property was acquired. MR. SHEFCHIK was unsure, except that the permitting and the layout to set up the plant was in place, and if the choice had been a North Slope contractor, it would have been used by AIDEA; however, he did not say that there is incremental value to the plant on the North Slope, if the plant is installed in Cook Inlet. CO-CHAIR COLVER asked for the total cost. MR. SHEFCHIK said the expense of the gravel pad was paid to subcontractor "TIC," and $3 million to $4 million was paid to MWH. MR. THERRIAULT offered to provide more specific information in that regard. Slide 5 was a map depicting components of the supply chain from Cook Inlet to Fairbanks: supply from Cook Inlet; liquefaction; temporary storage; transportation by truck; storage to fulfil the Regulatory Commission of Alaska's requirement for at least five days' worth of LNG in storage; regasification into the distribution system. As depicted, there are currently two distribution utilities, Fairbanks Natural Gas (FNG) utility and Interior Gas Utility (IGU), and he described several possible configurations of distribution systems, including linking the two systems together. 10:35:27 AM CO-CHAIR VAZQUEZ asked how many customers are served by IGU. MR. THERRIAULT said pipe has been installed in the streets but no customers will be signed up until it is known that they can be served on a long-term basis. REPRESENTATIVE WOOL questioned whether the FNG distribution system currently has a storage tank and regasification capabilities. MR. THERRIAULT explained that FNG does receive and store LNG in south Fairbanks. REPRESENTATIVE WOOL surmised the proposal will duplicate that system or incorporate the existing system with the IEP system. MR. THERRIAULT said a 5.2 million gallon storage tank is proposed for the bulk storage in Fairbanks. Because of the expense, the storage investment must be timed right so not to burden the initial customers needlessly; he advised that existing storage tanks may be moved to North Pole to minimize the capital cost of smaller tanks for that community. Mr. Therriault redirected attention to the revised RFP, which solicited a wide range of proposals to supply energy for the Interior. From sixteen proposals, on 3/3/15, the RFP evaluation committee recommended the Salix, Inc., Cook Inlet proposal. Salix is a division of Avista Corporation, a utility in the Pacific Northwest, which also owns Alaska Electric Light and Power (AEL&P) in Juneau, and seeks to bring LNG to Juneau and Southeast Alaska. At this time, there are ongoing negotiations with Salix to finalize the commercial terms, which are on target for consideration at the 3/31/16 board meeting [slide 6]. 10:40:04 AM CO-CHAIR COLVER asked Mr. Therriault to provide an outline of the terms and conditions of the proposal, such as the price and amount of gas, its distribution cost, and other parameters. MR. THERRIAULT said these issues would be addressed later in the presentation. He informed the committee that last year the AIDEA board of directors decided to acquire Pentex Alaska Natural Gas Company (Pentex) assets, including its existing LNG plant in Cook Inlet, and the existing FNG distribution system; AIDEA intends to be a "short-term owner" and plans a resale to a utility company. Through a purchase or long-term lease, the utility company would utilize the existing infrastructure and the expanded facility, operated as one unit in order to keep operating costs down. He characterized AIDEA's purchase as a key component to meet the $15 per Mcf target. CO-CHAIR COLVER asked whether AIDEA has tax-free status as the owner of the distribution lines in Fairbanks. MR. THERRIAULT expressed his belief that AIDEA is exempt from taxation, and if ownership is combined with IGU, it would retain said status. CO-CHAIR COLVER further inquired as to provisions in the legislation authorizing the project for tax-exempt status for a future private owner. MR. THERRIAULT opined that if the project goes into private ownership, it would be subject to local taxes. MR. SHEFCHIK confirmed Mr. Therriault's statement on taxation, adding that two factors affect whether municipal property taxes apply: ownership and control. Thus, if the project is leased, operated, or controlled by a private entity, such as Salix, property taxes would apply. However, as envisioned at this time, property taxes would not apply to a plant in Fairbanks, but would apply to a plant in Cook Inlet as proposed. CO-CHAIR VAZQUEZ asked for the price AIDEA paid to acquire Pentex. 