ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                       February 10, 2020                                                                                        
                           3:30 p.m.                                                                                            
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Peter Micciche, Chair                                                                                                   
Senator John Coghill, Vice Chair                                                                                                
Senator Click Bishop                                                                                                            
Senator Cathy Giessel                                                                                                           
Senator Joshua Revak                                                                                                            
Senator Scott Kawasaki                                                                                                          
Senator Jesse Kiehl                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Lora Reinbold                                                                                                           
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 171                                                                                                             
"An Act relating to industrial hemp."                                                                                           
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
SENATE BILL NO. 161                                                                                                             
"An Act relating to geothermal resources; relating to the                                                                       
definition of 'geothermal resources'; and providing for an                                                                      
effective date."                                                                                                                
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 171                                                                                                                  
SHORT TITLE: INDUSTRIAL HEMP PROGRAM; MANUFACTURING                                                                             
SPONSOR(s): SENATOR(s) HUGHES                                                                                                   
                                                                                                                                
01/31/20       (S)       READ THE FIRST TIME - REFERRALS                                                                        
01/31/20       (S)       RES                                                                                                    
02/10/20       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
BILL: SB 161                                                                                                                  
SHORT TITLE: GEOTHERMAL RESOURCES                                                                                               
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
01/22/20       (S)       READ THE FIRST TIME - REFERRALS                                                                        
01/22/20       (S)       RES, FIN                                                                                               
02/10/20       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BUDDY WHITT, Staff                                                                                                              
Senator Shelley Hughes                                                                                                          
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Introduced SB 171.                                                                                        
                                                                                                                                
JOAN WILSON, Assistant Attorney General                                                                                         
Civil Division                                                                                                                  
Commercial, Fair Business & Child Support Section                                                                               
Alaska Department of Law                                                                                                        
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Answered questions related to SB 171.                                                                     
                                                                                                                                
DAVE SCHADE, Director                                                                                                           
Division of Agriculture                                                                                                         
Alaska Department of Natural Resources                                                                                          
Palmer, Alaska                                                                                                                  
POSITION STATEMENT: Testified in support of SB 171.                                                                           
                                                                                                                                
ROB CARTER, Agronomist                                                                                                          
Division of Agriculture                                                                                                         
Alaska Department of Natural Resources                                                                                          
Palmer, Alaska                                                                                                                  
POSITION STATEMENT: Answered question regarding SB 171.                                                                       
                                                                                                                                
LAURA    OGAN,   Legislative    Liaison   &    Special   Projects                                                               
Commissioner's Office                                                                                                           
Alaska Department of Natural Resources                                                                                          
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Participated in an overview of SB 161.                                                                    
                                                                                                                                
STEVEN MASTERMAN, Director                                                                                                      
Division of Geological and Geophysical Surveys                                                                                  
Alaska Department of Natural Resources                                                                                          
Fairbanks, Alaska                                                                                                               
POSITION STATEMENT: Participated in an overview of SB 161.                                                                    
                                                                                                                                
TOM STOKES, Director                                                                                                            
Division of Oil and Gas                                                                                                         
Alaska Department of Natural Resources                                                                                          
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Answered questions regarding SB 161.                                                                      
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
                                                                                                                                
3:30:41 PM                                                                                                                    
CHAIR  PETER  MICCICHE  called   the  Senate  Resources  Standing                                                             
Committee meeting  to order at 3:30  p.m. Present at the  call to                                                               
order  were Senators  Kiehl, Kawasaki,  Coghill, Giessel,  Revak,                                                               
Bishop, and Chair Micciche.                                                                                                     
                                                                                                                                
         SB 171-INDUSTRIAL HEMP PROGRAM; MANUFACTURING                                                                      
                                                                                                                                
3:31:25 PM                                                                                                                    
CHAIR MICCICHE announced  that the first order  of business would                                                               
be SENATE BILL NO. 171, "An Act relating to industrial hemp."                                                                   
                                                                                                                                
3:31:49 PM                                                                                                                    
BUDDY  WHITT,   Staff,  Senator  Shelley  Hughes,   Alaska  State                                                               
Legislature,  Juneau,   Alaska,  explained   that  Representative                                                               
Shelley  Hughes worked  with  Senator Johnny  Ellis  in the  29th                                                               
Alaska State Legislature to create  an industrial hemp program in                                                               
the state, but the legislation did  not cross the finish line. In                                                               
2016, Senator  Hughes took the  lead on legislation to  create an                                                               
industrial  hemp pilot  program..  She was  able  to establish  a                                                               
feasible  way for  industrial hemp  through Section  7606 of  the                                                               
2014 Farm Bill,  which allowed states to  establish an industrial                                                               
pilot  hemp program.  The U.S.  Department of  Agriculture (USDA)                                                               
gave statements of  principles on industrial hemp  in August 2016                                                               
that  outlined a  path forward  for  the pilot  hemp program  and                                                               
Senate Bill  6 was signed into  law in April 2018.  However, when                                                               
taking  direction from  the  federal  government, things  quickly                                                               
changed.                                                                                                                        
                                                                                                                                
