Legislature(2009 - 2010)BUTROVICH 205

03/11/2010 03:30 PM Senate RESOURCES

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03:40:13 PM Start
03:41:38 PM Finish Overview of Agia Regulatins
04:21:54 PM SB242
04:29:56 PM SB243
05:22:56 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Heard & Held
Overview: AGIA Regulations -
Dept of Revenue (continued)
+ Bills Previously Heard/Scheduled TELECONFERENCED
             SB 242-GEOTHERMAL RESOURCE TAX CREDITS                                                                         
4:21:54 PM                                                                                                                    
CO-CHAIR MCGUIRE called the meeting back to order at 4:21 and                                                                   
announced SB 242 to be up for consideration.                                                                                    
SENATOR FRENCH moved to adopt CSSB 242(RES) 26-LS1347\E. There                                                                  
were no objections and it was so ordered.                                                                                       
MIKE  PAWLOWSKI, staff  to Senator  Wielechowski, explained  that                                                               
the  committee substitute  (CS)  version  E for  SB  242 makes  a                                                               
substantial departure  from the original version  by changing the                                                               
development and exploration tax credits in the following ways:                                                                  
   · Page 1, lines 9-14, subsection (b) is an exploration                                                                       
     credit. Since  geothermal is  a resource  you have  to drill                                                               
     for, they felt it was  appropriate to develop an exploration                                                               
     credit.  The original  bill had  an  exploration tax  credit                                                               
     that differentiated  between exploration  on state  land and                                                               
     land  that  was not  state  land.  It was  originally  50/25                                                               
     percent,  but  is changed  to  a  flat  30 percent.  In  the                                                               
     original version  the applicability of the  expenditures was                                                               
     retroactive; in  the current  version it  is not.  These are                                                               
     prospective expenditures made within the state. The carry-                                                                 
     forward language  in the  original bill  was limited  to 5-7                                                               
     years and that has been changed  to 20 years on page 1, line                                                               
   · Page 2, lines 2-6, subsection (c) introduces a development                                                                 
     tax credit  - you have  explored for a  geothermal resource,                                                               
     discovered  that there  is a  commercial  project there  and                                                               
     then step  into the  development phase. The  development tax                                                               
     credit is  also a 30  percent tax credit. The  unused carry-                                                               
     forward tax credit  on page 2, line 5, has  been extended to                                                               
     20 years. In the original version  of the bill this was a 10                                                               
     percent credit.  The substantial departure that  was made in                                                               
     the bill is rather than  a credit against income taxes, they                                                               
     moved to a  refundable credit (page 2, lines  12-15) for the                                                               
     exploration expenditures  (lines 12-13) that  are refundable                                                               
     on an  annual basis. Once you  move to the development  of a                                                               
     phase of a  project (lines 14-15) the  development credit is                                                               
     only  refundable  after  the   project  actually  goes  into                                                               
     service.  So you  actually have  to finish  the project  and                                                               
     start producing gross  income from the project  and then you                                                               
     can get  your development credits. The  reason carry-forward                                                               
     language  was  included  in  a  refundable  credit  is  that                                                               
     refundable  credits are  ultimately  subject to  legislative                                                               
     appropriation.  That is  a risk  project sponsors  take when                                                               
     they are looking at refundable  credit. So, in the event the                                                               
     Legislature didn't  appropriate the  money for  a refundable                                                               
     credit  that  unused  credit could  be  rolled  forward  and                                                               
     applied  against income  taxes or  when the  Legislature had                                                               
     the money to appropriate for the credit.                                                                                   
   · Page 2, lines 20-21, working with the Department of Natural                                                                
     Resources (DNR) they developed a definition of when                                                                        
     exploration turns into development.                                                                                        
4:26:42 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI said  he supported the bill  in concept but                                                               
the  state could  be put  into a  position of  investing tens  of                                                               
millions  of dollars  without getting  any geothermal  plant from                                                               
it,  and he  wanted to  make sure  that this  credit is  actually                                                               
needed. He had the same concern about any project.                                                                              
MR.   PAWLOWSKI  responded   that   the   original  bill   capped                                                               
