Legislature(2015 - 2016)BUTROVICH 205

04/07/2016 03:30 PM RESOURCES

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Audio Topic
03:30:29 PM Start
03:30:55 PM SB130
04:33:55 PM Continuation of Additional Modeling and Scenario Analysis by Dor
05:30:11 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
<Pending Referral> --Invited Testimony Only--
Heard & Held
-- Testimony <Invitation Only> --
Regulatory Commission of Alaska; Enstar
Natural Gas; Matanuska Electric Association
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
           SB 130-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
        [Contains discussion of companion bill HB 247.]                                                                       
3:30:55 PM                                                                                                                    
CHAIR  GIESSEL announced  consideration  of SB  130 [version  29-                                                               
GS2609\A was before the committee].  She said today the committee                                                               
would hear  from the utilities  and the Regulatory  Commission of                                                               
Alaska  (RCA) before  going  back to  the  Department of  Revenue                                                               
(DOR) for  more fiscal numbers.  She welcomed the  Enstar Natural                                                               
Gas representatives to the table.                                                                                               
3:31:32 PM                                                                                                                    
JARED GREEN,  President, Enstar  Natural Gas  Company, Anchorage,                                                               
Alaska, said  Enstar is the  largest purchaser of natural  gas in                                                               
the Cook Inlet.  Ultimately their customers are  a beneficiary of                                                               
the tax credit  program that has been in place  since 2012. Their                                                               
customers depend  on natural  gas from Cook  Inlet to  heat their                                                               
homes,   their   businesses,   their  schools,   hospitals,   and                                                               
industries. Fundamentally,  Enstar's interest  is in  fostering a                                                               
stable and appealing  natural gas environment in  the Cook Inlet.                                                               
Their  number-one  priority  is  safe  reliable  service  to  its                                                               
140,935 natural gas customers.                                                                                                  
3:32:36 PM                                                                                                                    
SENATOR STOLTZE joined the committee.                                                                                           
MR.  GREEN said,  on average,  their customers  burn 33  Bcf/year                                                               
(power corporation  load is  separate), but  this varies  from as                                                               
little  as 30  Bcf to  35  Bcf/year. He  said overall  production                                                               
coming out of Cook Inlet is about 80 Bcf/year.                                                                                  
He said that  Enstar has high seasonality gas needs  with a ratio                                                               
of   12:1  winter/summer   gas  along   with  substantial   daily                                                               
variability  due to  weather. With  their current  customer base,                                                               
there is  a potential daily  demand of  287 mmcf/day and  that is                                                               
most likely  to occur on a  cold January date of  any given year,                                                               
but, depending on weather, that  same January date could be under                                                               
100 mmcf/day.                                                                                                                   
When Enstar plans  its natural gas portfolio it  looks many years                                                               
in  advance, Mr.  Green  said.  It operates  in  a closed  supply                                                               
system and, therefore, very long  lead times are needed. Firm gas                                                               
contracts need to be lined up and  in place at least two years in                                                               
advance. Anything  less than that  puts their  141,000 customers,                                                               
over half the population of  Alaska, at risk of supply shortages.                                                               
To  put the  customer count  in context,  that number  represents                                                               
over half of the South-central population in Alaska.                                                                            
There is no doubt Cook Inlet  is challenged, he said, and between                                                               
the  producers   and  Cook  Inlet  Natural   Gas  Storage  Alaska                                                               
(CINGSA), 287 mmcf/day needs to  be available, although it is not                                                               
needed  every  day.  This  means   producers  need  to  have  the                                                               
operational  capability  to  ramp  up production,  but  also  the                                                               
capability to throttle it back when it's not needed.                                                                            
MR. GREEN said Cook Inlet is  a very different world than what is                                                               
in the  Lower 48.  With the  integrated transmission  and storage                                                               
network, producers  down south can  simply drill a well  and open                                                               
up their  taps and the large  market simply absorbs the  gas. The                                                               
utilities  have  an  easy  role  also: they  have  a  line-up  of                                                               
marketers who  are trying  to sell them  gas from  various places                                                               
and if a contract that a  utility has is not being fulfilled, the                                                               
utility simply goes back to  its marketing stream, and source gas                                                               
from any one of the thousand  other producers who are willing and                                                               
able to  supply them gas. Cook  Inlet does not have  that luxury;                                                               
it is a very small and illiquid marketplace.                                                                                    
3:35:42 PM                                                                                                                    
SENATOR COSTELLO joined the committee.                                                                                          
MR. GREEN  said Cook Inlet  has a handful  of buyers and  an even                                                               
smaller  number of  suppliers. The  fact  that ConocoPhillips  is                                                               
selling its assets to ML&P will  take another supplier out of the                                                               
marketplace,  but then  ML&P will  be self-supplied.  That places                                                               
Enstar in a somewhat delicate position with respect to supply.                                                                  
However, Enstar  is in a much  better position now than  in 2012.                                                               
They have transitioned  from a time of  supply and deliverability                                                               
shortages to signing a contract  with Hilcorp that takes them out                                                               
through 2023. However,  that 2023 date would be  just outside the                                                               
range of  short-term planning.  This contract  is now  before the                                                               
Regulatory Commission of Alaska (RCA) for approval.                                                                             
3:37:54 PM                                                                                                                    
Enstar  has fairly  good  visibility for  gas  needs out  through                                                               
2021,  Mr. Green  said. With  continued activity  by Hilcorp  and                                                               
Furie along  with hopeful  growth and  added stability  from Cook                                                               
Inlet Energy and AIX, and the  new players - BlueCrest Energy and                                                               
others -  he is  optimistic that  he can  see the  supply horizon                                                               
moving  out into  the  2025s.  But that  hinges  on fostering  an                                                               