3:33:47 PM                                                                                                                    
MR. WHITT explained that with the  passage of the 2018 Farm Bill,                                                               
the new legislation  removed industrial hemp from  the Schedule I                                                               
Controlled  Substances  [U.S.   Department  of  Drug  Enforcement                                                               
Administration  (DEA)  classification].  The  USDA  released  its                                                               
final rule of  regulations on the 2018 Farm Bill  in October 2019                                                               
which provided  additional information  on the needed  changes to                                                               
the state's statutes to meet federal compliance.                                                                                
                                                                                                                                
MR. WITT  said the  passage of  the 2018  Farm Bill  requires the                                                               
state to make a few changes,  which SB 171 does. The bill removes                                                               
the industrial hemp pilot program  statute and adds the authority                                                               
to  permit   the  manufacturing  of  hemp-related   products  and                                                               
registration, and  the renewal process  for participation  in the                                                               
industrial  hemp  program.  This  authority  resides  within  the                                                               
Alaska Department of Natural Resources (DNR).                                                                                   
                                                                                                                                
He noted  that the  bill adds  that a  registrant could  not have                                                               
been  convicted  of a  drug-related  felony  within the  last  10                                                               
years. Further,  the department  must develop  a program  that is                                                               
compliant with  federal law and  submit those regulations  to the                                                               
USDA for  approval in order  to have an industrial  hemp program.                                                               
The bill also fixes some incongruent language in the statutes.                                                                  
                                                                                                                                
CHAIR  MICCICHE asked  Mr. Whitt  to proceed  with the  sectional                                                               
analysis for SB 171.                                                                                                            
                                                                                                                                
3:35:37 PM                                                                                                                    
MR.  WHITT paraphrased  the following  sectional analysis  for SB                                                               
171:                                                                                                                            
                                                                                                                                
     Section 1    AS 03.05.010(a)    Page 1, Line  3 through                                                                  
     Page 3, Line 8                                                                                                           
     Two subsections  added to this section  authorizing the                                                                    
     commissioner of the Department  of Natural Resources to                                                                    
     include  the   manufacturing  of  products   made  from                                                                    
     industrial hemp,  as well  as registration  and renewal                                                                    
     procedures, in the regulations  for the industrial hemp                                                                    
     program.                                                                                                                   
                                                                                                                                
He  explained that  the two  subsections were  added because  the                                                               
pilot program is being eliminated.                                                                                              
                                                                                                                                
     Section 2   AS 03.05.076(a)    Page 2, Lines through 24                                                                  
     Adds  language that  a  registrant  for the  industrial                                                                    
     hemp  program   is  not  eligible  if   they  had  been                                                                    
     convicted of a felony  involving a controlled substance                                                                    
     within the last  ten years in order to  comply with the                                                                    
     2018 Farm Bill.                                                                                                            
                                                                                                                                
MR. WITT noted  that there is a grandfather  provision, which was                                                               
not in the  2018 Farm Bill, but is in  the federal regulations, 7                                                               
CFR 990.6(e)(1).                                                                                                                
                                                                                                                                
     Section 3    AS 03.05.076(d)   Page 2,  Line 25 through                                                                  
     Page 4, Line 11                                                                                                          
     Adds that  the department  shall develop  an industrial                                                                    
     hemp   pilot  program   that   complies  with   federal                                                                    
     requirements and submit a plan  for the program to USDA                                                                    
     for approval.                                                                                                              
                                                                                                                                
     Section 4  Page 4, Line 12                                                                                               
     Repeals   AS  03.05.077,   the  establishment   of  the                                                                    
     industrial hemp pilot program,  and AS 03.05.079, which                                                                    
     was   the  violation   section   for  industrial   hemp                                                                    
     containing 0.3 and 1.0 percent THC.                                                                                        
                                                                                                                                
3:37:33 PM                                                                                                                    
MR. WHITT explained that AS  03.05.077 established the industrial                                                               
hemp  pilot program  which  is being  replaced  with a  permanent                                                               
program that  resides within and  is regulated by  the Department                                                               
of Natural Resources.  The repeal of AS  03.05.079 eliminates the                                                               
incongruency  between that  statute  and  AS 03.05.076(b)(4)  and                                                               
(d)(4). The department can use  the latter provisions to regulate                                                               
and manage hemp growers who are  acting in good faith to keep THC                                                               
levels in their product at or below the statutory limits.                                                                       
                                                                                                                                
MR. WHITT said  Senator Hughes requests the  committee consider a                                                               
friendly amendment  to change the  "shall" in AS  03.03.010(c) to                                                               
"may" to  align with other  provisions in  the bill that  allow a                                                               
bit of leniency for good actors. Subsection (c) currently reads:                                                                
                                                                                                                                
