Legislature(2009 - 2010)HOUSE FINANCE 519

03/17/2010 01:30 PM FINANCE

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Heard & Held
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Heard & Held
<Bill Hearing Rescheduled from 9:00 am>
HOUSE BILL NO. 280                                                                                                            
     "An  Act relating  to natural  gas; relating  to a  gas                                                                    
     storage   facility;   relating    to   the   Regulatory                                                                    
     Commission of Alaska; relating  to the participation by                                                                    
     the  attorney   general  in  a  matter   involving  the                                                                    
     approval of a  rate or a gas  supply contract; relating                                                                    
     to an  income tax  credit for  a gas  storage facility;                                                                    
     relating  to  oil  and   gas  production  tax  credits;                                                                    
     relating to  the powers  and duties  of the  Alaska Oil                                                                    
     and   Gas   Conservation    Commission;   relating   to                                                                    
     production   tax  credits   for   certain  losses   and                                                                    
     expenditures,   including   exploration   expenditures;                                                                    
     relating to  the powers and  duties of the  director of                                                                    
     the  division  of  lands  and to  lease  fees  for  the                                                                    
     storage  of gas  on state  land; and  providing for  an                                                                    
     effective date."                                                                                                           
1:35:47 PM                                                                                                                    
REPRESENTATIVE  MIKE  HAWKER,  SPONSOR, explained  that  the                                                                    
purpose of the  bill was to address the shortage  of fuel in                                                                    
Southcentral Alaskan  communities.  He introduced  staff who                                                                    
had worked on the legislation.                                                                                                  
1:38:55 PM                                                                                                                    
Co-Chair   Hawker  directed   attention  to   the  sectional                                                                    
analysis  (copy  on  file).  He  emphasized  the  increasing                                                                    
difficulty of  meeting the demand  for fuel  in Southcentral                                                                    
due to growing  population in the area and  the depletion of                                                                    
natural  gas  in the  Cook  Inlet  basin. He  reported  that                                                                    
studies  conducted by  utilities,  government, and  industry                                                                    
have universally  concluded that  gas storage capacity  is a                                                                    
critical  element in  achieving energy  security. He  argued                                                                    
that  the  empty  or  nearly  empty  reservoirs  left  after                                                                    
extracting  the  original  natural  gas  could  be  used  as                                                                    
storage  vessels  for  gas  produced  from  new  wells.  The                                                                    
warehoused gas  could then allow for  flexibility in meeting                                                                    
demands during times of peak use.                                                                                               
Co-Chair Hawker anticipated that  adding storage capacity to                                                                    
the supply chain would result  in increased costs. He stated                                                                    
that  HB 280  would  enable the  legislature to  effectively                                                                    
provide  consumer  cost relief  without  cost  to the  state                                                                    
through an investment tax credit  for the development of gas                                                                    
storage businesses when the stored  gas is used for consumer                                                                    
utilities.  He   stressed  that  the  tax   credits  in  the                                                                    
provision would not apply to existing warehouses.                                                                               
Co-Chair Stoltze noted that market  forces do not supply the                                                                    
necessary incentive.                                                                                                            
1:43:26 PM                                                                                                                    
Co-Chair  Hawker  called  the  legislation  a  market-driven                                                                    
solution, not a government-driven  one; government would not                                                                    
provide  a  subsidy for  the  service  but would  facilitate                                                                    
lowering   the  cost   to   consumers  through   third-party                                                                    
developed storage.                                                                                                              
Co-Chair  Hawker continued  that the  bill resolves  current                                                                    
regulatory uncertainty  that has  been impeding  gas storage                                                                    
facility  development. He  reminded the  committee that  the                                                                    
Regulatory  Commission of  Alaska (RCA)  had recently  asked                                                                    
the   legislature  for   clarification  of   its  regulatory                                                                    
responsibilities   related   to   gas   storage   facilities                                                                    
providing gas to Southcentral  consumers; HB 280 establishes                                                                    
that the activity is regulated.                                                                                                 
Co-Chair Hawker added  that regulatory clarification related                                                                    
to  the management  of inventory  was  needed for  potential                                                                    
owners of gas storage  facilities. He defined "inventory" as                                                                    
the gas  in the facility  that would  be cycled back  to the                                                                    
market when  needed. The legislation  adopts a "last  in and                                                                    
first out" inventory  management structure. Production taxes                                                                    
were not paid on any  original gas remaining in the reserve,                                                                    
but those molecules are indistinguishable  from gas that has                                                                    
been put in for storage.  To address this classic accounting                                                                    
challenge related  to any kind  of inventory, the  bill does                                                                    
not tax gas pulled out until it exceeds the amount put in.                                                                      
1:47:14 PM                                                                                                                    
Co-Chair Hawker pointed out that  HB 280 explicitly mandates                                                                    
that investment tax credit utilized  for the construction of                                                                    
a qualified  gas facility be  passed on to the  consumer. In                                                                    
addition,   the  bill   provides   for  gas   deliverability                                                                    
requirements in  Southcentral by making it  as attractive as                                                                    
possible for the exploration and  development industry to go                                                                    
after undiscovered gas in Cook Inlet.                                                                                           
Co-Chair  Hawker described  challenges getting  companies to                                                                    
explore  and develop  potential reserves  in the  Cook Inlet                                                                    
basin. When Cook  Inlet was first developed  around 50 years                                                                    
ago,  there were  several large  domes of  natural gas  that                                                                    
were  relatively easy  to locate  and  to exploit,  allowing                                                                    
Southcentral  access to  inexpensive energy.  Although there                                                                    
may still be  a great deal of gas, it  is located in smaller                                                                    
stratigraphic  traps.  In addition,  most  of  the basin  is                                                                    
under water, and  large portions are under land  that is not                                                                    
available for exploration and development.                                                                                      