environment that keeps both existing and new producers engaged.                                                                 
MR. GREEN said  he feels strongly that the utilities  in the Cook                                                               
Inlet  have a  very large  responsibility for  providing reliable                                                               
gas,  and Enstar  has  designed its  portfolio  to balance  their                                                               
number-one priority of  safe, reliable gas service  with the need                                                               
to foster  the long-term viability  of the Inlet. Enstar  has put                                                               
their support  behind Furie's development  of the  Kitchen Lights                                                               
Unit  and signed  a three-year  contract  with them  that is  now                                                               
before  the   RCA.  This   is  a   core  underpinning   to  their                                                               
development.  Enstar has  left  about 10  percent  of its  supply                                                               
portfolio open for other producers to be able to come in.                                                                       
He said that  since 2012, the state has provided  huge support to                                                               
the  viability  of Cook  Inlet  gas  supply  and that  Enstar  is                                                               
conscious of  the state's budget  crisis. They would love  to see                                                               
the  state continue  to encourage  this  marketplace in  whatever                                                               
form it can to keep it an attractive investment for producers.                                                                  
MR. GREEN said finally, Cook Inlet  is in a good place right now,                                                               
but they have had  the advantage of two very warm  years in a row                                                               
and 2016  looks like another.  If Alaskans had  experienced three                                                               
cold  years in  a row,  the  current facilities  might have  been                                                               
stretched. Today  there is  only one well  in the  Kitchen Lights                                                               
Unit and  there are no gas  productions wells in the  Cosmo Unit,                                                               
as BlueCrest is purely focused on  oil. Cook Inlet has four large                                                               
fields, which are aging every year.  With cold weather or even if                                                               
one of the  existing platforms or fields had an  issue, it has no                                                               
large  contingency  of  backup alternatives.  As  this  committee                                                               
knows, Mr.  Green said, Alaska has  no interties to the  Lower 48                                                               
or Canada;  it is 100-percent  dependent on this  small, illiquid                                                               
market to keep half of the state's population warm.                                                                             
3:41:12 PM                                                                                                                    
MOIRA SMITH,  Vice President and General  Counsel, Enstar Natural                                                               
Gas  Company,  Anchorage, Alaska,  said  slide  3 was  an  actual                                                               
representation of  daily supply/demand  in each  day in  2014 and                                                               
2015 and  illustrates why Enstar  is a complicated  customer. She                                                               
noted the extreme daily variability and  how their job is to have                                                               
the gas in  the pipeline to meet the customers'  demand when they                                                               
turn the thermostats up or down in winter and summer.                                                                           
MS.  SMITH   said  they  have  contracts   with  AIX  (succeeding                                                               
Buccaneer's  bankruptcy), with  Cook  Inlet  Energy, with  Anchor                                                               
Point Energy (which  sold its assets to Cook  Inlet Energy), with                                                               
Hilcorp  and  ConocoPhillips.  All of  those  contracts  supplied                                                               
their customers in each of the days in 2014/15.                                                                                 
She also  noted how  injections from the  Cook Inlet  Natural Gas                                                               
Storage  Alaska  (CINGSA)  plays  a  critical  role  in  Enstar's                                                               
ability to  meet its  customers' needs on  a day-to-day  basis by                                                               
allowing them to inject gas in the summer time.                                                                                 
CHAIR GIESSEL asked if CINGSA is owned by Enstar.                                                                               
MS. SMITH  replied that Enstar's  parent company, SEMCO,  owns 65                                                               
percent of  CINGSA, along with  First Alaskan Cook  Inlet Region,                                                               
Incorporated, and  a subsidiary  of Berkshire Hathaway.  She said                                                               
the  top   of  the   chart  reflects   the  maximum   daily  peak                                                               
deliverability Enstar requires from  the marketplace in the event                                                               
of a super-cold day.                                                                                                            
3:44:03 PM                                                                                                                    
This  event comes  along  every once  in a  decade  and has  only                                                               
happened  four  times in  Enstar's  history,  but when  that  day                                                               
comes, Enstar's  obligation is  to ensure that  the gas  is there                                                               
for its customers, Ms. Smith said.                                                                                              
Slide 4 is a further  illustration of the seasonality of Enstar's                                                               
demand on  an average day in  each of the months  in 2019 through                                                               
2021. She noted  that the dark blue lines  represent firm volumes                                                               
Enstar will  take under the  Hilcorp contract.  Optional volumes,                                                               
represented by light  blue, are stacked on top and  are also from                                                               
the Hilcorp  contract. The dark  green are the firm  volumes take                                                               
from the Furie contract and  then light green, which are optional                                                               
volumes from Furie.                                                                                                             
MS. SMITH  said Enstar worked very  hard in their new  gas supply                                                               
portfolio  to ensure  that they  not  only have  their base  load                                                               
contracts in place, but options for  more volumes. So, on any day                                                               
they can  choose to  withdraw from CINGSA  instead of  drawing on                                                               
the firm  volumes. This  allows the  flexibility to  manage their                                                               
storage volume  and ensure  they have  sufficient storage  to get                                                               
them  through each  winter, but  at the  same time  buy from  the                                                               
market as needed. The expected  daily injections from CINGSA were                                                               
represented in orange on the chart.                                                                                             
3:45:46 PM                                                                                                                    
She said slide  5 illustrates what Enstar was  thinking when they                                                               
sat down  in 2014 to issue  their request for proposal  (RFP) for                                                               
supply contracts  through 2023.  Enstar's gas portfolio  for 2016                                                               
and  2017 consisted  of relatively  small contracts,  and because                                                               
they knew  that every gas  supply contract would expire  in 2018,                                                               