     The  Commissioner of  Natural Resources  shall issue  a                                                                    
     stop order to  any person who is found  to be producing                                                                    
     a plant  product with THC over  0.3 percent, regardless                                                                    
     of whether the person is registered.                                                                                       
                                                                                                                                
SENATOR  COGHILL noted  that the  proposed  amendment would  fall                                                               
under  section 1.  He mentioned  the stop  order requirement  and                                                               
asked for help understanding the  difference between the stop for                                                               
the product transaction versus the producer transaction.                                                                        
                                                                                                                                
MR.  WHITT   deferred  to  Rob   Carter  with  the   Division  of                                                               
Agriculture to explain what a stop order entails.                                                                               
                                                                                                                                
3:43:14 PM                                                                                                                    
SENATOR  KIEHL  referenced  the criminal  conviction  barrier  to                                                               
participating  in  the industrial  hemp  industry  and asked  who                                                               
would be  subject to the background  check if the applicant  is a                                                               
limited liability  company or corporation. He  also inquired what                                                               
the public safety need is for  a 10-year lookback for some people                                                               
and a 2-year lookback for others.                                                                                               
                                                                                                                                
3:45:01 PM                                                                                                                    
JOAN   WILSON,  Assistant   Attorney  General,   Civil  Division,                                                               
Commercial,  Fair  Business  &   Child  Support  Section,  Alaska                                                               
Department  of Law,  Anchorage, Alaska,  explained that  7 U.S.C.                                                               
1639p sets  out the minimum  requirements that a state  plan must                                                               
have  to  be  acceptable  by   the  federal  government.  In  its                                                               
language, the section says the following:                                                                                       
                                                                                                                                
     In  general, except  as provided  in  clause (ii),  any                                                                    
     person convicted  of a felony relating  to a controlled                                                                    
     substance  under State  or Federal  law before,  on, or                                                                    
     after  December 20,  2018, shall  be ineligible  during                                                                    
     the   10-year  period   following  the   date  of   the                                                                    
     conviction.                                                                                                                
                                                                                                                                
MS.   WILSON  specified   that   in  the   case  of   cooperative                                                               
associations, each  person with the  ability to benefit  from the                                                               
association would be subject to that bar.                                                                                       
                                                                                                                                
SENATOR KIEHL commented  that hemp is not marijuana  so the fewer                                                               
barriers the better.                                                                                                            
                                                                                                                                
CHAIR MICCICHE asked if the  federal code would include employees                                                               
or just members of the association who have ownership.                                                                          
                                                                                                                                
MS. WILSON answered that her  reading is the code includes people                                                               
who  benefit financially  from the  association  in an  ownership                                                               
status.  She  said  to  include  an employee  would  be  quite  a                                                               
stretch.                                                                                                                        
                                                                                                                                
3:47:28 PM                                                                                                                    
DAVE   SCHADE,   Director,   Division  of   Agriculture,   Alaska                                                               
Department of  Natural Resources, Palmer, Alaska,  testified that                                                               
the division and department support  SB 171. He said the division                                                               
is  trying to  take  a  pilot program  and  make  it a  permanent                                                               
program.                                                                                                                        
                                                                                                                                
He stated  that the  division analyzed  the bill  and recommended                                                               
changes to give the department  more leeway to allow conditioning                                                               
from  1.0  percent THC  to  0.3  percent thereby  protecting  the                                                               
farmer from changes due to genetics or the environment.                                                                         
                                                                                                                                
3:49:02 PM                                                                                                                    
CHAIR MICCICHE said  he assumed the division will  follow up with                                                               
a letter on the suggested changes.                                                                                              
                                                                                                                                
MR. SCHADE answered yes.                                                                                                        
                                                                                                                                
SENATOR BISHOP  asked for  a brief  explanation of  hemp farming,                                                               
including the  types of  seeds the producers  use, how  the seeds                                                               
are  planted, and  how the  hemp is  harvested. He  remarked that                                                               
neighboring  hemp  crops  with higher  THC  levels  could  impact                                                               
neighboring hemp crops.                                                                                                         
                                                                                                                                
MR.  SCHADE  answered  that  there   are  hundreds  of  different                                                               
varieties of  industrial hemp  that have a  variety of  uses. The                                                               
product  can be  traditionally farming  or grown  in greenhouses.                                                               
The department has  set up the program in  response to industrial                                                               
hemp's many  uses and  has put in  isolation distances  and other                                                               
factors  to try  to  manage the  crop  differences. For  example,                                                               
growing for  fiber is  a variety  that grows tall  with a  lot of                                                               
mass and  growing for  buds might mean  growing in  a greenhouse.                                                               
The department has  developed a program that  morphs depending on                                                               
the different varieties and uses.                                                                                               
                                                                                                                                