Co-Chair  Hawker   maintained  that  the  small   traps  are                                                                    
unattractive   to  large   oil  and   gas  exploration   and                                                                    
development companies  such as  ExxonMobile, ConocoPhillips,                                                                    
and  Chevron. He  noted that  the state  must attract  a new                                                                    
kind of explorers  who are very reluctant to  work in Alaska                                                                    
because  of oil  and gas  taxes currently  in place;  HB 280                                                                    
modifies  some provisions  to make  existing credits  or tax                                                                    
advantages  more  accessible  with  minimal  enhancement  to                                                                    
other credits.                                                                                                                  
Co-Chair  Hawker detailed  that HB  280 would  eliminate the                                                                    
prohibition against utilization  of credits. Current statute                                                                    
requires that  the credits be  amortized over two  years; HB                                                                    
280  allows  amortization  over  one  year.  The  bill  also                                                                    
eliminates  the  penalty  against existing  Cook  Inlet  tax                                                                    
credits   from   earlier  PPT/ACES   [Petroleum   Production                                                                    
Tax/Alaska Clear and Equitable  Share] legislation. He noted                                                                    
that  the Cook  Inlet  tax  structure is  based  on the  ELF                                                                    
[Economic Limit Factor] formula,  which was meant to provide                                                                    
consumer cost relief.  A company exploring in  Cook Inlet is                                                                    
required to  discount tax credits  it owns,  eliminating the                                                                    
benefit based on  the differential between the  ELF rate and                                                                    
the ACES  rate. The result  has been investment  outside the                                                                    
Cook Inlet.                                                                                                                     
1:53:12 PM                                                                                                                    
Co-Chair Hawker  concluded that HB  280 is about  making gas                                                                    
available to  consumers and relieving future  cost increases                                                                    
related  to   gas  storage.  The  bill   would  also  impose                                                                    
regulation  on the  emerging gas  storage  industry for  the                                                                    
benefit of  consumers and  provide potential  operators with                                                                    
the assurances needed to move forward.                                                                                          
Co-Chair  Stoltze noted  energy  challenges in  Southcentral                                                                    
and  concerns  about  a  coming  shortage.  Co-Chair  Hawker                                                                    
opined  that the  state has  been fortunate  so far  to have                                                                    
sufficient  production  and  the ability  to  divert  excess                                                                    
production in times  of less demand, but  he anticipated the                                                                    
demand would exceed  supply. He expected that  the March 31,                                                                    
2011  expiration   of  the   federal  export   permit  could                                                                    
eliminate   the  production   buffer  in   Southcentral.  He                                                                    
underlined that  without the  proposed storage,  the average                                                                    
daily flow would not meet peak demands.                                                                                         
Vice-Chair  Thomas   queried  the  transferability   of  tax                                                                    
credits.   Co-Chair  Hawker   replied  that   under  current                                                                    
statute,  the  credits  are not  transferable;  however,  an                                                                    
individual  entity   has  the   ability  to  apply   to  the                                                                    
Department  of  Revenue  for   reimbursement  if  it  cannot                                                                    
utilize all the credit.                                                                                                         
1:56:49 PM                                                                                                                    
Representative Austerman questioned  whether stored gas that                                                                    
is  tapped  when  needed  would fluctuate  in  price  or  be                                                                    
amortized across the year. Co-Chair  Hawker replied that the                                                                    
RCA  would  regulate  gas flowing  to  consumers  through  a                                                                    
storage   facility.  The   commission  might   level  prices                                                                    
throughout  the year;  alternatively, it  could allow  lower                                                                    
prices in the  summer when demand is low and  gas storage is                                                                    
"off-line"  and require  higher  prices  during peak  winter                                                                    
Representative  Fairclough  referred  to  refunds  collected                                                                    
through  the Oil  and Gas  Tax Credit  Fund and  queried the                                                                    
balance  of  the  fund. Co-Chair  Hawker  replied  that  the                                                                    
credit  fund was  originally established  with $400  million                                                                    
and  is recharged  annually based  on expected  demands. The                                                                    
determination was made  the previous year that  the fund was                                                                    
overfunded and  the legislature reappropriated  $200 million                                                                    
out  of  the  fund  through  the  supplemental  budget.  The                                                                    
governor requested $140 million be  added to the fund in the                                                                    
current year's  budget. He anticipated  that $20  million to                                                                    
$25  million would  be needed  considering  the $15  million                                                                    
credit limit  per facility  (for the one  or two  10 billion                                                                    
cubic feet storage facilities needed for Cook Inlet).                                                                           
2:00:53 PM                                                                                                                    
Representative Fairclough referenced  ownership in Section 4                                                                    
and asked  what would happen  if a company sold  a facility.                                                                    
Co-Chair Hawker  responded that there are  two components to                                                                    
storage  facility  enhancements:  Section  10  addresses  an                                                                    
investment tax  credit and  Section 4  directs DNR  to waive                                                                    
land lease fees for the first  ten years for a qualified gas                                                                    
storage  facility. In  addition, an  anti-churning provision                                                                    
stipulates that  a facility in  operation prior to  the bill                                                                    
cannot  receive  credits, and  if  the  storage facility  is                                                                    
sold, credits cannot be obtained on the purchase.                                                                               
JAN LEVY, STAFF, REPRESENTATIVE  MIKE HAWKER, specified that                                                                    
the provision was in Section 10(g) on page 10 of HB 280.                                                                        
Co-Chair  Hawker pointed  to Section  10(h) on  page 10  and                                                                    
emphasized the importance  of providing recapture provisions                                                                    
when  providing investment  tax  credits in  case a  storage                                                                    
facility ceases  commercial operations. He did  not intend a                                                                    
business to get a credit in  year one, go out of business in                                                                    
year  two,  and  then  pocket   the  credit.  The  recapture                                                                    
provision requires  a ten-year  step-down in order  to fully                                                                    
vest in the tax credit.                                                                                                         
