Legislature(2009 - 2010)

04/14/2010 03:19 PM Senate FIN

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 280(FIN) am                                                                                             
     "An Act 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 a gas                                                                          
     storage facility on state land; and providing for an                                                                       
     effective date."                                                                                                           
REPRESENTATIVE MIKE  HAWKER, SPONSOR, explained  his reasons                                                                    
for  proposing HB  280,  the "Cook  Inlet  Recover Act".  It                                                                    
addresses a very critical issue  that all communities in the                                                                    
Railbelt  are facing.  Consumer energy  is based  nearly 100                                                                    
percent on natural gas from  Cook Inlet. The productivity of                                                                    
those fields has reached its  natural decline point and peak                                                                    
demands  won't be  met within  two winters  becoming a  life                                                                    
safety  issue.   It  is  a  lead   priority  of  Anchorage's                                                                    
administration. Stakeholders have  reached conclusions as to                                                                    
what is needed to meet and to resolve this issue.                                                                               
5:20:58 PM                                                                                                                    
Representative Hawker referred to  a study that listed seven                                                                    
immediate needs  for Cook  Inlet. HB  280 addresses  four of                                                                    
those needs.  Most importantly, there  is a need  to develop                                                                    
major  gas storage  facilities for  new  gas and  increasing                                                                    
deliverability in order to meet  peak requirements. The bill                                                                    
provides  a  Facilities  Development Credit  against  income                                                                    
taxes.   He  emphasized   that  the   facilities  would   be                                                                    
delivering gas for utilities.                                                                                                   
5:22:38 PM                                                                                                                  
Representative Hawker  explained the  credit would  become a                                                                    
mandatory "flow  through" to reduce  the cost of gas  to the                                                                    
Representative Hawker  discussed the storage  facilities and                                                                    
whether they would be regulated  by the Regulatory Authority                                                                    
of Alaska  (RCA). The  bill defines  RCA's responsibilities.                                                                    
The bill also provides for  storage for a company's own gas,                                                                    
which is not  RCA regulated. It also  provides for technical                                                                    
5:25:46 PM                                                                                                                    
Representative Hawker  spoke of  the difficulty RCA  has had                                                                    
in   approving  long-term   contracts.  The   bill  provides                                                                    
guidance  when  evaluating  such contracts.  The  Regulatory                                                                    
Commission of Alaska  is directed to consider  the impact on                                                                    
consumers  if   it  rejects  a   proposed  contract   -  the                                                                    
"consequence  of  saying  no"  provision. The  RCA  is  also                                                                    
directed  to recognize  the  value of  a  utility holding  a                                                                    
diversified   portfolio  of   gas   supply  contracts   with                                                                    
different  pricing mechanisms.  The  bill  provides for  the                                                                    
Regulatory  Affairs  and  Public Advocacy  Division  of  the                                                                    
Department of  Law (RAPA) to  peruse the  proposed contracts                                                                    
and  abide   by  the  same   requirement  to   consider  the                                                                    
consequence of denying a contract.                                                                                              
5:28:20 PM                                                                                                                    
Representative  Hawker stated  that  the  bill provides  for                                                                    
increased  access  to  existing development  incentives  the                                                                    
state offers in current statute.  This will help promote the                                                                    
exploration of remaining gas in  Cook Inlet, which exists in                                                                    
much smaller  concentrations than  in previous  "domes", and                                                                    
costs more to extract.                                                                                                          
Representative  Hawker added  that the  bill eliminates  the                                                                    
Cook  Inlet  penalty, which  was  built  around North  Slope                                                                    
issues. He recalled the ELF  process and the allowing of ELF                                                                    
to apply to Cook Inlet,  which does not have a progressivity                                                                    
feature.  Cook Inlet  has a  lower tax  rate than  the North                                                                    
Slope and  the penalty should  not apply. The  ELF provision                                                                    
is  counterproductive  to Cook  Inlet.  The  bill allows  "a                                                                    
dollar  spent  and  credits  earned" in  Cook  Inlet  to  be                                                                    
applied  universally  across  the  state  as  anyone  else's                                                                    
5:34:29 PM                                                                                                                    
Representative   Hawker  talked   about  production   credit                                                                    
amortization.  The bill  allows credits  to be  amortized in                                                                    
full the year  incurred, instead of over  a two-year period.                                                                    
The bill also  allows for CAPEX credit  for well enhancement                                                                    
and recovery work. That language  has been carefully drafted                                                                    
with the Department of Revenue.                                                                                                 
Representative Hawker noted that  the bill eliminates tiered                                                                    
credit  and goes  straight to  40 percent.  Cook Inlet  is a                                                                    
small  region  that  is in  need  of  promotion.  Production                                                                    
credits are  allowed to be sold  back to the state  in order                                                                    
to  capitalize  explorers.  The Cook  Inlet  region  is  not                                                                    
particularly  attractive  to  international  companies.  The                                                                    
bill intends  to attract the appropriate  scale of explorers                                                                    
and developers.                                                                                                                 
5:38:43 PM                                                                                                                    
Senator Thomas asked if the  tax credits could be applied to                                                                    
a  producer in  Prudhoe Bay  or sold.  Representative Hawker                                                                    
clarified that  the benefit of  having a credit is  in order                                                                    
to receive  a tax refund.  He added that the  credit section                                                                    
of the  bill is  for Cook Inlet;  however, the  gas facility                                                                    
development section would apply to  the North Slope, as well                                                                    
to anyone developing gas storage facilities.                                                                                    
Senator Thomas  asked if it  was for storage,  not drilling.                                                                    
Representative  Hawker  said  credits apply  to  Cook  Inlet                                                                    
only. Senator  Thomas asked  for the  reason. Representative                                                                    
Hawker  noted concern  about  expanding  credits across  the                                                                    