exploration credits at  $20M; a refundable credit  for the actual                                                               
facility doesn't exist until you  go into the development phase -                                                               
the facility  has to be  actually built and producing  energy. In                                                               
terms of the  overall risk of not ever getting  a project, he was                                                               
correct  there could  be  a lot  of  exploration that  eventually                                                               
yields no project.                                                                                                              
CO-CHAIR WIELECHOWSKI  said he  understands that  the exploration                                                               
aspect  of the  Mt. Spurr  project is  about $137M,  and so  a 30                                                               
percent tax credit would be $40M-plus.                                                                                          
MR.  PAWLOWSKI said  he felt  uncomfortable  answering that.  The                                                               
language  that they  used from  the Division  of Oil  and Gas  is                                                               
different  than  what  the  Ormat  project  sponsors  thought  in                                                               
determining exploration versus development.  He would let them or                                                               
the  representatives  from  Akutan  speak  about  what  would  be                                                               
expenses in the exploration phase.                                                                                              
CO-CHAIR MCGUIRE  said these  are great questions  to get  on the                                                               
record.  She had  asked Ormat  to  model their  internal rate  of                                                               
return  (ROR)  and to  show  what  every  one of  the  government                                                               
incentives would look like and  how that would benefit consumers,                                                               
in particular.                                                                                                                  
CO-CHAIR   WIELECHOWSKI  said   he  could   wait  and   see  that                                                               
presentation and then ask Mr. Pawlowski questions afterwards.                                                                   
CO-CHAIR MCGUIRE set CSSB 242(RES) aside.                                                                                       
             SB 242-GEOTHERMAL RESOURCE TAX CREDITS                                                                         
4:57:05 PM                                                                                                                    
CO-CHAIR MCGUIRE said they would go to back to SB 242.                                                                          
MR. THOMSEN  said they reset their  model in SB 242  to again say                                                               
at today's  costs they would  need $.14. If  SB 243 were  to pass                                                               
they  would be  eligible for  a 30-percent  refundable investment                                                               
tax credit  and that  would allow  them to  lower the  price they                                                               
would need to develop this project  by 2.5 cents. In dollars this                                                               
would  be worth  $82.5 million  to this  $275-million project.  A                                                               
very  small portion  of that  is  in the  exploration phase;  the                                                               
majority is in the development phase.                                                                                           
When  they  originally  look at  resource  development  they  are                                                               
talking about all  the wells required for the  development of the                                                               
project. In  CSSB 242(RES) exploration  is defined to  stop after                                                               
drilling   the  second   production  well.   To  put   that  into                                                               
perspective,  he said  a good  geothermal  well today  at a  good                                                               
temperature is enough to produce  approximately 4-5 MW. So, after                                                               
the second well  is drilled and they can confirm  that there is a                                                               
resource, they  move into the  development phase where  they will                                                               
still drill many  production and reinjection wells  for the fluid                                                               
and covering the  body of the power plant. So  for total exposure                                                               
during this  exploration phase  they are looking  at a  number in                                                               
the  vicinity of  $15 million.  If both  of the  production wells                                                               
were  $5 million  and the  leases they  have already  acquired in                                                               
Alaska  are about  $3 million,  any additional  money in  between                                                               
those would  amount to an  exposure of about $4.5  million. Since                                                               
this would  be in the exploration  phase they could get  that tax                                                               
credit annually. Once  they get past that point then  there is no                                                               
exposure until the project is placed in service.                                                                                
MR. THOMSEN  said that  $82 million would  be quite  a commitment                                                               
from the  State of Alaska  to make this project  happen. Lowering                                                               
the rate by  2.5 cents would result in a  $260 million savings to                                                               
Railbelt ratepayers for  the life of the project  and an economic                                                               
benefit for Ormat of $175 million.                                                                                              
Eighty-two million  is an undiscounted  number. Knowing  the time                                                               
value of  money and that $82  million in one payment  up front is                                                               
worth  a lot  more than  them paying  the state  for the  next 26                                                               