Representative Fairclough turned to  a Section 4 requirement                                                                    
that the  credits be  reflected in the  fuel base  rate. She                                                                    
asked  how to  ensure protection  for rate  payers once  the                                                                    
credits are passed on to the owner of the gas.                                                                                  
2:04:36 PM                                                                                                                    
Co-Chair Hawker  responded that the  RCA would  regulate the                                                                    
operations of  gas storage facilities operated  for consumer                                                                    
Representative  Fairclough  asked  about royalties  and  the                                                                    
relationship between  the market  price a utility  would pay                                                                    
for gas and the price  a consumer would pay. Co-Chair Hawker                                                                    
pointed out that a utility  does not pay royalties; only the                                                                    
producer of  the gas  pays royalties when  the gas  is taken                                                                    
from  the ground  during  original  production. He  stressed                                                                    
that   the   storage   facilities   are   only   warehousing                                                                    
Representative Fairclough  remarked that the rate  paid by a                                                                    
utility includes  the tax. She was  concerned that utilities                                                                    
would buy low, store the gas, and charge consumers more.                                                                        
LARRY PERSILY, STAFF,  REPRESENTATIVE MIKE HAWKER, explained                                                                    
that for third-party gas storage,  the utility would buy gas                                                                    
during  the  year   and  pay  the  contract   price  to  the                                                                    
producers. He  emphasized that the  price for the  gas would                                                                    
not  change  when  it  comes back  out  of  storage  because                                                                    
utilities are not  allowed to make a profit on  the gas. The                                                                    
RCA would  allow the  utility to only  recover what  it paid                                                                    
for the gas plus the cost of storage.                                                                                           
Co-Chair  Hawker  added  that the  contracts  are  typically                                                                    
long-term upstream procurement contracts.                                                                                       
2:08:09 PM                                                                                                                    
Representative  Gara queried  the current  tax structure  in                                                                    
Cook Inlet. He wanted to  know more about the additional tax                                                                    
incentives as  well as  the current  production tax  in Cook                                                                    
Inlet. He  agreed that gas  storage is needed  and supported                                                                    
passage  of  some  form  of gas  storage  incentive  in  the                                                                    
current  year. Regarding  incentives to  promote exploration                                                                    
in Cook  Inlet, he believed  that the  tax rate was  not too                                                                    
high, but that  no one would spend the money  to get the gas                                                                    
unless they  knew they  could sell  it. He  relayed concerns                                                                    
that  the remaining  gas  resource is  hard  to explore  for                                                                    
without a long-term buyer. He  wondered why more tax credits                                                                    
on Cook Inlet gas was the answer.                                                                                               
Mr.  Persily  responded  that  the  tax  structure  for  gas                                                                    
produced  in Cook  Inlet  and used  in  Alaska is  hardwired                                                                    
under ELF at about $0.17 per thousand cubic feet.                                                                               
Representative Gara asked for  more information. Mr. Persily                                                                    
explained that  the tax  essentially comes  in at  $0.17 and                                                                    
cannot  go above  that number;  he did  not know  whether it                                                                    
could go  under. He  noted that  the tax  rate would  not be                                                                    
changed; the legislation deals with exploration credits.                                                                        
2:12:14 PM                                                                                                                    
ROGER MARKS,  CONSULTANT, HOUSE FINANCE  COMMITTEE, detailed                                                                    
that Cook Inlet taxes were  originally crafted under PPT and                                                                    
carried over into  ACES and used the ELF  structure that was                                                                    
in place when  PPT came into effect April 1,  2006. For both                                                                    
oil and  gas, the  average ELF structure  that was  in place                                                                    
the prior  twelve months is  hardwired in through  2022; for                                                                    
any field that went into  production after the PPT effective                                                                    
date, the average  ELF rate for all other  fields became the                                                                    
actual ELF structure for new fields.                                                                                            
Mr. Marks explained that the  ELF structure was a product of                                                                    
two things: the  nominal rate of 10 percent for  gas and the                                                                    
ELF, which was a number that  gave every gas well 10,000 mcf                                                                    
per  well per  day tax  free.  The ELF  number (a  fraction)                                                                    
times the  10 percent tax  rate comes to $0.17/mcf  for Cook                                                                    
Mr. Marks  continued that  oil works in  a similar  way; the                                                                    
ELF structure for  oil was 300 barrels per well  per day tax                                                                    
free coupled with a 15 percent  gross rate. For oil, the ELF                                                                    
rate  happened  to  be  zero,  so Cook  Inlet  oil  pays  no                                                                    
severance tax under the current production tax law.                                                                             
Representative Gara queried the  percentage tax rate charged                                                                    
on  the  gross on  Cook  Inlet  gas currently.  Mr.  Persily                                                                    
responded that the number would  depend on the price; if the                                                                    
price is $8  per thousand cubic feet, the tax  rate would be                                                                    
2 percent  using the  $0.17. The  rate would  fluctuate with                                                                    
the price the producers get under a particular contract.                                                                        
Mr. Marks pointed  out that the $0.17 is  independent of the                                                                    
price; ELF  reflected 10,000 mcf  per well per day  tax free                                                                    
regardless of the price.                                                                                                        
Representative Gara  asked the  range of current  gas prices                                                                    
to understand the relative value of the $0.17.                                                                                  
2:16:16 PM                                                                                                                    
Mr. Marks  replied that a  wide spectrum of  contracts exist                                                                    
in Cook Inlet,  including old contracts with  low prices and                                                                    
others  that  reflect the  current  Henry  Hub [natural  gas                                                                    
spot] price based on a  three-year rolling average. He added                                                                    
that  the $0.17  tax rate  applies whether  the contract  is                                                                    
currently receiving $1 or $8 for the gas.                                                                                       
Representative  Gara queried  the current  Henry Hub  price.                                                                    
Co-Chair Hawker  replied that the price  was currently $4.20                                                                    
and  has been  shifting between  $4.25 and  $5 for  the past                                                                    
