Legislature(2009 - 2010)BUTROVICH 205

03/31/2010 03:30 PM Senate RESOURCES

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03:32:30 PM Start
03:33:47 PM SB255
03:36:16 PM HB162
03:41:22 PM Overview by Dnr and Dor on Cook Inlet Incentives
04:20:46 PM SB309
04:52:31 PM SB290
05:06:02 PM HB280
05:35:26 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview by DOR & DNR on Cook Inlet Gas TELECONFERENCED
Heard & Held
Heard & Held
Heard & Held
Bills Previously Heard/Scheduled
Moved SB 255 Out of Committee
Moved SCS HB 162(RES) Out of Committee
            HB 280-NATURAL GAS: STORAGE/ TAX CREDITS                                                                        
5:06:02 PM                                                                                                                    
CO-CHAIR   WIELECHOWSKI   announced  HB   280   to   be  up   for                                                               
consideration. [CSHB 280(FIN)am was before the committee.]                                                                      
5:06:06 PM                                                                                                                    
REPRESENTATIVE  MIKE   HAWKER,  sponsor   of  HB  280,   said  it                                                               
specifically addresses  three issues  regarding the needs  of the                                                               
Cook  Inlet:  the   need  for  gas  storage   for  utilities  and                                                               
proprietary  storage  for  managing  inventories,  the  need  for                                                               
additional exploration, and long-term supply contracts.                                                                         
He explained  that the  bigger components  of the  bill encourage                                                               
the development of  gas storage facilities. It  creates the first                                                               
regulatory framework  for those facilities that  don't exist now.                                                               
At  the end  of  the  day they  will  provide a  volumetric-based                                                               
development  credit  based on  certain  criteria  that a  storage                                                               
facility  has to  meet. Any  investment  in storage  in the  Cook                                                               
Inlet is going  to increase the gas to consumers  and is a supply                                                               
chain cost.  The development credit  is intended  specifically to                                                               
be  consumer cost  relief  in that  the credit  is  to be  passed                                                               
through ultimately to consumers.                                                                                                
As  far  as  encouraging  development  and  further  gas  storage                                                               
Representative Hawker  said he asked  DNR to  expedite permitting                                                               
of  the storage  facilities. It  is important  also to  recognize                                                               
that  while  this  bill  offers the  "pass  through  credit"  for                                                               
development of  gas storage facilities,  for any entity  to avail                                                               
themselves   of  those   credits  they   must  also   accept  RCA                                                               
regulation. This  is an  absolute linkage in  the bill.  The bill                                                               
protects the  ability of individual producers  to develop storage                                                               
for  their own  purposes for  those companies  who want  to build                                                               
proprietary  storage,  but  very   specifically  no  credits  are                                                               
available  for it.  Likewise, the  RCA does  not have  regulatory                                                               
authority  over those  privately owned  proprietary interest  gas                                                               
storage facilities; unlike today.                                                                                               
5:11:17 PM                                                                                                                    
SENATOR FRENCH  asked him to  identify the sections  that pertain                                                               
to  gas  storage  credits  and  those that  pertain  to  the  RCA                                                               
5:12:11 PM                                                                                                                    
REPRESENTATIVE  HAWKER responded  that he  wanted to  present the                                                               
bill's themes  first without reference  to specific  sections and                                                               
then  he would  go  through  a sectional.  He  said  a couple  of                                                               
significant  applications   for  long-term  contracts   were  not                                                               
approved by the  RCA in the past several years.  He asked the RCA                                                               
what it  would need  to approve them,  because in  hindsight they                                                               
would have  been very good  contracts to have approved.  The bill                                                               
directs  the  RCA  now  when  making a  decision  on  a  contract                                                               
application that they  not only have to look at  the specifics of                                                               
the  contract, but  at  the  consequences of  saying  no to  that                                                               
contract. A  number of sections  increase access to  existing tax                                                               
credits for explorers and developers working in the Cook Inlet.                                                                 
REPRESENTATIVE HAWKER said  this bill was developed  with a great                                                               
deal of  help from  Larry Persily  (Federal Gasline  Czar), Roger                                                               
Marks (former  Senior DOR Petroleum Economist),  Jan Levy (former                                                               
DOL oil and gas attorney), and Julie Lucky, legislative staff.                                                                  
5:15:12 PM                                                                                                                    
                             HB 280                                                                                             
          Cook Inlet Recovery Act - Sectional Analysis                                                                          
        Prepared by Representative Mike Hawker's Office                                                                         
Section  1: Sets  out a  short  title for  the legislation:  Cook                                                               