years, they  used a discounted  rate of  7 percent and  said with                                                               
the  time  value  of  money the  estimated  discount  savings  to                                                               
ratepayers  would  about  $132   million,  which  still  nets  an                                                               
economic  benefit of  $50 million  for Ormat.  He said  they were                                                               
trying to  show that dealing  in a fixed  market if the  state is                                                               
willing to partner with Ormat and  give them $82 million up front                                                               
allowing  them to  get this  PPA in  place and  move the  project                                                               
forward  more  rapidly  they  would   be  able  to  discount  the                                                               
wholesale price to the utility by 2.5 cents.                                                                                    
He  explained that  because they  are regulated  by the  RCA they                                                               
will know what  their construction costs were  because the credit                                                               
is based  on them reviewing  the eligible construction  costs and                                                               
giving them  30 percent of that  in a cash rebate.  They disclose                                                               
their rate of return and the  RCA will know the price because not                                                               
only  will Ormat  have disclosed  it  but the  utility will  have                                                               
brought  the contract  to them.  So,  there should  be very  good                                                               
transparency with this model.                                                                                                   
5:01:12 PM                                                                                                                    
SENATOR STEDMAN  asked why the  tax credit is 30  percent instead                                                               
of 10, 15, 50 or zero.                                                                                                          
MR. THOMSEN  replied that  they are  trying to  get to  what they                                                               
think utility  expectations are today  for a PPA. The  savings is                                                               
less with 10  percent. To enter into a PPA  in an aggressive time                                                               
frame they  need to be  around 10 cents;  this gets them  to that                                                               
CO-CHAIR MCGUIRE  said the  earlier version had  a 25  percent on                                                               
state land and 50 percent on  federal land. The decision was made                                                               
to go to  a flat 30 percent.  It's just a question  of what level                                                               
of  partnering. The  idea is  that the  state offers  exploration                                                               
credits in  Cook Inlet and other  places; so is this  a place the                                                               
state  wants to  help mitigate  costs  and absorb  risk. If  they                                                               
think they  do, then they  can argue  about what the  rate should                                                               
be. She appreciated them at least  putting in the numbers so they                                                               
could understand what the benefits are.                                                                                         
5:02:59 PM                                                                                                                    
SENATOR  FRENCH  followed  up  on  some  questions  from  Senator                                                               
Wielechowski and asked  how an amendment saying  something like a                                                               
taxpayer   accepting  credits   under  this   bill  accepts   RCA                                                               
regulation would be viewed.                                                                                                     
MR.  THOMSEN said  he didn't  see  a problem  with that.  Ormat's                                                               
understanding is  that they  are currently  regulated by  the RCA                                                               
and will always be regulated by  them as long as they are selling                                                               
power to anyone in the State of Alaska.                                                                                         
CO-CHAIR  WIELECHOWSKI said  if  that 10  cents  was a  wholesale                                                               
price or retail to the consumer.                                                                                                
MR. THOMSEN replied that all prices his prices are wholesale.                                                                   
CO-CHAIR  WIELECHOWSKI  said  he understood  that  the  wholesale                                                               
price for consumers in the Cook Inlet area is roughly 6.5 cents.                                                                
MR. THOMSEN answered that he just  came from the House hearing on                                                               
GRETC and  the Black &  Veatch report had changed  their estimate                                                               
from 5 cents to 17.5 cents. So  he didn't know enough to tell him                                                               
what the wholesale price is today.                                                                                              
CO-CHAIR   WIELECHOWSKI   said   he   is  curious   as   to   the                                                               
competitiveness of the project because  the state would be making                                                               
a pretty large up front contribution.                                                                                           
MR.  THOMSEN  said  Ormat  can be  competitive.  They  have  been                                                               
developing projects  for 40 years  and they make money  doing it;                                                               
they  typically have  a 13-14  percent  rate of  return. What  is                                                               
unique about this price  is if they move quickly to  lock it in -                                                               
whether  it's 10  or 11  cents -  that is  a fixed  price for  25                                                               