state. The  intent of the bill  is to leave that  issue to a                                                                    
statewide bill.                                                                                                                 
5:42:06 PM                                                                                                                    
Senator Thomas  noted some are  concerned about  not drawing                                                                    
and storing  gas consistently and  the loss of  a percentage                                                                    
of gas when  shutting down. He wondered if  exporting is the                                                                    
solution to  maintaining consistency.  Representative Hawker                                                                    
replied that  it is a multi-faceted  approach issue. Storage                                                                    
is  one  element.  Maintaining  an  export  component  is  a                                                                    
production buffer. He said that  gas wells don't turn up and                                                                    
turn down well.  It would be ideal to  maintain a continuous                                                                    
flow.   The   export   buffer  expires   March   31,   2011.                                                                    
ConocoPhillips said  they would  pursue an extension  of the                                                                    
export  permit. He  suggested that  storage facilities  were                                                                    
needed in order to meet peaking demands.                                                                                        
Co-Chair Stedman  noted the remaining agenda  would be taken                                                                    
up in the morning.                                                                                                              
5:46:26 PM                                                                                                                    
Senator  Egan   asked  how   many  facilities   are  needed.                                                                    
Representative  Hawker   did  not  know.   Anecdotally,  DOT                                                                    
envisions  one   large,  open  access  facility   and  other                                                                    
facilities  to address  storage  requirements.  He spoke  of                                                                    
credit  limits  which  determine facility  size,  and  other                                                                    
5:49:06 PM                                                                                                                    
Co-Chair Stedman  noted four  zero fiscal  notes: Department                                                                    
of Natural Resources, Department  of Commerce, Community and                                                                    
Economic  Development,  Department  of  Administration,  and                                                                    
House Finance Committee.                                                                                                        
MARSHA  DAVIS, DEPUTY  COMMISSIONER, DEPARTMENT  OF REVENUE,                                                                    
introduced herself.                                                                                                             
Co-Chair  Stedman asked  why the  committee should  pass the                                                                    
bill. Ms. Davis explained  that the department was satisfied                                                                    
with the  size criteria  for the  gas storage  facility, the                                                                    
capital credit, and the reinvestment requirements.                                                                              
5:50:58 PM                                                                                                                    
Co-Chair Stedman  asked if  the administration  supports the                                                                    
bill. Ms. Davis said it did.                                                                                                    
Co-Chair  Stedman  referred to  page  7  and requested  more                                                                    
information  about the  jack up  drill. He  wondered if  the                                                                    
credits could "go negative" with  the state ending up paying                                                                    
over 100 percent. Ms. Davis asked  if he was referring to SB
309. Co-Chair Stedman  said yes. Ms. Davis  explained that a                                                                    
review of the  jack up rig has been done  and the department                                                                    
is satisfied  with it. It would  cost up to $54  million for                                                                    
the three rigs  with the potential for the  state to receive                                                                    
a 50 percent reimbursement of about $27 million.                                                                                
Co-Chair Stedman asked if Kevin Banks supported the bill.                                                                       
KEVIN BANKS,  DIRECTOR, DIVISION OF OIL  AND GAS, DEPARTMENT                                                                    
OF  NATURAL  RESOURCES  (via  teleconference),  related  the                                                                    
department's view  of HB 280.  The bill expands  tax credits                                                                    
to pay  for the kinds of  wells needed in Cook  Inlet. Under                                                                    
today's  tax  system,  only  exploration  wells  would  have                                                                    
received  a credit.  He commented  that  the department  has                                                                    
spent a good  deal of time on the  storage facility language                                                                    
and has  reached a compromise  regarding how  storage leases                                                                    
would be administered.                                                                                                          
5:55:01 PM                                                                                                                    
DAN SULLIVAN, MAYOR, ANCHORAGE,  testified in support of the                                                                    
bill. He said energy is of  critical concern to his area. He                                                                    
highlighted the  current lack of  gas in Cook Inlet  and the                                                                    
creation of a  task force to find solutions. He  said it was                                                                    
a top priority.  Gas storage is one solution  on high demand                                                                    
days.  He noted  that HB  280  addresses three  of the  task                                                                    
force's goals:  storage and  credit for  storage, incentives                                                                    
and  credits  for  production,   and  working  with  RCA  on                                                                    
deliverability and contract terms.                                                                                              
5:57:44 PM                                                                                                                    
Mr. Sullivan spoke  of the uniqueness of Cook  Inlet and the                                                                    
challenges there of a small,  expensive, isolated market. He                                                                    
thought the bill  was a short-term solution for  about 10 to                                                                    
15 years. He restated the key components of the bill.                                                                           
Mr. Sullivan spoke of the  balance between the state's needs                                                                    
and  producers'   needs.  He   maintained  that   people  in                                                                    
Southcentral  are willing  to pay  more for  gas as  long as                                                                    
they have reliability.                                                                                                          
5:59:54 PM                                                                                                                    
TADD  OWENS,   DIRECTOR,  GOVERNMENT  AND   PUBLIC  AFFAIRS,                                                                    
PIONEER  NATURAL RESOURCES,  listed  his company's  projects                                                                    
and history.  He suggested  Cook Inlet  could be  a valuable                                                                    
asset in  spite of its  challenges. He testified  in support                                                                    
of HB 280.                                                                                                                      
6:02:31 PM                                                                                                                    
Co-Chair  Stedman   asked  Senator  Thomas  if   there  were                                                                    
amendments  forthcoming.  Representative Hawker  noted  that                                                                    
the administration is  working with ENSTAR to  extend a line                                                                    
to Homer.  The administration  is proposing an  amendment to                                                                    
that affect.                                                                                                                    
HB  280  was  heard  and   HELD  in  Committee  for  further                                                                    

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