Inlet Recovery Act (CIRA).                                                                                                      
Section  2:  Establishes  an application  process,  criteria  and                                                               
timeline  for  the Alaska  Oil  and  Gas Conservation  Commission                                                               
(AOGCC) to  certify that a  gas storage facility (GSF)  meets the                                                               
minimum  working gas  storage capacity  and  daily delivery  rate                                                               
requirements  to   be  eligible  for  the   financial  incentives                                                               
provided in this bill.                                                                                                          
5:17:01 PM                                                                                                                    
CO-CHAIR  WIELECHOWSKI asked  on page  2, line  10, if  there was                                                               
"any magic"  in selecting 500 mmcf  and on line 13  being able to                                                               
withdraw a minimum of 10 mmcf.                                                                                                  
REPRESENTATIVE  HAWKER   answered  they   were  the   product  of                                                               
consensus in  discussions with  the DNR  and DOR.  Initially they                                                               
considered a  bill that  would pay  the credit  up to  double the                                                               
capacity,  but  recognized  this  credit does  not  flow  to  the                                                               
developer; 100  percent of  it flows  through to  consumers. They                                                               
were trying to second-guess the  volume of large capacity storage                                                               
that  will be  developed in  Cook  Inlet, and  the DOR  expressed                                                               
concern that  they wanted the  bill as  close as possible  to the                                                               
perspective development as  possible. It was an effort  to try to                                                               
mitigate  the potential  gaming of  the system.  The idea  of the                                                               
flow-through  volumetrics  indicates  they  don't  want  to  give                                                               
credits  to  someone  building a  storage  facility  that  cannot                                                               
deliver sufficient  gas to  meek their  peak demands.  They might                                                               
consider  expanding the  size of  the  credits once  they see  an                                                               
actual project.                                                                                                                 
CO-CHAIR  WIELECHOWSKI asked  if it's  projected that  Cook Inlet                                                               
would need 10 million mmcf on any cold day.                                                                                     
REPRESENTATIVE HAWKER  answered that's  the minimum amount  and a                                                               
fairly low  number. They get  400 mmcf/day demand on  really cold                                                               
days. The idea  of the storage facilities is to  meet the peaking                                                               
demands, not the  sustained delivery. Section 2 also  says if you                                                               
cease  using a  storage facility  within the  first 10  years the                                                               
state  has a  recovery  provision on  any  credits provided  that                                                               
would have be refunded by the  developer. The AOGCC would have to                                                               
be notified on those cessations.                                                                                                
REPRESENTATIVE HAWKER continued the analysis:                                                                                   
5:19:46 PM                                                                                                                    
Section  3: Requires  a  GSF owner  to notify  the  AOGCC if  the                                                               
facility ceases operation.                                                                                                      
-Provides definitions for terms used in CIRA.                                                                                   
-Requires the Director of the  Division of Mining, Land and Water                                                               
to give priority  to and expedite "when  reasonably possible" any                                                               
applications,   permits   and   lease  assignments   needed   for                                                               
development and operation of a GSF.                                                                                             
5:20:30 PM                                                                                                                    
Section 4: Directs  the Department of Natural  Resources (DNR) to                                                               
waive any state  land lease fees or rents for  the first 10 years                                                               
of  a GSF's  operation.  The  waiver would  stop  if the  storage                                                               
facility ceases commercial operations.                                                                                          
-States that any  waivers of lease fees or rents  would be public                                                               
-Requires  that the  GSF pass  on the  financial benefits  of any                                                               
lease exemption to utilities that use its service.                                                                              
-Clarifies that any gas withdrawn from  a GSF is considered to be                                                               
non-native gas  and not subject  to royalty until  all non-native                                                               
gas is withdrawn.                                                                                                               
SENATOR FRENCH asked  if the director has  already denied permits                                                               
to producers for their storage wells.                                                                                           
REPRESENTATIVE HAWKER  answered that  he heard that  DNR's policy                                                               
is  that they  would not  permit storage  facilities unless  they                                                               
were  an  open  access  facility.  As presented  to  him  in  his                                                               
conversations with  Mr. Banks, the  concern is that  more storage                                                               
capacity is needed  right now and smaller producers  may not have                                                               