10:45:22 AM MR. SHEFCHIK said $52.5 million. CO-CHAIR VAZQUEZ then asked how many utility customers are affected. MR. THERRIAULT answered 1,100 residential and commercial customers. He added that the existing distribution system can support many more customers with a larger supply of gas. CO-CHAIR COLVER pointed out the equity issue related to providing energy throughout the state. MR. THERRIAULT returned to investments in the distribution system in the last year [slide 7]: FNG expanded its existing system by 30 miles; IGU installed 73 miles of new pipeline in North Pole; financed with SETS; prepared the community for a new source of LNG. As directed by House Bill 105, two quarterly reports on the project have been submitted to the legislature and a third is due at the end of March, 2016. The reports are available on the IEP web site [slide 8]. Slide 9 was a graph which illustrated IEP project milestones from 10/30/15 through 6/23/16. Mr. Therriault advised if the AIDEA board of directors is unable to finalize authorization of the project on 3/31/16, authorization would be scheduled for the next board meeting in April. MR. THERRIAULT turned attention to a memorandum and combined documents found in the committee packet addressed to John Springsteen, executive director, AIDEA, dated 3/3/16. 10:48:59 AM CO-CHAIR COLVER asked whether the SETS loans would be repaid by the consumer base through a rate approved by RCA. MR. THERRIAULT said yes. He pointed out that the entity is not governed by RCA jurisdiction because it is government-owned. As of 1/1/16, there was a reduction in rates. CO-CHAIR COLVER asked for the SETS loan repayment schedule. MR. SHEFCHIK responded that the current financing structure for the IGU and FNG loans is: fixed 1.0 percent interest rate; 30- year term; 5-year deferral on payment. The goal is to maintain pricing at the $15 target, and make payments based on the ability to pay. 10:51:26 AM MR. THERRIAULT returned attention to the memorandum and attached documents, noting that the cover letter includes details of how the RFP Evaluation Committee met. He pointed out that the evaluation committee met on 2/4/16, and the date on the reports on the two finalists by Arcadis U.S., Inc., is 2/26/16. The reason for this is that the Arcadis reports originally submitted to the evaluation committee contained some confidential information, therefore, redacted reports dated 2/26/16 were made available for release to the public. Also attached was a report from the evaluation committee which detailed important issues related to the evaluation, such as the annual revenue requirement. He further explained that after their review, all of the members of the evaluation committee discussed their views; ultimately there was a unanimous decision to recommend a supply of natural gas out of Cook Inlet as proposed by Salix. Page 6 was an outline of the evaluation committee's 2/4/16 agenda; pages 7 through 22 were the reports by Arcadis. On page 8, there was a description of the methodology applied to both of the final proposals. In response to Co-Chair Colver, he said the 2/4/16 meeting of the evaluation committee was held in executive session. 10:55:22 AM CO-CHAIR VAZQUEZ questioned why Golden Valley Electrical Association (GVEA) declined to participate in the project. MR. THERRIAULT said GVEA has indicated interest in participating as a seasonal customer. With the declining price of oil, GVEA was able to secure a source of fuel oil delivered sooner, and at a lower cost. Although negotiations with GVEA will continue, a seasonal demand from GVEA is beneficial to the project. MR. THERRIAULT provided a summary of the Arcadis report on the Salix proposal: · [Page 1 of the report, page 8 of the combined documents] refers to methodology · [Page 2 of the report, page 9 of the combined documents] evaluates Salix, its financial strength, and the proposed gas supply, gas treatment, LNG liquefaction plant and onsite storage · [Page 3 of the report, page 10 of the combined documents] relates to the power source of the LNG plant CO-CHAIR COLVER returned attention to the gas supply [page 6 of the combined documents] and read: : the NG received for liquefaction would be purchased by the utilities participating in the IEP. CO-CHAIR COLVER surmised that the Fairbanks utilities would be responsible for buying the gas supply and not Salix. 10:59:22 AM MR. THERRIAULT said yes. It is incumbent on the utilities to sign the gas supply contracts, on behalf of their customers, in order to transport the gas to the Salix LNG plant for liquefaction. CO-CHAIR COLVER inquired as to how to contain costs if Salix does not have the burden of procuring sales contracts and delivering the gas for the targeted price. MR. THERRIAULT advised that as directed by House Bill 105, a gas supply for the duration of the contract at a price that meets the goals must be verified by the AIDEA board of directors. CO-CHAIR COLVER concluded that Salix is not involved in production, buying assets in Cook Inlet, or developing gas resources. MR. THERRIAULT said yes. He added that AIDEA has identified potential sources of gas and is researching prices and volume; however, it is up to the utilities to negotiate gas supply contracts. In further response to Co-Chair Colver, he said AIDEA issued a request for information to gauge interest from suppliers. CO-CHAIR COLVER cautioned that the gas supply is a variable that would affect the target price. 