3:51:38 PM                                                                                                                    
SENATOR  KIEHL  noted  that  the   fiscal  note  showed  $750,000                                                               
collected  in year  one.  He  asked how  much  the department  is                                                               
currently collecting  in fees,  how likely it  is that  fees will                                                               
increase with  passage of  the bill, the  number of  current hemp                                                               
farmers, and the expected increase in farmers.                                                                                  
                                                                                                                                
MR.  SCHADE  replied the  division  has  not collected  any  fees                                                               
because it is just finalizing  the regulations for the handful of                                                               
farmers  in  the  pilot  program.  The  division  has  identified                                                               
approximately 20 manufacturers along  with 700 to 1,000 retailers                                                               
that are working in the  industry. The industrial hemp program is                                                               
designed   to   have    regulations   for   registered   growers,                                                               
manufacturers,  or  retailers.  A registrant  can  have  multiple                                                               
registration  designations. Fees  for the  grower are  fairly low                                                               
but  testing  fees are  expected  to  amount to  several  hundred                                                               
thousand dollars. The  division expects to register  600 to 1,000                                                               
entities  that will  require departmental  resources in  the $0.5                                                               
million range for the first  months. Should the program grow, the                                                               
division  will  have  the  leeway to  hire  more  people  because                                                               
funding is receipt based.                                                                                                       
                                                                                                                                
3:53:54 PM                                                                                                                    
SENATOR  KIEHL  commented  that  the  cash seems  to  be  in  the                                                               
manufacturing permit language in section 1.                                                                                     
                                                                                                                                
MR. SCHADE answered  yes. He said the farming  is relatively easy                                                               
from a fee and supervision  standpoint, but manufacturing is more                                                               
intense where  each manufacturer  is going to  have to  get their                                                               
product  manufacturing system  approved as  well as  working with                                                               
the Alaska Department of Environmental  Conservation (DEC) if the                                                               
product is  food related. The  final stage is the  retail market.                                                               
He noted  that the system is  designed to track the  product from                                                               
the grower,  to the  manufactures, to the  retail sales.  Part of                                                               
the concern is a lot of  the cannabinoid products can have things                                                               
in them that  the department does not want. The  concern is about                                                               
heavy metals, pesticides, and to make  sure zero THC is zero. The                                                               
division will have a lot  of focus on manufacturing. However, the                                                               
state has a serious amount of  product that is already there that                                                               
the  department must  make  sure is  not  synthetic. The  product                                                               
startup is going to be challenging.                                                                                             
                                                                                                                                
3:55:39 PM                                                                                                                    
SENATOR KIEHL stated his intention  to review the retail piece in                                                               
the bill.                                                                                                                       
                                                                                                                                
SENATOR  COGHILL  asked   how  the  state  is   going  to  manage                                                               
flexibility with the  modified language in section  3 while still                                                               
fitting within the U.S. code on USDA penalties.                                                                                 
                                                                                                                                
MR. SCHADE  replied that  is the dilemma.  He explained  that the                                                               
USDA  provided  an  interim  final   rule  that  set  a  one-year                                                               
expiration for pilot programs. None  of the states are happy with                                                               
the rule but there  is no workaround for parts of  it such as the                                                               
10-year lookback  for felony  convictions relating  to controlled                                                               
substances.  He   said  all  states  are   probably  looking  for                                                               
flexibility on  the THC levels  and testing time and  Alaska will                                                               
argue for rule exceptions due  to its logistical issues. However,                                                               
if the statute says that  the division absolutely must follow the                                                               
federal  guidelines, then  negotiating  and  working through  the                                                               
issues will be more difficult.                                                                                                  
                                                                                                                                
3:57:58 PM                                                                                                                    
CHAIR MICCICHE asked how the  department will pay for the program                                                               
until   there   is   sufficient   participation   from   growers,                                                               
manufacturers, and retailers.                                                                                                   
                                                                                                                                
MR.  SCHADE answered  that the  division  has two  general-funded                                                               
positions in  the current budget  to standup the  receipt -funded                                                               
program. He  assured the committee  that he will not  hire people                                                               
until there is  industry support to build the  program over time.                                                               
He said  he has always been  concerned when running a  program on                                                               
receipts  to  make  sure  there  are  receipts.  The  dilemma  is                                                               
stepping up a program with out the receipts in the first place.                                                                 
                                                                                                                                
3:59:23 PM                                                                                                                    
SENATOR   COGHILL   noted   that  the   requirement   under   [AS                                                               
03.05.010(c)] to  put a  stop order on  product that  exceeds the                                                               
THC levels is  not part of the bill. He  asked how the department                                                               
will deal  with the product  and the  producer if the  stop order                                                               
statute uses the word "may."                                                                                                    
                                                                                                                                