in late 2014,  they sent out an  RFP to all comers  in Cook Inlet                                                               
who  were either  actually producing  gas, had  publically stated                                                               
their intention  to produce gas, or  even were in the  process of                                                               
doing seismic  work or exploring for  oil, to try to  ensure that                                                               
anyone who might have gas available was able to respond.                                                                        
Then, Ms. Smith said, Enstar  engaged in intensive and protracted                                                               
negotiations with  these entities  throughout 2015/16,  the first                                                               
priority  being  to  secure  an  anchor  contract  at  reasonable                                                               
prices, which  would form  the foundation for  gas supply  in the                                                               
post-2018  world.  These  negotiations  took over  one  year  and                                                               
resulted in APL-14, the new  contract with Hilcorp that was filed                                                               
with the RCA in February.                                                                                                       
She  explained  that  APL-14  was   signed  on  December  23  and                                                               
represents approximately  70 percent or  110 Bcf of  Enstar's gas                                                               
supply needs  from 2018  through 2023. It  will supply  around 22                                                               
Bcf/year. The  contract has optional volumes,  which allow Enstar                                                               
a great degree  of flexibility to manage  the weather variability                                                               
they deal with  not only on a  daily basis but also  on an annual                                                               
Another key element of this  contract is its reasonable price. In                                                               
2013, the  State of Alaska  entered into a consent  decree, which                                                               
resolved  an anti-trust  investigation  and set  price caps  that                                                               
escalate  at  4 percent  annually.  The  weighted average  annual                                                               
price under APL-12, which is  Enstar's contract with Hilcorp that                                                               
was based on the consent  decree prices, during its last contract                                                               
year will be $8.33 mcf.  By contrast, the weighted average annual                                                               
price per firm delivery during  the first contract year of APL-14                                                               
will be $7.56 mcf, almost a 10-percent decrease.                                                                                
3:48:26 PM                                                                                                                    
SENATOR STEDMAN  asked if a  conversion for a btu  equivalency to                                                               
oil was available.                                                                                                              
MS. SMITH  said yes  and that  she would follow  up on  that. She                                                               
noted  that  importantly,  this  contract  doesn't  meet  all  of                                                               
Enstar's  gas  supply requirements  and  as  of December  23,  30                                                               
percent of their  portfolio was left open for  other producers to                                                               
fill. As a  public utility, Enstar values  safety and reliability                                                               
above all else,  but they also understand that in  the Cook Inlet                                                               
market they have  to have a diversified  portfolio. This contract                                                               
not only diversifies  supplier risk, but it also  helps to foster                                                               
investment  and  drilling,  which  are good  for  the  long  term                                                               
stability of Cook Inlet supply.                                                                                                 
3:49:13 PM                                                                                                                    
SENATOR WIELECHOWSKI joined the committee.                                                                                      
MS. SMITH  said that Enstar  also entered into a  second contract                                                               
with Furie, which begins at the  same time as APL-14 and goes for                                                               
three years.  It will  supply 20 percent  of Enstar's  annual gas                                                               
supply needs, and like the  Hilcorp contract, it offers both firm                                                               
and optional volumes.  Both contracts are pending  before the RCA                                                               
for  approval. These  two  contracts ensure  that  Enstar has  90                                                               
percent  of its  needs met  through  2021. To  ensure the  entire                                                               
market had yet another opportunity  to participate in selling gas                                                               
to  them, Enstar  sent another  RFP to  producers at  the end  of                                                               
February to recruit participants for  the remaining 10 percent of                                                               
their open portfolio starting in 2018.                                                                                          
3:50:11 PM                                                                                                                    
MS.  SMITH  said   they  believe  that  the   Hilcorp  and  Furie                                                               
contracts, if approved, represent a  huge measure of stability in                                                               
the Cook Inlet gas market. They  will be the most significant gas                                                               
contracts  entered into  in 15  years, laying  the foundation  of                                                               
Enstar's gas supply  well into the next decade.  Given where they                                                               
were just  three years ago,  they consider  this to be  very good                                                               
MR. GREEN added  that they are working in a  very delicate market                                                               
with  a  small number  of  buyers  and  a  very small  number  of                                                               
producers. Enstar has  contracts that meet most of  its needs out                                                               
to 2021  and 2023, but extensions  will have to be  negotiated in                                                               
the next couple of years. It  is important to all of Southcentral                                                               
Alaska  to have  a capable  producer marketplace  to be  there to                                                               
provide  the  gas and  the  deliverability  that their  customers                                                               
3:51:17 PM                                                                                                                    
SENATOR  COSTELLO said  over the  state's history,  gas contracts                                                               
have spanned  decades and  asked him to  explain how  things have                                                               
changed with the shorter contracts.                                                                                             
MR.  GREEN  replied  that  a   few  decades  ago,  from  Enstar's                                                               
perspective, the utility  was in "the place that  a utility wants                                                               
to  be."  They  were  a  tiny  percentage  of  what  the  overall                                                               
marketplace  was  producing  and buying,  and  their  significant                                                               
seasonal  needs were  easily  absorbed by  the  large assets  and                                                               
large production that  was occurring with the big  players in the                                                               
marketplace.  They  were  almost   inconsequential  to  the  load                                                               
challenges  that were  going on.  With  that, opportunities  were                                                               
available for  very long term  contracts. They were  also sitting                                                               
with  four very  large  reservoirs of  significant reserves  that                                                               