the financial wherewithal  to build their own. Until  they have a                                                               
very  vibrant  third-party  storage   facility,  the  agency  had                                                               
concluded that it was best  to make all future storage facilities                                                               
open access. To  him, this crossed his line of  a little too much                                                               
government interference and didn't  recognize the reality that he                                                               
sees  in the  Cook Inlet  where the  producers have  the need  to                                                               
manage their  own inventory  (warehousing). For  example, Chevron                                                               
had  substantial  warehousing  capability   in  the  Drift  River                                                               
Terminal  Facility  that sat  at  the  foot  of a  volcano.  That                                                               
storage  facility   has  been  taken  off   line  after  volcanic                                                               
activity. While  it was oil  storage, it is now  interfering with                                                               
their ability to maximize and  sustain ongoing production because                                                               
they don't have a warehouse to put their own product in.                                                                        
The  same thing  with gas,  he said.  If producers  don't have  a                                                               
place to  store their case,  the state would be  encouraging them                                                               
to  shut   in  gas  and   not  maximize  production.   This  bill                                                               
anticipates seeing proposals for a  very large open access third-                                                               
party owned project in the Cook  Inlet in the near-term, but that                                                               
would deny benefits  to someone who simply wants  to manage their                                                               
own inventory.                                                                                                                  
5:24:37 PM                                                                                                                    
Section  5: Directs  the Regulatory  Commission of  Alaska (RCA),                                                               
when  considering   the  approval  of  a   utility's  gas  supply                                                               
contract, to consider  the impact on consumers  if the commission                                                               
rejects  a utility's  gas supply  contract and  to recognize  the                                                               
value of a utility holding  a diversified portfolio of gas supply                                                               
contracts with  different pricing mechanisms in  order to protect                                                               
consumers from inadequate  gas supplies and the risk  of a single                                                               
pricing mechanism.                                                                                                              
REPRESENTATIVE  HAWKER explained  if an  open access  third-party                                                               
owned facility  is constructed on  state land, the lease  fees or                                                               
rents would be  waived for the first 10 years  of that facility's                                                               
He added that this bill  also provides a regulatory framework for                                                               
"last in,  first out" inventory  accounting in these  new storage                                                               
facilities. This means  the last gas pumped into it  is the first                                                               
gas  that  comes out.  This  is  relevant  because the  last  gas                                                               
(residual  gas to  maintain some  pressure in  the bottom  of the                                                               
well) in  the bottom of the  well has not ever  been produced and                                                               
when it is  produced there will be a liability  and obligation to                                                               
pay production taxes on it.                                                                                                     
5:27:10 PM                                                                                                                    
Section 6: Requires that a utility's  cost of gas storage that is                                                               
passed on to consumers reflect  the financial benefits of any tax                                                               
credits and state lease exemptions  provided in this legislation.                                                               
It  also stipulates  that a  portfolio representing  diversified-                                                               
terms of gas supply contracts is a good thing.                                                                                  
5:28:19 PM                                                                                                                    
Section  7: Specifies  that the  Regulatory Commission  of Alaska                                                               
(RCA)  has   jurisdiction  over  natural  gas   storage  services                                                               
provided for  gas that is owned  by a regulated utility  and that                                                               
any benefits  provided in this  legislation flows through  to the                                                               
Section  8: Further  defines "natural  gas storage  facility" and                                                               
clarifies what is considered part of the storage facility.                                                                      
-Further defines  that RCA regulation  of gas  storage facilities                                                               
is limited  to facilities operated  primarily or  exclusively for                                                               
third-party   customers;  regulation   does  not   extend  to   a                                                               
proprietary  storage facility  operated exclusively  or primarily                                                               
to hold gas owned by the storage facility owner or operator.                                                                    
REPRESENTATIVE  HAWKER explained  that a  potential loophole  was                                                               
discovered by  DNR and  DOR that it  potentially could  be argued                                                               
that  a large  natural gas  pipeline (if  it were  to be  built),                                                               
since it is a vessel capable  of storing gas, someone might argue                                                               