MR. SCHADE  emphasized that producers are  prohibited from taking                                                               
a crop  out of the field  unless the division tests  and approves                                                               
the  crop below  0.3 percent,  or the  division provides  written                                                               
approval to  take the  crop out  of the  field. Even  without the                                                               
stop order  there is no sale  because the division is  in control                                                               
all  along. The  stop order  is more  for a  marijuana-considered                                                               
crop that tests  1.0 percent THC, which is outside  the bounds of                                                               
the industrial  hemp program.  The shall-to-may  revision changes                                                               
the requirement for  the division to issue a  notice of violation                                                               
and a  $500 fine  even if  there was an  unintended error  and an                                                               
intent to  fix. He explained  that the  division did not  want to                                                               
completely  delete   a  notice   of  violation  because   of  the                                                               
possibility of a bad actor.                                                                                                     
                                                                                                                                
SENATOR  BISHOP  asked if  producers  would  grow most  of  their                                                               
industrial  hemp  in hoop  houses  rather  than on  thousand-acre                                                               
fields that use combines for harvesting.  He said he is trying to                                                               
imagine how the  division applies a stop order  after testing for                                                               
a 100 or  200-acre field. He emphasized that he  is not trying to                                                               
inhibit  the  process   but  rather  is  looking   for  a  better                                                               
understanding of where the state thinks the market is headed.                                                                   
                                                                                                                                
4:02:35 PM                                                                                                                    
ROB   CARTER,  Agronomist,   Division   of  Agriculture,   Alaska                                                               
Department of  Natural Resources,  Palmer, Alaska,  replied there                                                               
will be individuals producing on  large acreage if they choose to                                                               
participate  in the  program. The  division has  seen exponential                                                               
growth in industrial  hemp fields across the  nation for biomass,                                                               
fiber, or green  manure. They expect applicants to  grow on large                                                               
scale,   traditional   agriculture  using   traditional   farming                                                               
methods, depending on the hemp variety grown and intended use.                                                                  
                                                                                                                                
He explained  that an  offered notice of  violation or  stop sale                                                               
occurs if  the division's  sample shows  the raw  industrial hemp                                                               
tested above 0.3 percent and  below 1.0 percent THC. The proposed                                                               
regulations  would  have an  option  to  recondition the  lot  by                                                               
blending with another lot. However,  the farmer cannot process or                                                               
move the lot from the farm or the farm's drying facility.                                                                       
                                                                                                                                
4:04:53 PM                                                                                                                    
CHAIR  MICCICHE opened  public testimony.  Seeing  none, he  said                                                               
public testimony will remain open for future meetings.                                                                          
                                                                                                                                
4:05:18 PM                                                                                                                    
CHAIR MICCICHE held SB 171 in committee.                                                                                        
                                                                                                                                
4:05:31 PM                                                                                                                    
At ease.                                                                                                                        
                                                                                                                                
                  SB 161-GEOTHERMAL RESOURCES                                                                               
                                                                                                                                
4:05:55 PM                                                                                                                    
CHAIR MICCICHE announced  that the final order  of business would                                                               
be  SENATE  BILL   NO.  161,  "An  Act   relating  to  geothermal                                                               
resources; relating to the  definition of 'geothermal resources';                                                               
and providing for an effective date."                                                                                           
                                                                                                                                
4:06:32 PM                                                                                                                    
LAURA  OGAN,  Legislative  Liaison  &  Special  Projects,  Alaska                                                               
Department  of Natural  Resources,  Anchorage, Alaska,  explained                                                               
that SB  161 seeks  to attract  attention to  Alaska's geothermal                                                               
exploration  program.  The  bill  will  align  with  the  state's                                                               
existing  oil  and  gas  exploration  license  program  and  will                                                               
diversify  the state's  energy portfolio.  It will  also increase                                                               
the  potential  for affordable  renewable  energy  to both  rural                                                               
communities and remote resource extraction projects.                                                                            
                                                                                                                                
4:07:31 PM                                                                                                                    
CHAIR  MICCICHE  welcomed  Senator   Reinbold  to  the  committee                                                               
meeting.                                                                                                                        
                                                                                                                                
4:07:47 PM                                                                                                                    
STEVEN   MASTERMAN,   Director,   Division  of   Geological   and                                                               
Geophysical  Surveys,  Alaska  Department of  Natural  Resources,                                                               
Fairbanks, Alaska, explained that  geothermal resources offer the                                                               
potential for sustainable, affordable,  local and renewable power                                                               
generation. He  said Governor Dunleavy's  administration supports                                                               
enhancing geothermal energy  development in Alaska and  SB 161 is                                                               
a progressive step in that direction.                                                                                           
                                                                                                                                
MR.  MASTERMAN  specified that  the  bill  removes obstacles  for                                                               
exploration and  development of Alaska's geothermal  resources in                                                               
a number  of ways.  The bill  provides for  five-year exploration                                                               
licenses  instead  of  the  current  two-year  permits  with  one                                                               
additional year,  to allow  more time to  meet the  challenges of                                                               
bringing remote exploration projects into production.                                                                           
                                                                                                                                