11:02:55 AM MR. THERRIAULT noted that later in his presentation the evaluation reports discuss the potential costs of liquefaction using "a $6 per Mcf price for our evaluation ...." REPRESENTATIVE TALERICO asked whether the model suggests "contracting with the producers on a potential tariff rate in the ENSTAR line." If this is a direct purchase from producers, a utility/producer contract could be for a long term. 11:03:56 AM MR. THERRIAULT stated that a contract from a producer would not get the gas to the plant, and there would be a tariff to transport gas through the ENSTAR system; ENSTAR also could propose to sell gas including transportation. He acknowledged that all of the aforementioned are "in the mix in the negotiations with the potential gas supply." CO-CHAIR COLVER returned attention to [page 2 of the report, page 9 of the combined documents], noting that the proposal does not include a supply contract. He asked how the aforementioned $6 per Mcf estimate compared. MR. SHEFCHIK said there are ongoing negotiations with multiple suppliers; he expressed his belief that the estimate is in the range in order for the project to advance. He explained that if the cost of gas rises above the estimate, transportation or liquefaction costs must come down. In response to Co-Chair Colver's earlier question, he said that of the seventeen proposals, two proposals bundled gas and liquefaction. CO-CHAIR COLVER asked about the envisioned terms of the gas supply contracts. MR. SHEFCHIK said IEP seeks: (1) duration longer than usual, ten year contracts or five year with an extension; (2) bulk, fixed [prices], with escalators, that are not tied to Henry Hub natural gas spot price. 11:07:55 AM MR. THERRIAULT directed attention to [page 3 of the report, page 10 of the combined documents] that related to power to run the liquefaction plant, the balance of plant design and capital expenditures (CAPEX), and detailed project costs. [Page 4 of the report, page 11 of the combined documents] related to commercial terms and project financing, financing tools and their effect on costs, and risk identification and allocation. [Page 5 of the report, page 12 of the combined documents] related to the proposal's ability to meet IEP goals of $15 gas delivered to residential customers, including transportation, storage, regasification, and delivery to the outside meter of a residential dwelling. Also under IEP goals, Arcadis evaluated the Salix proposal to deliver at a cost of $15.74, which is close to the target goal and compares to $2 fuel oil. Mr. Therriault advised the project is competitive, with the Salix liquefaction fee at $3.24 per Mcf, and the estimated cost of gas at $6 per Mcf. REPRESENTATIVE WOOL asked whether a reduction in the estimated cost of gas to $5 per Mcf, would put the delivered cost at $14.74. 11:11:05 AM MR. THERRIAULT said correct. He read from [paragraph 5, page 5 of the report, page 12 of the combined documents] as follows [in part]: ; however, current market conditions for Cook Inlet gas supply suggest that there is a downward potential for the pricing of this feed [stock] gas. MR. THERRIAULT expressed IEP's hope to bring the cost component down, and he described the effect of the savings on operational cost (OPEX). There followed further descriptions of various savings, including transportation by rail. CO-CHAIR COLVER asked whether there is a rail siding at FNG's current storage location. MR. SHEFCHIK said no. However, there is rail access to the current site. CO-CHAIR COLVER suggested that using the existing plant would require the use of [shipping containers made to International Shipping Organization standards (ISO containers)] transported by truck and rail. He then asked whether it was difficult for the unsuccessful proposals to meet price goals and secure sources of gas. 11:14:23 AM MR. SHEFCHIK addressed the five finalists: two proposed sourcing gas from the North Slope, and three proposed sourcing gas from Cook Inlet. Challenges to sourcing natural gas from the North Slope were capital expense and high fixed operating costs, and in low-demand scenarios, significant negative cash flows were anticipated for the early years. In Cook Inlet, although there was gas either out of the inlet or imported, the challenges were: to determine the most effective use of investment money long-term; there were difficulties reaching the target price; there were risks associated with importing gas to future facilities; and capital required for out-of-state investment. From his perspective, the evaluation committee felt the risks of financing a plant on the North Slope in a low fuel oil price environment and with low cash flow for the first five years, were significantly higher than the risks of transportation and construction on Cook Inlet, in the current economic environment. CO-CHAIR VAZQUEZ noted that the major consumers