several months.                                                                                                                 
Representative  Gara surmised  the  benchmark would  be a  3                                                                    
percent  gross  tax. Mr.  Persily  replied  that the  number                                                                    
would be 4 percent.                                                                                                             
Co-Chair  Hawker commented  that one  of the  things driving                                                                    
the market was  that people who had gas to  produce and sell                                                                    
were  unable to  get a  long-term contract  approved by  the                                                                    
RCA. He reported  that the commission had  rejected a couple                                                                    
of viable  long-term contracts with minimal  explanation and                                                                    
that there had been conflict  over the issue. He referred to                                                                    
a shift within the  commission towards understanding that it                                                                    
has been part of the problem.                                                                                                   
Co-Chair Hawker  informed the committee  that he  had wanted                                                                    
to remove the RCA  from regulating procurement contracts. He                                                                    
recognized that allowing the market  to operate freely would                                                                    
not be  consumer-friendly. He noted  that language  had been                                                                    
put into HB 280 providing  specific guidance to the RCA; RCA                                                                    
had  helped with  the language  and  felt it  would aid  the                                                                    
agency in evaluating future  long-term contracts. In Section                                                                    
5,  the commission  is directed  to consider  the impact  of                                                                    
long-term  gas supply  contracts on  consumers. He  stressed                                                                    
that the criteria  was very different than in  the past; the                                                                    
consequence of  rejecting two  major contracts  has severely                                                                    
exacerbated    problems   with    securing   deliverability.                                                                    
Companies  are no  longer willing  to  enter into  long-term                                                                    
contracts under the same terms.                                                                                                 
2:20:00 PM                                                                                                                    
BOB PICKETT, CHAIRMAN, REGULATORY  COMMISSION OF ALASKA (via                                                                    
teleconference),  acknowledged   that  the   commission  had                                                                    
declined to  approve a series  of contracts in the  past. He                                                                    
noted that  HB 280 asks  RCA to consider and  articulate the                                                                    
reasons   for  declining   contracts  and   the  impact   on                                                                    
consumers. The bill requires wrap-up  and that other parties                                                                    
to   the   proceedings   take    into   account   the   same                                                                    
Representative Gara asked whether  HB 280 would change RCA's                                                                    
analysis  of  rulings  such  as the  denial  of  the  ENSTAR                                                                    
contract  the  previous  year.   Mr.  Pickett  believed  the                                                                    
commission  had  considered  the  impact  of  declining  the                                                                    
contracts  and pointed  out  that  the proceedings  involved                                                                    
other  parties.  He  emphasized that  the  commission  makes                                                                    
decisions on  the basis of  developments in  proceedings. He                                                                    
felt  the world  was significantly  different than  when the                                                                    
contracts   were  being   considered.   He  underlined   the                                                                    
seriousness of issues  such as the lack of  gas supply under                                                                    
contract  for  Southcentral   utilities  and  deliverability                                                                    
issues. He  believed HB  280 was a  move in  the appropriate                                                                    
direction, although  he did not  think it would  correct all                                                                    
problems in Cook Inlet.                                                                                                         
Representative  Gara emphasized  that he  did not  intend to                                                                    
criticize   the  RCA.   He   asked   whether  the   proposed                                                                    
legislation would  affect how the  commission would  rule on                                                                    
similar  issues in  the future.  Mr. Pickett  did not  think                                                                    
future RCA  rulings could be pre-judged.  He emphasized that                                                                    
RCA does  not regulate  producers in  Cook Inlet  and cannot                                                                    
compel producers  to enter  into any  kind of  contract with                                                                    
any utility.  The commission has  to respond to  the filings                                                                    
that the utilities make and  the contracts that they present                                                                    
for review.  He viewed  the Cook Inlet  market as  small and                                                                    
2:24:13 PM                                                                                                                    
Representative  Gara  clarified  that   he  wanted  to  know                                                                    
whether there  was a provision  in HB 280 that  would affect                                                                    
how the commission would rule on future cases.                                                                                  
Co-Chair  Hawker  noted  that  Section 5  was  the  relevant                                                                    
STUART GOERING, ASSISTANT  ATTORNEY GENERAL, COMMERCIAL/FAIR                                                                    
BUSINESS SECTION, CIVIL  DIVISION (ANCHORAGE), DEPARTMENT OF                                                                    
LAW  (via teleconference),  informed the  committee that  he                                                                    
was assigned to  RCA. He explained that Section  5 would add                                                                    
a new  provision to the  basic authority of  the commission,                                                                    
requiring  it to  look at  specifically  named factors  when                                                                    
determining whether  or not a contract  should be considered                                                                    
just and  reasonable and therefore approved.  In particular,                                                                    
the provision points RCA and  parties presenting evidence to                                                                    
the  commission  to  considerations  of  whether  or  not  a                                                                    
utility has  alternatives to the contract  presented, and if                                                                    
not, the  impact the rejection  of a contract would  have on                                                                    
the  reliability of  the  utility's  service. The  provision                                                                    
would change  the commission's behavior  as well  as require                                                                    
parties to bring relevant evidence to the commission.                                                                           
Representative  Gara  queried  the   role  of  the  Attorney                                                                    
General's  Office  related  to consumer  protection  on  RCA                                                                    
matters. Mr.  Goering replied that  there are  two statutory                                                                    
roles for  the department  regarding utilities  and pipeline                                                                    
regulation.  He described  his role  as advisor  to the  RCA                                                                    
directly. The  other role relates to  the Regulatory Affairs                                                                    
& Public Advocacy  (RAPA) section of the  Department of Law;                                                                    
that function is filled by Daniel Patrick O'Tierney.                                                                            
Mr.  Persily directed  attention to  Section 20  of HB  280,                                                                    
which uses the  same language as Section 5  and directs RAPA                                                                    
to consider the same issues when  weighing in on the side of                                                                    
the public.                                                                                                                     