MR.  MASTERMAN  explained  that  SB  161  changes  the  statutory                                                               
terminology  for  permits to  lease  to  more closely  align  the                                                               
geothermal program  with the state's dominant  model of petroleum                                                               
leasing. It allows conversion  of geothermal exploration licenses                                                               
to  production leases  upon  mutual state  lessee  approval of  a                                                               
workplan instead  of upon production of  commercial quantities to                                                               
provide the state  more flexibility in incubating  a new resource                                                               
industry.                                                                                                                       
                                                                                                                                
He  detailed that  the bill  nearly doubles  the maximum  size of                                                               
geothermal  lease holdings  to 100,000  acres to  accommodate the                                                               
expansive size of geothermal resource  systems. This will attract                                                               
greater interest in geothermal  resources because developers will                                                               
have a  greater opportunity  to explore  the appropriate  area to                                                               
delineate geothermal systems.                                                                                                   
                                                                                                                                
MR.  MASTERMAN   specified  that  SB  161   eliminates  statutory                                                               
reference  to surface  owners'  preferential  rights to  purchase                                                               
subsurface   geothermal    exploration   rights    to   eliminate                                                               
uncertainty among geothermal explorers  and investors. It updates                                                               
and refines the definition of  a geothermal resource and provides                                                               
an exclusion for domestic use of geothermal energy.                                                                             
                                                                                                                                
He  said  that  by  enacting  SB 161,  Alaska  will  continue  to                                                               
responsibly manage its  natural resources in a  manner to provide                                                               
maximum benefits  to Alaskans through  the development  of needed                                                               
energy sources.                                                                                                                 
                                                                                                                                
4:10:36 PM                                                                                                                    
MR.  MASTERMAN provided  the following  sectional analysis  of SB                                                               
161:                                                                                                                            
                                                                                                                                
     Section 1                                                                                                                
      Relates to refining the responsibilities between the                                                                      
      Division of Oil and Gas, and the Alaska Oil and Gas                                                                       
     Conservation Committee.                                                                                                    
                                                                                                                                
     Sections 2-4                                                                                                             
     Relates to changing from permits to leases.                                                                                
                                                                                                                                
     Section 5                                                                                                                
     Increases the  allowable acreage an entity  can hold to                                                                    
     100,000 acres.                                                                                                             
                                                                                                                                
     Section 6                                                                                                                
     Amends  the duration  of geothermal  leases and  allows                                                                    
     license conversion to leases.                                                                                              
                                                                                                                                
     Section 7                                                                                                                
     Adds new  clauses that allows  the creation  of similar                                                                    
     unit  agreements to  those within  the Division  of Oil                                                                    
     and  Gas  currently  utilizes to  manage  oil  and  gas                                                                    
     development.                                                                                                               
                                                                                                                                
     Section 8                                                                                                                
     Refines the definition of a geothermal resource.                                                                           
                                                                                                                                
     Section 9                                                                                                                
     Clarifies  that DNR  manages leasing  and licensing  of                                                                    
     geothermal resources.                                                                                                      
                                                                                                                                
     Section 10                                                                                                               
     Exempts domestic use of  geothermal energy from leasing                                                                    
     requirements.                                                                                                              
                                                                                                                                
     Section 11                                                                                                               
     Updates the definition of geothermal resources.                                                                            
                                                                                                                                
     Sections 12-16                                                                                                           
     Conforming changes and provides for effective dates.                                                                       
                                                                                                                                
4:11:59 PM                                                                                                                    
MR. MASTERMAN said the Alaska  Oil and Gas Conservation Committee                                                               
and the Division of Oil and  Gas submitted zero fiscal notes. The                                                               
fiscal  note  from the  Division  of  Geological and  Geophysical                                                               
Surveys (DGGS) reflects restarting  the Geothermal Program, which                                                               
was terminated five  years ago. The program  would synthesize and                                                               
provide  data on  Alaska's geothermal  resources  to support  the                                                               
Division of Oil  and Gas leasing of geothermal  resources, and to                                                               
attract  and  assist companies  wishing  to  develop the  state's                                                               
resources. The  DGGS position would  monitor developments  in the                                                               
quickly  changing  geothermal  technology  and  seek  to  attract                                                               
federal funding to support investigations  to develop the state's                                                               
geothermal resources.                                                                                                           
                                                                                                                                
4:13:40 PM                                                                                                                    
SENATOR  KIEHL noted  the earlier  testimony  about removing  the                                                               
preferential  right   of  a  surface  owner   to  the  geothermal                                                               
resources under  their land and  the deleted language  that talks                                                               
about  notice.  He  asked,  should the  bill  pass  as  currently                                                               
drafted, what notice  a surface owner would  receive when there's                                                               
a proposal to lease the geothermal rights under their land.                                                                     
                                                                                                                                
4:15:05 PM                                                                                                                    
TOM STOKES, Director, Division of  Oil and Gas, Alaska Department                                                               
of  Natural  Resources,  Anchorage,  Alaska,  answered  that  the                                                               
notice  would be  similar to  oil  leases where  entities on  the                                                               
division's mailing  list would receive  public notice  and public                                                               
comment would be solicited.                                                                                                     
                                                                                                                                