of energy in the Fairbanks area are GVEA, the University of Alaska Fairbanks (UAF), and the military bases. She asked whether joint action with one of these entities - to bring down the cost of the project - was studied. MR. SHEFCHIK said yes. Since prior to 2014, GVEA has been involved in the project; in fact, GVEA was offered an opportunity to participate as an anchor tenant. The decision by GVEA to participate as a summer customer affected the monthly demand for energy from the project, and weakened the viability of a North Slope plant proposal. At UAF, the decision to participate was deferred until 2013, when UAF chose to build a solid fuel plant. At the military bases, Fort Wainwright has infrastructure issues, and Eielson Air Force Base has recently renovated its boiler systems for solid fuel. Although Fort Wainwright is the more likely of the two options, he cautioned against overbuilding the project prior to its actual demand for gas. 11:21:50 AM MR. THERRIAULT returned attention to [page 5 of the report and page 12 of the combined documents] related to the overall reasonableness and completeness of the development plan, wherein Arcadis compared Spectrum LNG and Salix proposals' to the worldwide cost of LNG. The Salix proposal was rated at 105 percent of the mean cost of construction of LNG plants worldwide, which was deemed "on-target." In addition, Salix budgeted +/-30 percent of capital cost. Although Spectrum also budgeted +/-30 percent of capital cost, its proposal was rated at 48 percent of worldwide costs, suggesting a higher risk for capital overruns. [Pages 15-22 of the combined report] are the Arcadis report on the Spectrum proposal, and page 24 of the combined documents illustrates IEP project milestones. 11:24:15 AM REPRESENTATIVE CLAMAN asked whether +/-30 percent budget is normal for the natural gas industry, as that is a broad range. MR. THERRIAULT explained that given the present expected level of project engineering and design, +/- 30 percent is reasonable; as the project moves to final and detailed engineering, the percentage will narrow down to 10 percent or less. In further response to Representative Claman, he said this is fairly normal, and added that all of the parties are motivated because the community target price is at parity with that of competing fuel. CO-CHAIR VAZQUEZ asked why the project proposals were compared to a worldwide ratio versus a nationwide ratio. MR. THERRIAULT opined that in some regions of Alaska, building a project is more comparable to construction projects in remote areas of world due to limited infrastructure; in addition, in some areas of the Lower 48, capital construction costs are much lower than in Cook Inlet. 11:28:21 AM REPRESENTATIVE WOOL recalled earlier testimony that the price of heating oil has dropped from $4 per gallon to $2 per gallon. He asked how the price of Cook Inlet gas has changed within the same timeframe, related to the project target price and the cost of gas. MR. THERRIAULT estimated that the cost of ENSTAR gas increased to $8 or $9 per Mcf, and is dropping back down. The project estimates that gas will cost $6 per Mcf, and market conditions suggest that for gas from Cook Inlet "we might be able to improve on that" with favorable volumes and terms. REPRESENTATIVE WOOL asked for the current price for coal, compared to $2 for diesel oil being equivalent to the project target price of $15 per Mcf of natural gas. MR. THERRIAULT advised that comparable British thermal units (Btus) of heat off of coal is around $5, which is significantly lower than natural gas. He added that UAF and the military bases have cogeneration systems that generate electricity and also utilize waste heat for heating facilities. CO-CHAIR COLVER observed that the AIDEA board of directors will make a final investment decision on 6/23/16. MR. THERRIAULT advised 6/23/16 is the target, although there are many details, and the date could be a few weeks later. CO-CHAIR COLVER asked for the construction schedule. MR. THERRIAULT expected the surface work to begin summer and fall, [2016], and construction the next year. Potentially, first gas out of the plant would be in late 2017, and to residential customers in the spring of 2018. 11:33:36 AM CO-CHAIR VAZQUEZ inquired as to the estimated price to convert a residence to gas. MR. THERRIAULT responded that the cost is dependent upon the age of the existing heating system; for a boiler less than 10 years old, a conversion may cost less than $2,000 to $3,000. For maximum efficiency, a new gas-fired appliance would cost $10,000 to $12,000. The conversion expense to the customer is a factor, and IEP is looking for mechanisms to assist with conversions, such as access to long-term, low-interest loans, and federal funds which may have zero-interest rates. 11:36:26 AM ADJOURNMENT  There being no further business before the committee, the House Special Committee on Energy meeting was adjourned at 11:36 p.m.