2:28:26 PM                                                                                                                    
Representative Gara  asked the  department's opinion  on the                                                                    
section. Mr.  Goering opined that language  in both sections                                                                    
will be  beneficial to  the RCA  in that  it will  cause the                                                                    
parties   to  bring   additional   relevant  evidence   into                                                                    
proceedings when  the commission  is considering  whether or                                                                    
not to  approve gas  sales agreements  and rates  related to                                                                    
natural gas  transactions. He emphasized that  more evidence                                                                    
is always good and  encouraged guidance from the legislature                                                                    
regarding the  kinds of evidence  that should  be considered                                                                    
when    making   such    an   important    public   interest                                                                    
Mr. Persily informed  the committee that he  had worked with                                                                    
Mr. O'Tierney on the section.                                                                                                   
Representative Gara requested input from Mr. O'Tierney.                                                                         
Co-Chair Hawker suggested more  explanation of the increased                                                                    
access to existing credits offered  by the bill. Mr. Persily                                                                    
explained  that the  hope is  that  third-party gas  storage                                                                    
would   foster  more   of  a   market  and   therefore  more                                                                    
production.  He anticipated  that  the credits  in the  bill                                                                    
would  remove the  limitation so  that someone  investing in                                                                    
Cook  Inlet exploration  receives credit,  can use  the full                                                                    
credit  for their  state-wide tax  return,  and allows  Cook                                                                    
Inlet  explorers to  recover their  full tax  credit in  the                                                                    
first year rather than over two years.                                                                                          
Mr. Persily  noted that  currently in  Cook Inlet  a company                                                                    
can get a  30 or 40 percent credit  on exploration depending                                                                    
on how  far it is  from the  existing well; Section  16 puts                                                                    
the credit at 40 percent  and applies it to all well-related                                                                    
lease   expenditures   in   Cook   Inlet,   which   includes                                                                    
delineation wells,  service wells,  and anything  related to                                                                    
producing oil and gas.                                                                                                          
Co-Chair Hawker added that after  HB 280 had been introduced                                                                    
and   identified  impediments   in  the   Cook  Inlet,   the                                                                    
administration brought  forward a state-wide bill  to adjust                                                                    
some of  the oil and  gas credits. He assured  the committee                                                                    
that HB 280 does not apply beyond the Cook Inlet.                                                                               
2:32:56 PM                                                                                                                    
Representative   Gara   requested  analysis   of   estimated                                                                    
subsidies under  HB 280. He  wondered whether the  $0.17 tax                                                                    
rate and 40 percent credit  could result in paying people to                                                                    
produce  Cook  Inlet gas.  Mr.  Persily  responded that  the                                                                    
amount  was unknown;  to  calculate how  much  tax credit  a                                                                    
company  could get  he  needed  to know  how  much it  would                                                                    
invest in  the inlet during  the next ten years.  The fiscal                                                                    
effect would be a percentage  of eligible expenses in future                                                                    
years; if  no one spends,  the state  pays no credits.  If a                                                                    
company finds  gas, the state  would come out  ahead through                                                                    
its royalty and production tax.  In addition, there would be                                                                    
the indirect benefit of more gas in Cook Inlet.                                                                                 
Mr.  Persily  responded  to the  second  question  regarding                                                                    
whether the  state could  end up  paying someone  to produce                                                                    
gas. He explained  that the state would not end  up paying a                                                                    
producer. However,  a company could possibly  invest so much                                                                    
in  a single  year that  available tax  credit for  the year                                                                    
would  exceed production  tax liability;  in  that case  the                                                                    
credit  could  be  carried  forward  to  a  future  year  or                                                                    
essentially refunded by the state.  He added that regardless                                                                    
of where a producer made  the investment that earned the tax                                                                    
credit, the  credit would  be applied  to the  company's tax                                                                    
return  for its  total statewide  production tax  liability.                                                                    
[Under  state  law, production  taxes  are  assessed on  the                                                                    
value  of  a  company's   total  statewide  production,  not                                                                    
individual wells or fields.]                                                                                                    
Co-Chair Stoltze  regarded the measure  as a tax  credit for                                                                    
constituents  who are  using natural  gas.  He believed  the                                                                    
ultimate subsidy was for the  consumers in Southcentral. Co-                                                                    
Chair  Hawker  agreed that  corporate  entities  do not  pay                                                                    
taxes; consumers pay the taxes.  The Cook Inlet is unique in                                                                    
that the majority  of the gas produced there  is for Alaskan                                                                    
consumption.  The state  needs a  reasonable tax  structure;                                                                    
considerations are different than  for larger projects aimed                                                                    
at export.                                                                                                                      
Co-Chair Stoltze  believed some  would view  the issue  as a                                                                    
Southcentral subsidy.  Co-Chair Hawker agreed  the political                                                                    
argument   could  be   raised.  He   asked  members   to  be                                                                    
"statesmanlike"  and  emphasized   the  number  of  citizens                                                                    
affected. He  stressed that nothing  was being asked  of the                                                                    
state  treasury   in  the  bill;  the   measure  intends  to                                                                    
incentivize third-party  investment in  Cook Inlet  in order                                                                    
to provide greater development of resources.                                                                                    
Co-Chair Stoltze viewed the measure as a consumer credit.                                                                       
2:37:53 PM                                                                                                                    
Representative  Doogan questioned  who would  take advantage                                                                    
of  the  gas storage  in  the  legislation. Co-Chair  Hawker                                                                    
responded that  the issue was inventory  management; part of                                                                    
inventory management  is who owns  the inventory.  He listed                                                                    
possible alternatives:                                                                                                          
   · A public utility constructs its own gas storage                                                                            
     facility, acquires a lease, and develops the storage                                                                       