were easily  developable, especially  along with the  large wells                                                               
coming off of both Agrium and the LNG export facility.                                                                          
Today, Agrium  is closed and only  a couple of loads  of LNG went                                                               
out in  the last couple of  years. He was surprised  when LNG hit                                                               
the  high $8-range  and then  went  down to  under $5,  recently.                                                               
Enstar  is now  the largest  buyer  in the  marketplace, and  its                                                               
variability requirements  make it a  challenge to be  there. It's                                                               
tough for producers  to commit to make their  assets available to                                                               
hit  the peaks  for  a 10,  15, or  20-year  period, because  the                                                               
production Enstar  actually pays  them for is  significantly less                                                               
than that. He  said it makes longer term contracts  a little more                                                               
difficult and  Enstar is very  happy with the  five-year contract                                                               
they have in place, because  it is significantly longer term than                                                               
what they  could see  back in  2012. This  contract is  showing a                                                               
measure  of  stability,  and  a  20-year  commitment  just  isn't                                                               
available right now.                                                                                                            
3:54:27 PM                                                                                                                    
BOB  PICKETT, Chairman,  Regulatory Commission  of Alaska  (RCA),                                                               
Anchorage, Alaska,  said he  had been  a commissioner  since 2008                                                               
and  that the  RCA  is  involved in  a  number  of very  critical                                                               
proceedings  regarding  Cook Inlet  gas.  They  have the  Hilcorp                                                               
purchase agreement  with extension  options before them,  a five-                                                               
year  agreement  that  covers   106  Bcf/gas,  and  a  three-year                                                               
Hilcorp/Enstar contract  with extension options  of approximately                                                               
19 Bcf.  In a  little over a  week, the RCA  will have  a hearing                                                               
concerning  Municipal  Light  and   Power's  (ML&P)  and  Chugach                                                               
Electric's proposed purchase of  ConocoPhillips's interest in the                                                               
Beluga River  Unit, so he would  not be able to  comment on those                                                               
He said the RCA  does not have a position on  the specifics of SB
130,  but it's  fair to  say,  that the  commission realizes  the                                                               
positive role the  tax credits have played in the  Cook Inlet gas                                                               
market  over the  last  few  years. A  couple  of  years ago  the                                                               
conditions  were much  different and  conditions in  2009/10 were                                                               
much worse.                                                                                                                     
3:56:56 PM                                                                                                                    
The RCA  absolutely does  not regulate  the producers  of natural                                                               
gas in  Cook Inlet, Mr.  Pickett said,  nor do they  regulate the                                                               
well head  price of  natural gas. However,  they do  evaluate gas                                                               
sale agreements between  the utilities and the  producers. In the                                                               
standard  review they  consider whether  the utility  acted in  a                                                               
prudent manner,  whether the  terms of  the gas  supply agreement                                                               
are  reasonable,  whether  the  process to  secure  offerings  to                                                               
provide gas to the various  utilities was reasonable, and whether                                                               
the gas  supply agreement assures reliable  and reasonably-priced                                                               
utility service.                                                                                                                
A big  contention in Cook Inlet  historically is that it  has not                                                               
been an open and transparent  natural gas market, particularly in                                                               
2001-2009. In  2001, the  RCA approved what  was termed  a "Henry                                                               
Hub  Order," which  included a  variety of  pricing proxies  that                                                               
were  considered by  the utilities,  the producers,  the attorney                                                               
general, and the RCA. But from 2001  to 2009, not a single one of                                                               
those  pricing proxies  resulted  in an  RCA-approved gas  supply                                                               
agreement that delivered gas to  utility customers. That led to a                                                               
bit of a  marketplace issue that was reflected  in investment and                                                               
the number of  wells being drilled, and ultimately,  and the exit                                                               
from  the  marketplace  of  Marathon  and  Union.  In  2010,  the                                                               
utilities were  concerned about where  they would get  their gas,                                                               
and in  2010 Enstar,  Chugach Electric  and ML&P  contracted with                                                               
PetroTechnical Resources  of Alaska for a  study. The conclusions                                                               
at  that  time were  quite  alarming.  In part,  the  legislature                                                               
responded  by giving  direction to  the commission  as to  how to                                                               
evaluate  gas supply  agreements  and modified  a  section of  AS                                                               
42.05.141  dealing with  the  general powers  and  duties of  the                                                               
commission adding section (d) as follows:                                                                                       
3:59:51 PM                                                                                                                    
     Section (d) when considering whether the approval of a                                                                     
     rate or a gas supply contract proposed by a utility to                                                                     
     provide  a  reliable supply  of  gas  for a  reasonable                                                                    
     prices in  the public interest, the  commissioner shall                                                                    
     (1)  recognize  the  public   benefits  of  allowing  a                                                                    
     utility to negotiate  different pricing mechanisms with                                                                    
     different gas  suppliers and to maintain  a diversified                                                                    
     portfolio of gas supply  contracts to protect customers                                                                    
     from the risks of  inadequate supply or excessive costs                                                                    
     that may  arise from the single  pricing mechanism; and                                                                    
     (2),  consider   whether  a  utility  could   meet  its                                                                    
     responsibility  to the  public in  a timely  manner and                                                                    
     without  undue risk  to the  public  if the  commission                                                                    
     fails  to  approve a  rate  or  a gas  supply  contract                                                                    
     proposed by the utility.                                                                                                   
MR. PICKETT said this general  guidance has been helpful over the                                                               
past  six  years and  a  number  of  gas supply  agreements  were                                                               