SENATOR KIEHL asked if the  mailing list includes all the surface                                                               
owners.                                                                                                                         
                                                                                                                                
MR. STOKES answered yes.                                                                                                        
                                                                                                                                
CHAIR MICCICHE directed  attention to the language  in section 7,                                                               
lines  28-30,  "The  commissioner   may  not  reduce  royalty  on                                                               
geothermal lease issued  under this section in  connection with a                                                               
unit agreement."  He asked how  royalties are paid  on geothermal                                                               
resources  and  if the  payment  is  British thermal  unit  (BTU)                                                               
based.                                                                                                                          
                                                                                                                                
MR. STOKES answered  that the current geothermal  royalty rate is                                                               
1.75 percent of gross revenue.                                                                                                  
                                                                                                                                
CHAIR  MICCICHE asked  if gross  revenue means  that there  is no                                                               
royalty payment if the geothermal operation is not profitable.                                                                  
                                                                                                                                
MR.  STOKES answered  that the  royalty  rate is  based on  gross                                                               
revenue, not net revenue.                                                                                                       
                                                                                                                                
4:17:19 PM                                                                                                                    
CHAIR MICCICHE  summarized that  the 1.75  percent is  an expense                                                               
that is not based on the profitability of the operation.                                                                        
                                                                                                                                
MR. STOKES answered correct.                                                                                                    
                                                                                                                                
CHAIR MICCICHE asked for an  explanation of the sentence, "Except                                                               
as provided in (f) and (j)."                                                                                                    
                                                                                                                                
MR.  STOKES  explained  that  the rate  charged  to  the  company                                                               
initially would  be on  a per  acre rental  cost basis.  Once the                                                               
lease becomes commercially  viable, the rate would  change from a                                                               
per acre rental to the royalty rental.                                                                                          
                                                                                                                                
CHAIR MICCICHE referenced subsection (j)  in section 7 on page 4,                                                               
lines  3-5  and asked  if  it  allows  the commission  to  adjust                                                               
royalty requirements on a postproduction basis.                                                                                 
                                                                                                                                
MR.  STOKES  said he  believes  the  subsection is  referring  to                                                               
renewals subsequent to the initial 20-year lease.                                                                               
                                                                                                                                
4:19:22 PM                                                                                                                    
SENATOR KIEHL  asked if  the bill maintains  the division  in the                                                               
existing statutes  between little guys and  industrial operations                                                               
or if  people will  have to lease  a minimum of  40 acres  to tap                                                               
into geothermal to heat their cabins in the winter.                                                                             
                                                                                                                                
MR. STOKES replied  the bill refers to  commercial operations. An                                                               
individual owner  does not need  a license to  utilize geothermal                                                               
resources under personal property.                                                                                              
                                                                                                                                
SENATOR KIEHL asked if an individual  will continue to be able to                                                               
use the  geothermal resources under  their property if  a company                                                               
leases those resources.                                                                                                         
                                                                                                                                
MR. STOKES answered  that it would only change  if the individual                                                               
owner  turned   their  geothermal  resource  into   a  commercial                                                               
operation.                                                                                                                      
                                                                                                                                
SENATOR KIEHL pointed out that  there are some communities around                                                               
the  state that  are  using geothermal  resources.  He asked  how                                                               
potential conflicts  will be  worked out in  the future  if there                                                               
was commercial interest in those geothermal resources.                                                                          
                                                                                                                                
4:21:44 PM                                                                                                                    
MR. STOKES  answered that those  details would have to  be worked                                                               
out. He  reiterated that the  intent is for  commercial operation                                                               
and not for local usage.                                                                                                        
                                                                                                                                
CHAIR  MICCICHE  suggested  the department  think  about  Senator                                                               
Kiehl's question and  provide the committee with  their vision of                                                               
how they will address a geothermal  conflict. He said he knows of                                                               
instances   where  Alaskans   have  used   local  resources   for                                                               
generations.                                                                                                                    
                                                                                                                                
SENATOR  BISHOP referred  to  subsection (a)  in  section 2  that                                                               
read,  "The commissioner  may, under  regulations adopted  by the                                                               
commissioner,  grant   prospecting  licenses  and  leases   to  a                                                               
qualified  person to  explore for,  develop,  or used  geothermal                                                               
resources."  He  pointed  out  that a  drill  site  has  drilling                                                               
fluids, drilling  mud, and cement  and asked what  the department                                                               
is thinking about for their regulations.                                                                                        
                                                                                                                                
MR. STOKES replied it would  be equivalent to what the department                                                               
does  with oil  and gas.  The lessee  would have  to apply  for a                                                               
license  and   within  the   application  the   department  would                                                               
understand their level  of operations and address  any hazards or                                                               
associated drilling.                                                                                                            
                                                                                                                                