years. So,  10 years from  now when they  are trying to  find the                                                               
prevailing rate  of electricity,  this is  their hedge;  10 cents                                                               
locked in  for this period of  time is very competitive.  He said                                                               
they brought  on projects in  Nevada in  1985 and had  to compete                                                               
with and draw down their rate  of return to compete at 6.5 cents.                                                               
They are  still sitting on  those projects today saying  boy that                                                               
was a good investment.                                                                                                          
5:07:16 PM                                                                                                                    
He  said  their  project  would   diversify  the  state's  energy                                                               
resources  and remove  the fuel  cost risk;  and while  he didn't                                                               
know how  to value  that, but  he didn't know  of any  other fuel                                                               
supply they  could go to to  get a 25-year fixed  rate. They have                                                               
zero emissions,  a closed loop  system and are not  depleting the                                                               
reservoir of any hot water, and  they think in the long term this                                                               
will  be 100-percent  competitive. They  might get  to the  point                                                               
someday  where  renewable  resources  will enable  policy  to  be                                                               
changed on directing fossil fuel generation.                                                                                    
CO-CHAIR WIELECHOWSKI asked if his  numbers are a fixed price for                                                               
25  years  if  in  2035  the utility  would  still  be  paying  a                                                               
wholesale price of 11.5 cents.                                                                                                  
MR.  THOMSEN replied  that  they have  negotiated  a very  modest                                                               
price  escalation  in  the  price  contract  for  operations  and                                                               
maintenance and the RCA would have to approve it.                                                                               
CO-CHAIR   WIELECHOWSKI   asked   who  would   build   the   long                                                               
transmission line.                                                                                                              
MR.  THOMSEN  answered  they  assume   that  building  a  40-mile                                                               
transmission line is a job for the utility.                                                                                     
SENATOR  STEDMAN   said  if  they   were  going   to  incentivize                                                               
geothermal electrical  generation, maybe they should  do modeling                                                               
to  see  if  the  state  would  be  better  off  subsidizing  the                                                               
transmission lines,  which are  the negative  side of  this whole                                                               
scenario. He didn't know the answer.                                                                                            
CO-CHAIR MCGUIRE  remarked if you  don't have a project  to begin                                                               
with to connect to a transmission line who cares.                                                                               
SENATOR  STEDMAN said  he assumed  they had  selected a  physical                                                               
MR. THOMSEN  answered yes, because  they are on state  leases. He                                                               
added  that these  bills are  independent  of transmission  lines                                                               
because they  can impact other  geothermal developments  that may                                                               
not have  the same transmission  "log jams" they have.  The Mount                                                               
Spurr development is  40 miles from the Beluga  power plant where                                                               
they would tie  in and be able to access  the Railbelt grid. This                                                               
infrastructure  would benefit  future  hydro plans  in this  area                                                               
like Chakachamna and Tyonek/CIRI.                                                                                               
SENATOR STEDMAN  asked if they  had done economic models  for the                                                               
40-mile power line to Beluga.                                                                                                   
5:14:32 PM                                                                                                                    
CO-CHAIR  MCGUIRE  explained  that   the  bill  was  designed  to                                                               
incentivize geothermal  exploration and development  generally in                                                               
any  geothermal area  that  might  be explored  in  the state  of                                                               
Alaska. It  is not project-specific. Interestingly,  the contract                                                               
that Ormat has already entered  into renders the royalty portions                                                               
of the bills before them meaningless.                                                                                           
MR.  THOMSEN said  he  would  be happy  to  provide  them with  a                                                               
presentation  on those  hurdles that  they are  already preparing                                                               
for another committee.                                                                                                          
5:16:49 PM                                                                                                                    
RAYMOND MANN,  Renewable Energy Program Manager,  City of Akutan,                                                               
said  they  are  currently  pursuing development  of  both  hydro                                                               
electric and  geothermal power  with feasibility  and exploration                                                               
currently being  funded by  the Renewable  Energy Grant  Fund. He                                                               