approved within  that timeframe with  a great variety  of pricing                                                               
and  peaking   mechanisms,  as  evidenced  by   the  most  recent                                                               
contracts   before  them.   He   commended   the  utilities   for                                                               
recognizing the  importance of leaving  a slice of  business open                                                               
for the smaller  producers to become part of the  solution to the                                                               
needs picture.                                                                                                                  
He shared Mr. Green's concerns about  where they will be in 2023,                                                               
because it will  take significant investment for  gas to continue                                                               
being produced in Cook Inlet.                                                                                                   
SENATOR STOLTZE asked what some  of the triggers are that concern                                                               
him  as  an  advocate  for consumers  and  what  cautions  should                                                               
legislators consider on a policy level.                                                                                         
MR. PICKETT answered  that one of the most important  things on a                                                               
policy level  is to make  decisions that encourage  stability and                                                               
movement towards  a more  competitive gas  market in  Cook Inlet.                                                               
One of  the things  that has  helped the  Cook Inlet  natural gas                                                               
market is the  rationalization of the pipeline  system, which was                                                               
very  fragmented, Balkanized  system.  That will  make it  easier                                                               
over time  for smaller  producers to  access the  pipeline system                                                               
and  to  know  what the  rules  of  the  road  are and  what  the                                                               
aggregate tariff is on that.                                                                                                    
It  would be  nice to  have  more competition,  too, Mr.  Pickett                                                               
said, but  the RCA  has to play  the hand that  it is  dealt. The                                                               
legislature has  strongly cautioned the commission  to not reject                                                               
contracts  on the  belief  that something  better  may come  when                                                               
there actually is  nothing better in the timeframe  for which the                                                               
contracts are  being proposed. It is  a very tough thing  to say,                                                               
because at  the end of  the day it is  the ratepayers who  end up                                                               
MR. PICKETT also  said he would be cautious with  the tax credits                                                               
and that  the RCA  had not taken  a position on  SB 130.  But the                                                               
existing investment  decisions that have  been made in  the Inlet                                                               
are based  on the fact that  they can get utility  contracts they                                                               
can count  of for  some reasonable extended  period of  time. The                                                               
credits paid a role in those investment decisions.                                                                              
SENATOR STEDMAN  asked if  he knew the  Btu crossover  is between                                                               
natural gas  and oil, so they  could have an idea  of a benchmark                                                               
in the price of the energy source.                                                                                              
MR. PICKETT  responded that  he didn't  know off  the top  of his                                                               
head, but he would get that information in the next day.                                                                        
CHAIR GIESSEL  thanked Mr.  Pickett for taking  the time  to talk                                                               
with  the  committee today  and  invited  the next  presenter  to                                                               
4:07:22 PM                                                                                                                    
TONY  IZZO,  General   Manager,  Matanuska  Electric  Association                                                               
(MEA), Palmer, Alaska,  said he had been in  the utility industry                                                               
for 30  years and was with  Enstar Natural Gas from  1999 through                                                               
2007 and was president for a period of time.                                                                                    
4:08:46 PM                                                                                                                    
His  PowerPoint  presentation  was  labelled  "MEA,  Natural  Gas                                                               
Supply,  Senate Resources  Committee,  April 7,  2016." Mr.  Izzo                                                               
said MEA  is the oldest electric  co-op in the Railbelt  and will                                                               
celebrate its  75th anniversary this  year. They are  now serving                                                               
the second largest population center  in the State of Alaska with                                                               
over 62,000 customers, a service  area the size of West Virginia.                                                               
Their  generation portfolio  is  90 percent  gas  and 10  percent                                                               
He said  the last two  bullets provide some perspective  in terms                                                               
of how  much gas MEA buys.  It is somewhat unfortunate,  based on                                                               
his experience,  that MEA is the  third largest gas buyer  in the                                                               
Cook  Inlet today.  It  is a  reflection of  the  fact that  even                                                               
Enstar  was kind  of background  noise in  comparison to  the two                                                               
large  industrial  users, the  Kenai  LNG  plant and  the  Agrium                                                               
facility.  At 6  to 6.5  Bcf,  for MEA  to be  the third  largest                                                               
electric  utility is  significant. Their  annual cost  is in  the                                                               
$45-to-$46 million range, not  including the transportation. This                                                               
is  a significant  number  for  a utility  like  MEA, because  it                                                               
represents 40 percent of the total  cost of a kilowatt hour for a                                                               
MR. IZZO said he would answer three questions (slide 3):                                                                        
1. What is MEA's gas supply forecast?                                                                                           
2. What has changed in the Inlet over the past five years?                                                                      
3.  How have  tax  credit  programs in  Cook  Inlet affected  gas                                                               
4:11:11 PM                                                                                                                    
He said MEA is coming off a  period when it was very difficult to                                                               
contract for up  to two years of supply (slide  4). They have all                                                               
the supply they need through March  31, 2018 (green), and that is                                                               
the year the unmet requirements (red) start, going out to 2026.                                                                 
MR. IZZO  said MEA  negotiated a supply  contract that  has board                                                               
approval, and they  are preparing a filing for  RCA approval that                                                               
will fill up the red through 2022 and the first quarter of 2023.                                                                
He said  slide 5 addresses what  has changed in the  last 5 years                                                               
in Cook Inlet. Five years ago,  gas supply was available in small                                                               
quantities and  for short terms.  He was  at Enstar in  2001 when                                                               
they signed  an agreement that was  linked to the Henry  Hub that                                                               
was  capped at  450 Bcf.  This large  agreement was  linked to  a                                                               