4:23:53 PM                                                                                                                    
CHAIR MICCICHE asked  if he agrees that a  prospecting license or                                                               
lease is not required for exploration.                                                                                          
                                                                                                                                
MR. STOKES answered  no; a commercial entity is  required to have                                                               
a license for exploration.                                                                                                      
                                                                                                                                
CHAIR  MICCICHE summarized  that a  license is  not required  for                                                               
exploration  or  development  if  the  intent  is  for  domestic,                                                               
noncommercial,  or small-scale  industrial  use,  and the  ground                                                               
temperature is not more than 30 degrees Celsius.                                                                                
                                                                                                                                
MR. STOKES answered correct.                                                                                                    
                                                                                                                                
SENATOR  GIESSEL asked  if  the department  could  provide a  map                                                               
showing the  potential geothermal  areas in the  state, including                                                               
the  nearby population  centers that  might be  using the  energy                                                               
sources.                                                                                                                        
                                                                                                                                
MR. MASTERMAN answered yes.                                                                                                     
                                                                                                                                
4:25:21 PM                                                                                                                    
CHAIR MICCICHE asked  if there is a fairly  good probability that                                                               
there  is domestic  noncommercial or  small-scale industrial  use                                                               
throughout  the state  that the  department is  not knowledgeable                                                               
about. He  inquired if  there is a  reason why  the smaller-scale                                                               
users would register  with the department at some  point in their                                                               
production process.                                                                                                             
                                                                                                                                
MR. MASTERMAN  replied the technology  for home-use  systems that                                                               
use ground source heat pumps  will evolve, become more efficient,                                                               
and develop  into more widespread  use. The department  is trying                                                               
to   segregate   that   small-scale    use   from   the   heavier                                                               
industrialized  use   that  might  be  generating   power  for  a                                                               
community-scale  operation or  a  large  industrial facility.  He                                                               
noted that  the warmer parts  of the  state will more  likely see                                                               
greater expansion and less so in places that are colder.                                                                        
                                                                                                                                
CHAIR  MICCICHE  explained  that  his question  ties  to  Senator                                                               
Giessel's  query on  what the  department knows  about geothermal                                                               
resources and Senator Kiehl's  question about protecting smaller-                                                               
scale  users  with   regards  to  their  unlikely   affect  on  a                                                               
commercial entity.                                                                                                              
                                                                                                                                
4:27:40 PM                                                                                                                    
MR. MASTERMAN said  there are a number of ways  that other states                                                               
have  addressed the  issue of  safeguarding and  segregating home                                                               
use of geothermal energy from industrial uses.                                                                                  
                                                                                                                                
He pointed out that industrial  uses of geothermal energy require                                                               
a nearby hot spring system,  fumarole system, or a local volcanic                                                               
field that provides the large-scale  heat source for a commercial                                                               
operation. There are  only a couple of places in  the state where                                                               
those things overlap with surface  ownership or subsurface use of                                                               
the  geothermal resource  and most  small-scale users  will steer                                                               
clear because  of the associated  extra costs.  Most residential-                                                               
type uses will be shallow and  on the low temperature side of the                                                               
temperature spectrum. He said there  will be a natural separation                                                               
between small-scale users and commercial operations.                                                                            
                                                                                                                                
4:29:45 PM                                                                                                                    
CHAIR  MICCICHE  said the  committee  did  not  want to  put  the                                                               
geothermal presenters on the spot.  He suggested that the queries                                                               
will provide something to think about for a follow-up meeting.                                                                  
                                                                                                                                
SENATOR  GIESSEL asked  if there  are tax  credits available  for                                                               
exploration and geothermal energy production.                                                                                   
                                                                                                                                
MR. MASTERMAN answered that he not familiar with that.                                                                          
                                                                                                                                
SENATOR GIESSEL said the reason she  asked is that the state gets                                                               
itself  into a  revenue dilemma  with tax  credits. She  said her                                                               
intent is to make sure that  there are not random exploration tax                                                               
credit applications out there for geothermal energy.                                                                            
                                                                                                                                
CHAIR MICCICHE said  he would like additional  information at the                                                               
next meeting. He  recalled when there was excitement  a few years                                                               
ago on  the westside of Cook  Inlet for a geothermal  program. He                                                               
said he did not know if the program sunsetted.                                                                                  
                                                                                                                                
SENATOR KIEHL noted that he could not track what the bill was                                                                   
changing and why. He asked the presenters to follow up on what                                                                  
the state is defining as geothermal resources.                                                                                  
                                                                                                                                
CHAIR MICCICHE said the committee would like their questions                                                                    
answered before moving the bill forward.                                                                                        
                                                                                                                                
4:32:20 PM                                                                                                                    
CHAIR MICCICHE held SB 161 in committee.                                                                                        
                                                                                                                                
4:32:57 PM                                                                                                                    
There being no further business to come before the committee,                                                                   
Chair Micciche adjourned the Senate Resources Standing Committee                                                                
meeting at 4:32 p.m.