thanked  the  legislature  for continuing  support  of  renewable                                                               
energy  development  which  is critical  to  the  development  of                                                               
sustainable rural communities. They  are committed to eliminating                                                               
their  dependence on  diesel fuel,  reducing  or eliminating  PCE                                                               
subsidies, eliminating  the 50,000  tons of carbon  emissions per                                                               
year and  providing residential and  commercial power  well below                                                               
the current 32 cents KWh that their residential users pay.                                                                      
They  are  also  committed  to public  private  funding  for  the                                                               
development   of  their   geothermal  resource.   It's  currently                                                               
estimated  that  3/4  of  the total  development  cost  of  their                                                               
project will be borne by  private investors. However, the ability                                                               
to attract private capital and  development expertise will depend                                                               
heavily   on   reasonable   tax   incentives,   carbon   offsets,                                                               
exploration credits  and a positive investment  environment. They                                                               
believe that  both SB 242 and  SB 243 are the  right approach and                                                               
would go a  long way in creating the  investment environment that                                                               
will  allow  Akutan and  many  other  communities to  create  the                                                               
public private partnerships needed for geothermal development.                                                                  
MR. MANN  said they support  the legislation in  general although                                                               
its  applicability  to  Akutan  is  not  quite  clear.  They  are                                                               
developing on private  land, for example, and  the royalty issues                                                               
may not be applicable to them.                                                                                                  
5:19:38 PM                                                                                                                    
BRAD  EVANS,  CEO,  Chugach Electric  Association,  said  Chugach                                                               
generates 90  percent of  its electricity  with natural  gas from                                                               
Cook  Inlet  and they  are  now  facing tremendous  pressures  in                                                               
security  in the  price  of  their natural  gas  fuel supply.  In                                                               
reaction to this,  Chugach is embarked on a  mission to diversify                                                               
its generation  portfolio and reduce  their reliance on  a single                                                               
source of fuel.  They also support the development  of a rational                                                               
statewide energy policy  that addresses where, when,  and how the                                                               
state   incentives  should   be   applied   for  development   of                                                               
alternative energy supplies. He said  priority should be made for                                                               
those   projects  that   are   sustainable   and  geothermal   is                                                               
sustainable; it is also good for future prosperity.                                                                             
He  said  the  potential  for geothermal  development  in  Alaska                                                               
appears  viable;  however  the   cost  of  development  for  this                                                               
resource in  remote areas  is significant.  Even a  location that                                                               
you might  be able to  see from a  tall building in  Anchorage is                                                               
still a long ways  away in terms of getting a  project built.  In                                                               
these situations it  makes an appropriate state  energy policy to                                                               
lower costs  barriers to development  where possible.  Both bills                                                               
want to  lower costs  and in  each of  these cases  their primary                                                               
concern  is the  assurance  these benefits  flow  through to  the                                                               
consumers and not  merely result in additional  enrichment to the                                                               
developer. To  be clear, their concerns  do not stop just  at the                                                               
incentives  contemplated here  today;  they also  apply to  those                                                               
situations  where  any  public  money  is  loaned  to  developers                                                               
whether they  are state or  federal. If public money  touches any                                                               
project directly  or indirectly  transparency should  be demanded                                                               
ensuring the flow of the benefits to the public.                                                                                
In   this  specific   situation,  Mr.   Evans  said,   Ormat  has                                                               
demonstrated  a refreshing  willingness to  work towards  an open                                                               
and transparent  process. He said  the efforts of  this committee                                                               
are noteworthy, measurable and a step in the right direction.                                                                   
5:22:56 PM                                                                                                                    
CO-CHAIR MCGUIRE  thanked everyone for their  testimony, set both                                                               
bills aside, and adjourned the meeting at 5:22 p.m.                                                                             

Document Name Date/Time Subjects
SB 242 Version E.pdf SRES 3/11/2010 3:30:00 PM
SB 242
SB 243 Version R.pdf SRES 3/11/2010 3:30:00 PM
SB 243