three-year trailing average  of the Lower 48  prices. In response                                                               
to  some concerns,  in  2005, they  filed  their next  agreement,                                                               
which was  a 12-month  trailing average of  Lower 48  prices that                                                               
would  have   filled  up  all   of  the  gas   utilities'  needed                                                               
requirements  through 2016.  That  contract was  not approved  in                                                               
2005/6. If those were in place  today, prices in the Lower 48 are                                                               
in the $2 range and  South-central utilities are currently paying                                                               
in the $7.42 range, which  is the consent decree price negotiated                                                               
by the Attorney General.                                                                                                        
4:14:59 PM                                                                                                                    
MR.  IZZO  said the  reason  he  raises  the  issue is  when  the                                                               
contract  was  rejected,  Marathon and  others  slowly  decreased                                                               
investment and interest in the  region, eventually devolving to a                                                               
point where they  left the Inlet entirely  once their contractual                                                               
obligations were  either met and/or  sold to others.  That's what                                                               
took them to  the point of five years ago,  but it's an important                                                               
point, because he  would hate to repeat  history. Utilities could                                                               
not support  things like extended LNG  export, industrial growth,                                                               
or exporting gas to  other parts of the state. It  was not a sign                                                               
of success;  it was  a sign  of dysfunction.  A market  is needed                                                               
that is growing, expanding, and attracting investment.                                                                          
The most significant  positive change in the last  five years has                                                               
been  the Hilcorp  investment and  the consent  decree. The  best                                                               
price he could get four or five  years ago was $10 for 20 percent                                                               
of  MEA's supply.  He also  joined  with the  other utilities  in                                                               
looking  for LNG  imports.  However,  another significant  change                                                               
brought multiple  new players  into the  Inlet who  have invested                                                               
significant capital, one of them being Hilcorp.                                                                                 
MR.  IZZO  said  all  of  the gas  MEA  has  under  the  existing                                                               
contracts are through  2018, and maybe beyond. They  are from the                                                               
same  three or  four mature  fields that  were discovered  in the                                                               
late 50s and 60s. It's  Hilcorp's core completeness in increasing                                                               
production from mature aging fields  combined with the investment                                                               
that has made the significant change in Cook Inlet.                                                                             
MR. IZZO  said all can  agree that what  has not changed  is that                                                               
they know where gas is in  Cook Inlet: the Cosmopolitan Field off                                                               
of  Anchor Point  and the  Kitchen Lights  Unit, which  Furie has                                                               
begun producing. The concern he has as  a buyer is that he has to                                                               
look at  gas in  terms of  if it's  behind pipe  and commercially                                                               
available for him to get deliverability.                                                                                        
He said  that slide 6  illustrated the  impact of the  tax credit                                                               
program  on  Cook Inlet.  The  good  news  is that  multiple  new                                                               
investors are available for gas  supply discussions, the lives of                                                               
mature  fields have  been extended,  and  some additional  proven                                                               
reserves have been  put behind pipe. Another bit of  good news is                                                               
energy security, but  that is temporary. Part of the  bad news in                                                               
terms of  the impact of the  tax credits is that  significant new                                                               
reserves  are  not   behind  pipe  and  doing   so  will  require                                                               
significant  current and  future investment,  and very  long lead                                                               
times. The  impact of the  tax credits  has brought on  access to                                                               
gas that  has been behind pipe  for a long time  and maybe wasn't                                                               
producible or  economic to produce  and simply required a  lot of                                                               
4:20:42 PM                                                                                                                    
MEA is  an island  in the sense  of energy  infrastructure (slide                                                               
7). They  are the only  climate with  both seismicity and  a sub-                                                               
Arctic  climate,  which  means curtailing  rolling  blackouts  to                                                               
preserve supply,  which most Lower 48  markets find unacceptable.                                                               
Finally, he  summarized that uncertainty  is the enemy  of energy                                                               
(security).  Exploration and  production  risks  are not  typical                                                               
core competencies of a regulated utility.                                                                                       
MR. IZZO  stated that  if he  finds himself  in a  situation like                                                               
four or  five years ago,  where it's  going to take  $4-5 million                                                               
for  exploration  and production  and  a  pipeline connection  to                                                               
maybe  get gas  into  an area  where he  has  no core  competence                                                               
versus importing LNG for a price  that is a little bit higher, he                                                               
believes  -  as  he  did  prior to  the  consent  decree  -  that                                                               
importation would be in the best interest of his customers.                                                                     
He said  that bringing new  gas reserves  to the point  that they                                                               
can  be  prudently  purchased by  a  regulated  utility  requires                                                               
extensive investment  and many  years. Because  he spent  so much                                                               
time in  the private sector  part of this  investor-owned utility                                                               
business, he  believes in  metrics. If a  program is  designed to                                                               
deliver a result,  there should be some key  metrics to determine                                                               
what the  results are. In terms  of Cook Inlet and  the impact of                                                               
the  tax credits  the real  metric is  investment, and  when that                                                               
went  away in  2005/6, there  were rolling  blackouts and  energy                                                               
curtailment  drills.  The  Cook  Inlet Recovery  Act  and  CINGSA                                                               
turned  things around.  He doesn't  want investment  to go  away,                                                               
because  getting it  back will  take a  long lead  time and  be a                                                               
capital intensive activity.                                                                                                     
4:23:49 PM                                                                                                                    