     facility that is operated as part of the utility;                                                                          
   · A public utility acquires gas under long-term purchase                                                                     
     contracts from a producer and further contracts with a                                                                     
     third-party storage owner/operator; or                                                                                     
   · A producer needs a warehouse for their own produced                                                                        
    gas prior to meeting contractual delivery demands.                                                                          
Co-Chair Hawker  pointed out that  the gas  storage facility                                                                    
investment  tax credits  in HB  280 are  not available  to a                                                                    
producer developing storage capacity  for their own gas. The                                                                    
credits are available to a  public utility that will benefit                                                                    
the consumer.                                                                                                                   
Mr.  Persily commented  that  Chevron  and Marathon  already                                                                    
have their own  gas storage facilities; they put  the gas in                                                                    
year-round  and  draw  to  meet  contractual  deliverability                                                                    
requirements for  utilities. He noted that  such proprietary                                                                    
storage  would  not get  the  incentives  and would  not  be                                                                    
regulated  by  the RCA  under  HB  280. The  incentives  and                                                                    
regulation apply  to open-access storage for  utilities that                                                                    
buy  gas  through  contracts;  the  utilities  pay  for  the                                                                    
storage fee as an unbundled price.                                                                                              
Representative   Doogan  questioned   whether  pricing   and                                                                    
regulatory  structure would  be  sufficient  to assure  that                                                                    
consumers would not be paying a  premium for the gas when it                                                                    
comes out of the warehouse.                                                                                                     
2:42:35 PM                                                                                                                    
Mr.  Persily replied  that  a  utility has  to  get the  gas                                                                    
contracts approved  by the RCA.  He stressed that  a company                                                                    
would only  be able to  charge the  price they paid  for the                                                                    
gas  plus the  cost of  storage; HB  280 would  regulate the                                                                    
cost  of  storage,  while  the   utilities  and  gas  supply                                                                    
contracts  are already  regulated. The  RCA would  determine                                                                    
whether  the  price  was  appropriate  to  pass  on  to  the                                                                    
consumer. The utility  could determine how to  deal with the                                                                    
cost of storage service; for  example, it could use a winter                                                                    
surcharge,  or  spread the  cost  over  the whole  year.  He                                                                    
underlined  that the  utility cannot  make a  profit on  the                                                                    
Representative  Doogan  asked  whether  he meant  to  say  a                                                                    
utility cannot make "any additional  profit on the gas." Mr.                                                                    
Persily replied that  utilities are not allowed  to make any                                                                    
profit on  the gas. Co-Chair  Hawker added that  a long-term                                                                    
supply  contract  by the  regulated  utility  would be  done                                                                    
through the RCA.                                                                                                                
Representative    Doogan   wanted    further   clarification                                                                    
regarding consumers  paying too  much for the  storage after                                                                    
costs have  been decided. Co-Chair  Hawker replied  that the                                                                    
regulations  and pricing  structure  work to  assure that  a                                                                    
utility does  not make  a profit on  gas. The  utility makes                                                                    
its  earnings  on  invested capital  in  the  transportation                                                                    
system. He referred  to an Institute of  Social and Economic                                                                    
Research  (ISER)  study  showing  that from  1996  to  2007,                                                                    
consumer  prices   declined  as  utilities   developed  more                                                                    
efficient  transportation  systems,   but  commodity  prices                                                                    
drove consumer prices up substantially.                                                                                         
Representative Doogan wanted people to  have a clear idea of                                                                    
what is being asked and what is being offered.                                                                                  
2:46:30 PM                                                                                                                    
Co-Chair  Hawker  assured  him   that  the  receipt  of  any                                                                    
financial advantage is under RCA regulation.                                                                                    
Representative  Gara queried  the change  in the  tax credit                                                                    
from  30 percent  to  40 percent.  He  questioned whether  a                                                                    
larger  tax  credit  would result  in  more  production;  he                                                                    
believed  the  lack  of  long-term  contracts  has  deterred                                                                    
exploration in  Cook Inlet, not  tax rates.  Co-Chair Hawker                                                                    
replied that  they would  have to agree  to disagree  on the                                                                    
point;  some people  believe industry  can  be motivated  to                                                                    
produce through taxes,  and others do not. He  felt that the                                                                    
consumer  benefited  the  most and  new  explorers/producers                                                                    
would  be  attracted when  government  takes  less from  the                                                                    
value of the resource.                                                                                                          
Mr.  Persily  added  that  exploration   in  Cook  Inlet  is                                                                    
increasingly costly  as well  as risky;  he argued  that the                                                                    
state  paying   more  in  tax   credits  was   cheaper  than                                                                    
subsidizing fuel or  paying towards a gas  pipeline if there                                                                    
is not enough gas in Cook Inlet.                                                                                                
Co-Chair Hawker noted that the  40 percent credit is not new                                                                    
but makes the existing  tiered 30/40 percent credit (crafted                                                                    
for the North Slope) more appropriate to Cook Inlet.                                                                            
2:50:39 PM                                                                                                                    
Representative  Gara wanted  evidence that  more tax  credit                                                                    
would mean  more gas. He  did not think  it was fair  to say                                                                    
the people in Southcentral would  suffer if more tax credits                                                                    
are  not offered.  He pointed  out that  there has  not been                                                                    
enough exploration in  Cook Inlet in spite  of extensive tax                                                                    
relief granted in the last  ten years through exemption from                                                                    
ACES and PPT, as well  additional tax credits for Cook Inlet                                                                    
exploration.  He  questioned  adding  another  form  of  tax                                                                    
relief  before  analyzing how  the  past  ten years  of  tax                                                                    
credits  have  worked.  Co-Chair Hawker  replied  that  Cook                                                                    
Inlet has not  been granted tax relief;  exempting the basin                                                                    
by  allowing retention  of the  existing  tax structure  had                                                                    