that  it would  fall under  the parameters  of this  legislation,                                                               
which was  not at all  the intent.  So language clarifies  that a                                                               
natural gas storage facility that  is part of a regulated natural                                                               
gas pipeline is not also regulated by the utility.                                                                              
5:29:51 PM                                                                                                                    
Section 9: Clarifies  that the names of taxpayers  and the amount                                                               
of  credits  claimed  for  gas   storage  facilities  under  this                                                               
legislation shall be public information.                                                                                        
-Requires  the  Department  of   Revenue  (DOR)  to  furnish  the                                                               
information to the RCA.                                                                                                         
REPRESENTATIVE HAWKER explained that  this section specifies that                                                               
the RCA does have jurisdiction  over gas storage services for gas                                                               
that  is owned  by a  regulated utility.  They are  looking at  a                                                               
couple  levels of  storage and  in this  case this  gas would  be                                                               
purchased on the  market by a utility that has  developed the gas                                                               
storage  facility  itself.  Other  provisions talk  about  how  a                                                               
third-party facility  that provides services to  a public utility                                                               
is also regulated.                                                                                                              
5:30:32 PM                                                                                                                    
SENATOR FRENCH  asked if  he was referring  to the  definition on                                                               
page 8, lines 18 and 19.                                                                                                        
REPRESENTATIVE HAWKER answered yes.                                                                                             
Section 10:  Establishes a credit against  corporate income taxes                                                               
of  $1.50 per  thousand cubic  feet of  new gas  storage capacity                                                               
opened in Alaska  during 2011-2015. The credit is  limited to $15                                                               
million  per GSF.  This  section sets  out  minimum capacity  and                                                               
deliverability requirements to qualify  for the credit, including                                                               
that the  GSF must  be available for  use by  regulated utilities                                                               
and, if utilizing state land, must  be in compliance with its DNR                                                               
storage lease.  The credit can be  refunded by the state  at full                                                               
value if the  owner does not have enough taxable  income to fully                                                               
utilize it.                                                                                                                     
REPRESENTATIVE HAWKER explained this  section picks up the third-                                                               
party customer coverage.                                                                                                        
CO-CHAIR  WIELECHOWSKI asked  if the  definition of  "natural gas                                                               
storage facility" included the LNG plant in Nikiski.                                                                            
REPRESENTATIVE HAWKER  answered as they have  defined the ability                                                               
for  someone to  get  a credit  under  this bill,  it  had to  be                                                               
delivering gas  to consumers.  An export  plant and  facility was                                                               
not contemplated for the benefits.                                                                                              
CO-CHAIR WIELECHOWSKI  asked if they  released some of  their gas                                                               
on the really cold winter days.                                                                                                 
REPRESENTATIVE HAWKER replied anecdotally  he was aware that when                                                               
the  peak demand  of coldest  days had  occurred in  Southcentral                                                               
Alaska in a past couple  of winters, ConocoPhillips, who owns and                                                               
operates that  facility, actually  voluntarily diverted  gas that                                                               
they  had committed  to  export to  customers  overseas into  the                                                               
supply chain for consumers.  Their good-friends relationship with                                                               
their consumers in Asia allowed them to do that.                                                                                
5:34:26 PM                                                                                                                    
Section 11: Sunsets the rule  that limits how certain tax credits                                                               
arising from  activity in  Cook Inlet or  from producing  gas for                                                               
in-state use  are used  on January  1, 2011.  This would  allow a                                                               
Cook Inlet explorer  or producer to explore  or produce elsewhere                                                               
in the state  and have full access to the  credits it earned from                                                               
its Cook Inlet activities. This  section also makes sure that the                                                               
names  of producers  and  amounts  of credit  are  public. It  is                                                               
necessary that the information is available to the RCA.                                                                         
5:35:26 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI asked if this would be a good place to                                                                    
stop and pick up at a future hearing.                                                                                           
REPRESENTATIVE HAWKER answered yes.                                                                                             
[HB 280 was held in committee.]                                                                                                 

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