SENATOR  STOLTZE asked  Mr.  Izzo for  a  narrative about  cooler                                                               
winters  and the  dynamics that  will  lead to  MEA's ability  to                                                               
provide power if  there is a shortage. Is  there a prioritization                                                               
of how the utilities supply for space heating over electricity?                                                                 
MR.  IZZO answered  that  Mr. Green's  12:1  ratio swing  between                                                               
summer and winter load is  consistent with his experience. He has                                                               
seen  an extreme  case of  almost 19:1.  For an  electric utility                                                               
like  MEA   that  is  94   percent  residential   customers,  the                                                               
difference in  demand between summer and  winter follows daylight                                                               
almost more than weather. For that they see a 2:1 ratio.                                                                        
He  explained  that prioritization  is  subject  to a  number  of                                                               
factors,  but deliverability  is  king. That  is  the measure  of                                                               
being  able to  get  the volume  of  gas at  the  moment that  is                                                               
needed.  Sometimes  it's  based  on  production  at  a  well,  or                                                               
compressor capacity,  or pipeline  capacity. It  can be  based on                                                               
where the demand  is located. Most jurisdictions in  the Lower 48                                                               
use a  variety of  measures. One  thing is for  sure, if  the gas                                                               
goes  out,  there is  a  much  longer  process of  shutting  off,                                                               
repairing,  purging,  reintroducing  gas, and  unlocking  meters.                                                               
Therefore,  MEA would  curtail  power, because  it  is the  right                                                               
thing to  do. He said  MEA is not a  signatory to what  is called                                                               
the  2009   Gas  Emergency  Letter,  an   agreement  amongst  the                                                               
utilities that rather than let the  gas system go out, they would                                                               
attempt to reduce  demand through a process  of rolling blackouts                                                               
a couple of hours at a time,  and moving it around the system. If                                                               
that were to occur, his  members and ratepayers would become much                                                               
more concerned  about what  plans are in  place to  address that.                                                               
The Lower  48 gas utilities  have access to imports  from Algeria                                                               
to Massachusetts,  and it can be  trucked and stored for  when it                                                               
is needed on those coldest days.                                                                                                
4:29:04 PM                                                                                                                    
MEA is  designed differently for  a variety of reasons,  Mr. Izzo                                                               
said, and they probably wouldn't build  a second one like it, but                                                               
their engines are dual fuel and  are run at an efficient range of                                                               
RPMs.  It's ultimate  efficiency, unlike  others, does  not occur                                                               
when  the plant  is running  full  throttle. They  store about  1                                                               
million  gallons of  diesel, which  would  provide enough  backup                                                               
power for  approximately 4.5 days  of peaking days and  to offset                                                               
any rolling blackouts. And if  it's not too presumptuous, because                                                               
it  is something  they purchase,  he  stated that  one needs  7.3                                                               
gallons of diesel  for 1 million Btus to equate  to 1 Mcf/gas. He                                                               
is buying diesel right now in  the range of $1.38, which means he                                                               
is  paying  about the  equivalent  of  $10.07/8  per Mcf  for  an                                                               
equivalent Mcf of gas, which is costing him $7.42.                                                                              
SENATOR  STOLTZE said  up  until sometime  in  2015, he  attended                                                               
regular  meetings of  the Energy  Security Committee  led by  the                                                               
Municipality of  Anchorage and MatSu  Borough and asked  if those                                                               
types of meetings are still being held or if the crisis is over.                                                                
MR. IZZO  answered that he was  chair of the mayor's  Energy Task                                                               
Force and  always appreciated seeing Senator  Stoltze there. With                                                               
the change  in administration, that  group was able to  shift its                                                               
initial focus away  from the immediate crisis,  partly because of                                                               
having  the  availability  of supply,  and  the  Municipality  of                                                               
Anchorage   utilities   continue   to   meet   in   unprecedented                                                               
cooperation for  contingency planning. He feels  very comfortable                                                               
because all of  their generation units are linked;  each unit can                                                               
see what the  other is doing. The daily number  of transactions -                                                               
buying and  selling the  most efficient energy  back and  forth -                                                               
has increased from zero  or one a year ago to  five and seven per                                                               
day.  These transactions  are purely  based on  win-win economics                                                               
between the  electric utilities. If that  coordination continues,                                                               
he is  confident in  their ability along  with Enstar  to address                                                               
any type of emergency.                                                                                                          
SENATOR STOLTZE said he appreciated the information.                                                                            
4:32:26 PM                                                                                                                    
SENATOR  STEDMAN  commented  that  energy  supply  is  clearly  a                                                               
function of  price; when the price  gets low the supply  dries up                                                               
and vice versa. If the gas  into the Railbelt is somewhere around                                                               
$1.00, the  so-called cheap  hydro energy  in Southeast  is still                                                               
about $3.50/oil. He remarked "if  $3.50/oil is cheap, $1/oil must                                                               
be free!"  He said that  places like  Iceland have a  flat energy                                                               
price  around  their  whole  island   to  levelize  the  economic                                                               
advantages or disadvantages that each section has.                                                                              
CHAIR GIESSEL thanked Mr. Izzo for joining the committee today.                                                                 
^Continuation  of Additional  Modeling and  Scenario Analysis  by                                                               
4:33:55 PM                                                                                                                    
CHAIR   GIESSEL  invited   the   Department   of  Revenue   (DOR)                                                               
representatives to continue their  presentation from the previous                                                               
meeting  on oil  and gas  tax credit  reform in  SB 130  labelled                                                               
"Additional  Modeling  and  Scenario Analysis."  She  noted  that                                                               
legislators  have a  "quick reference"  summary  of the  statutes                                                               