been determined to  be in the best interest  of the region's                                                                    
Co-Chair Stoltze  added that people  in Chugiak  and Wasilla                                                                    
believed the state did not require as much.                                                                                     
Co-Chair  Hawker stated  that  attracting  capital is  about                                                                    
being  competitive.  He believed  the  basin  would be  more                                                                    
attractive  to investors  through  elimination  of the  Cook                                                                    
Inlet penalty and the 30/40 percent tier.                                                                                       
Representative Gara  requested a  history of Cook  Inlet tax                                                                    
credits  adopted in  the past  decade.  Mr. Persily  replied                                                                    
that he would get the information.                                                                                              
Representative  Gara  did  not   think  the  bill  reflected                                                                    
discussion  that  production  and  exploration  tax  credits                                                                    
would benefit consumers. Co-Chair  Hawker explained that the                                                                    
cost of the product to the  utility is the basis of the rate                                                                    
making;  the less  government takes,  the less  the consumer                                                                    
will pay.                                                                                                                       
Representative Gara recalled a  past argument made connected                                                                    
to an  RCA application  about charging  market or  Henry Hub                                                                    
rates  without  an  adjustment for  tax  credits.  He  asked                                                                    
whether there  would be an  adjustment for tax  credits. Mr.                                                                    
Persily  replied  that  there  is not  a  statutory,  direct                                                                    
dollar-for-dollar   requirement   that  tax   dollars   flow                                                                    
through; the  tax rate  is reflected  in that  the utilities                                                                    
pay the production tax under Cook Inlet supply contracts.                                                                       
2:55:59 PM                                                                                                                    
Representative Doogan  noted that  one part  of the  bill is                                                                    
about gas  storage and another  is about  incentivizing more                                                                    
exploration  in Cook  Inlet. He  asked whether  there was  a                                                                    
reliable  estimate  of when  the  stored  gas would  not  be                                                                    
enough to  meet the  demand. Mr.  Persily believed  that the                                                                    
utilities would need  more gas around 2013 in  order to meet                                                                    
the need.                                                                                                                       
Co-Chair Stoltze  pointed out that  there have  already been                                                                    
some close  calls. Co-Chair Hawker added  that the situation                                                                    
could be  exacerbated if the  production buffer  provided by                                                                    
the export facility is lost  in March 2011. Co-Chair Stoltze                                                                    
emphasized the seriousness of the issue.                                                                                        
Co-Chair Hawker  MOVED to ADOPT Amendment  1 (26-LS1185\C.1,                                                                    
Bullock, 3/10/10):                                                                                                              
     Page 7, following line 14:                                                                                                 
          Insert a new bill section to read:                                                                                    
     "*Sec.7.AS 42.05.711 is amended by adding a new                                                                            
     subsection to read:                                                                                                        
               (q) The service of natural gas storage                                                                           
          furnished  by  operating  a  natural  gas  storage                                                                    
          facility that  is (1) part of  a pipeline facility                                                                    
          operated  by a  pipeline  carrier, (2)  part of  a                                                                    
          natural  gas  pipeline   facility  operated  by  a                                                                    
          natural  gas pipeline  carrier, or  (3) part  of a                                                                    
          North   Slope   natural  gas   pipeline   facility                                                                    
          operated  by a  North Slope  natural gas  pipeline                                                                    
          carrier  is  exempt  from this  chapter.  In  this                                                                    
          subsection,   "natural   gas  pipeline   carrier,"                                                                    
          "natural  gas  pipeline  facility,"  "North  Slope                                                                    
          natural  gas   pipeline  carrier,"   "North  Slope                                                                    
          natural   gas    pipeline   facility,"   "pipeline                                                                    
          carrier,"   and  "pipeline   facility"  have   the                                                                    
          meanings given in AS 42.06.630."                                                                                      
     Renumber the following bill sections accordingly.                                                                          
     Page 9, line 9:                                                                                                            
          Delete "for"                                                                                                          
Co-Chair Stoltze OBJECTED for discussion.                                                                                       
Co-Chair Hawker explained  that there is not  law related to                                                                    
gas  storage facilities  and that  a regulatory  distinction                                                                    
needed  to  be  made  between  storage  facilities  and  gas                                                                    
storage in something such as  a pipeline (called "packing").                                                                    
He informed the committee that  Amendment 1 clarifies that a                                                                    
gas storage facility that is  part of a natural gas pipeline                                                                    
and  already  regulated under  the  RCA  is not  subject  to                                                                    
regulation  under HB  280, which  intends to  create storage                                                                    
facilities in order to meet consumer demands.                                                                                   
3:00:38 PM                                                                                                                    
Mr. Persily expanded that the  language in the amendment was                                                                    
drafted  by  Mr.  Goering, the  Assistant  Attorney  General                                                                    
assigned to the RCA. Mr.  Goering had felt clarification was                                                                    
needed  for  two  sections  of  RCA  regulation:  AS  40.205                                                                    
(utilities,  under which  gas storage  would be  regulated),                                                                    
and AS 40.206 (which  regulates pipelines). Mr. Goering felt                                                                    
the bill  referred to a storage  facility that is part  of a                                                                    
regulated  natural gas  pipeline under  40.206 and  does not                                                                    
need to be regulated a second time under 40.205.                                                                                
Co-Chair Stoltze  queried the removal  of the word  "for" on                                                                    
page 9,  line 9. Co-Chair  Hawker replied that  the language                                                                    
was preferred by the Department of Revenue.                                                                                     
Co-Chair  Stoltze WITHDREW  his  OBJECTION.  There being  NO                                                                    
further OBJECTION, Amendment 1 was ADOPTED.                                                                                     
Co-Chair Hawker  MOVED to ADOPT Amendment  2 (26-LS1185\C.3,                                                                    
Bullock, 3/16/10):                                                                                                              
     Page 15, following line 9:                                                                                                 
     Insert a new subsection to read:                                                                                           
        "(o) For the purposes of (m) and (n) of this                                                                            
     section,  a  Cook Inlet  well  lease  expenditure is  a                                                                    
     lease expenditure  that is incurred  in the  Cook Inlet                                                                    
     sedimentary basin  that is directly related  to a well.                                                                    
     A lease expenditure is directly related to a well if                                                                       
        (1) during exploration and development, the lease                                                                       
             expenditure is  characterized as  an intangible                                                                    
             drilling and development  cost under  26 U.S.C.                                                                    
             263(c) (Internal  Revenue  Code)  or 26  C.F.R.                                                                    
             1.612-4 regardless of  any election  made under                                                                    
             those provisions;                                                                                                  
        (2) during production, the lease expenditure is an                                                                      
             expenditure that  is  directly  related to  the                                                                    
             processes of operating a well and moving fluids                                                                    
             to the assembly of valves,  pipes, and fittings                                                                    
             used to control  the flow of  oil and  gas from                                                                    
             the  casinghead,  but  does   not  include  the                                                                    
             processes   of   gathering,   separating,   and                                                                    
             processing well  fluids  downstream  from  that                                                                    
        (3) it is an overhead expenditure authorized under                                                                      
             AS   43.55.165(a)(2)    for   exploring    for,                                                                    
             developing, or  producing,  as applicable,  the                                                                    
             oil or gas deposits, or an  expense for seismic                                                                    
             work  conducted  within  the  boundaries  of  a                                                                    
             production or exploration unit."                                                                                   
Co-Chair Stoltze OBJECTED for discussion.                                                                                       
Co-Chair  Hawker explained  that  the  amendment provides  a                                                                    
clear  definition  of Cook  Inlet  well  lease expenses.  He                                                                    
pointed  to  vagueness  in  current law  that  needs  to  be                                                                    
addressed.   The  amendment   focuses  on   IRS  rules   for                                                                    
determining eligible well expenses.                                                                                             
Co-Chair  Stoltze WITHDREW  his  OBJECTION.  There being  NO                                                                    
further OBJECTION, Amendment 2 was adopted.                                                                                     
3:03:47 PM                                                                                                                    
Co-Chair Hawker wanted to discuss  an amendment that had not                                                                    
yet  been  drafted. He  believed  DNR  would object  to  the                                                                    
amendment,  and  that he  did  not  view the  department  as                                                                    
amenable to furthering the production  of Cook Inlet gas. He                                                                    
explained   that   the   undrafted  amendment   related   to                                                                    
proprietary    storage   lease    operations,   particularly                                                                    
connected with gas storage.                                                                                                     
Co-Chair Hawker listed three storage scenarios:                                                                                 
  · A regulated public utility owns and operates storage;                                                                       
   · Open-access third-party storage is offered for a                                                                           
     price; or                                                                                                                  
   · An investor in Cook Inlet builds a warehouse for their                                                                     
     own benefit, not available to the public on a third-                                                                       
     party basis.                                                                                                               
Co-Chair  Hawker  reminded  the  committee that  HB  280  is                                                                    
crafted so  that either  open-access third-party  storage or                                                                    
utility-owned storage  gets the benefits of  the incentives,                                                                    
but would be subject to regulation.                                                                                             
Co-Chair Hawker  referred to  a DNR  decision to  not permit                                                                    
proprietary  storage;  the   department  wanted  open-access                                                                    
storage.  He  felt the  decision  was  unfair and  an  over-                                                                    
application of  regulatory authority.  He also  believed the                                                                    
position  violates an  important free-market  principle: the                                                                    
state grants exploration/production leases  to an entity and                                                                    
then  tells  the  entity  it  cannot  build  the  assets  it                                                                    
believes  are  commercially   reasonable,  appropriate,  and                                                                    
necessary to operate the business  of developing the state's                                                                    
natural resources.                                                                                                              
Co-Chair  Hawker informed  the committee  that his  proposed                                                                    
amendment would  specifically allow  third-party proprietary                                                                    
storage and say  that DNR may not deny an  application for a                                                                    
lease  solely  on   the  grounds  that  it   would  be  used                                                                    
exclusively for  the entity's own  product. He  believed the                                                                    
amendment would protect  investors in Cook Inlet  and at the                                                                    
same  time not  compromise what  the bill  is attempting  to                                                                    
accomplish by creating incentives for open-access storage.                                                                      
Co-Chair  Stoltze  wanted DNR  to  testify  before the  full                                                                    
committee.  He thought  the proposed  amendment would  raise                                                                    
policy questions.                                                                                                               
3:08:11 PM                                                                                                                    
Representative Gara requested an analysis  of HB 280 by both                                                                    
DNR and REV.                                                                                                                    
Co-Chair Stoltze  reported that  he had  issued invitations.                                                                    
He wanted committee members to have the testimony needed.                                                                       
HB  280  was  HEARD  and   HELD  in  Committee  for  further                                                                    
3:10:47 PM          AT EASE                                                                                                   
3:14:40 PM          RECONVENED                                                                                                

Document Name Date/Time Subjects
CSHB 273 Land Selection.pdf HFIN 3/17/2010 1:30:00 PM
HB 273
HB 273 - Yakatat Borough Acreage Press Release[1].pdf HFIN 3/17/2010 1:30:00 PM
HB 273
HB 273 Sponsor CS.docx HFIN 3/17/2010 1:30:00 PM
HB 273
Sunny_Bay_Area_Calcs2.pdf HFIN 3/17/2010 1:30:00 PM
HB 280 Pipeline Amendment #1.pdf HFIN 3/17/2010 1:30:00 PM
HB 280 (RES) Sponsor Statement.pdf HFIN 3/17/2010 1:30:00 PM
HB 280
HB 280 (RES) Sectional.pdf HFIN 3/17/2010 1:30:00 PM
HB 280
HB 280 (RES) Overview.pdf HFIN 3/17/2010 1:30:00 PM
HB 280
HB 280 (RES) Background.pdf HFIN 3/17/2010 1:30:00 PM
HB 280
Motion in support of additional land selection.pdf HFIN 3/17/2010 1:30:00 PM
HB 273
CSHB 273 amendment support letter.pdf HFIN 3/17/2010 1:30:00 PM
HB 273
Well lease expenditure amendment#2.pdf HFIN 3/17/2010 1:30:00 PM
HB 273 statute 2005 Univ. Land Grant.pdf HFIN 3/17/2010 1:30:00 PM
HB 273
HB 273 Cleveland Peninsula Map.pdf HFIN 3/17/2010 1:30:00 PM
HB 273