addressing the credits.                                                                                                         
4:34:12 PM                                                                                                                    
RANDY  HOFFBECK,  Commissioner,   Department  of  Revenue  (DOR),                                                               
introduced himself.                                                                                                             
4:35:13 PM                                                                                                                    
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
introduced himself  and related  that he had  added a  column for                                                               
North Slope  production beginning in FY09  and forecasted forward                                                               
through FY25  onto slide 4,  which made it slightly  more complex                                                               
but maybe  more understandable. Because they  had an "alternative                                                               
reality" that  was leading to FY16,  they then said, if  they are                                                               
going to really  forecast, they have to reset the  present day to                                                               
zero and look at the  issues of stacking-up, carried-forward, and                                                               
net operating loss  (NOL) credits from there. The  new orange row                                                               
is FY16  as it  is and what  the future will  look like  based on                                                               
certain assumptions.                                                                                                            
4:36:09 PM                                                                                                                    
MR. ALPER said  yesterday they talked about the  history and what                                                               
would have happened had they  only appropriated money per the cap                                                               
through the guideline language in  AS 43.55.028. The general idea                                                               
was  to endow  a fund  and build  up a  balance approaching  $600                                                               
million, spend that down in FY15,  and then be right around where                                                               
they are in FY16, the  difference being perhaps a different level                                                               
of expectation  and assumption  as to the  nature of  the state's                                                               
role in  funding ongoing tax  credits. He had updated  this slide                                                               
with information from  the final version of  the spring forecast,                                                               
which the commissioner  released at about 2:00  today. It doesn't                                                               
make a  whole lot of  difference, just some small  differences in                                                               
revenue assumptions.                                                                                                            
Looking down  into the  FY17 row  at the end  of FY16,  no matter                                                               
what  is done,  the credit  account  will be  zero. The  governor                                                               
vetoed the number at $500 million  last year and $500 million was                                                               
transferred to  the fund.  By the  end of the  year it  will have                                                               
been  spent.  There  will  be roughly  $775  million  of  claimed                                                               
credits in  FY17. Should the  legislature appropriate  either the                                                               
$73 million  that is  in the  current budget  or the  $29 million                                                               
that is  the revised  figure from the  credit cap,  obviously the                                                               
fund would be highly short-funded by over $700 million.                                                                         
4:38:13 PM                                                                                                                    
Continuing  along those  lines,  Mr. Alper  said, the  forecasted                                                               
credit spend  (column known as  "Actual Claimed  Credits") starts                                                               
to stack  up. The appropriated  column is called the  "Credit Cap                                                               
per AS  43.55.028," and the  credits that  are owed by  the state                                                               
start to stack  up going from year to  year. Meanwhile, happening                                                               
almost  in parallel  to this,  is  the idea  of non-cashable  NOL                                                               
credits,  the  credits  earned  by  the  major  producers.  Those                                                               
numbers  have  a  couple  of   small  revisions.  The  department                                                               
switched from an  accrual system to a more  cash-based system. In                                                               
other words,  they are not  going to  count any credits  that are                                                               
earned at  the end of  FY16 until the  end of calendar  year 2016                                                               
(CY16), because they  are NOLs. Because of that, there  is a zero                                                               
in the  FY16 row. The  $618 million NOLs represent  the operating                                                               
loss credit really  for CY16. Those credits will have  to be paid                                                               
some  day  indirectly,  meaning  that   once  the  price  of  oil                                                               
recovers,  the major  producers  will subtract  that number  from                                                               
their production taxes to the state.                                                                                            
When  will that  money be  paid? The  chart indicates  roughly in                                                               
FY21/22, when the  big numbers go down from $600  million to $100                                                               
million. In  those years the  difference is  there will be  a tax                                                               
liability to subtract the NOL credits  from and the taxes will be                                                               
paid in smaller rates as the NOLs are "billed down."                                                                            
MR. ALPER said the  last column on the right is  the sum total of                                                               
both the cashable credits plus  the non-cashable credits that are                                                               
awaiting the return of higher oil  prices. At the end of the day,                                                               
the state would owe $2.8 billion in FY25.                                                                                       
SENATOR WIELECHOWSKI  said it  looks like  the FY17  numbers have                                                               
been revised to the actual  claimed credits of $775 million. Then                                                               
the state receives a production  tax of $59 million, which leaves                                                               
the state paying  out $715.6 million more in tax  credits than it                                                               
is  receiving in  production  taxes.  He asked  if  this math  is                                                               
MR. ALPER answered  yes; so long as he is  just talking about the                                                               
production tax.                                                                                                                 
SENATOR  WIELECHOWSKI  asked if  any  other  jurisdiction in  the                                                               
world pays out more in credits than it receives in taxes.                                                                       
MR. ALPER answered  not to his knowledge, but he  didn't claim to                                                               
have a comprehensive  knowledge of world tax  regimes. Alaska has                                                               
an unusual system and it's an  unusual time given the collapse in                                                               
oil prices.                                                                                                                     
SENATOR STEDMAN said it's a complex  subject, so it's nice to see                                                               
it in  black and white. His  concern was that in  the future, the                                                               
state would have  to pay off its projected  liabilities of around                                                               
$2 billion,  and then it  will be hard  to explain to  public the                                                               
advancing  prices without  advancing  revenue to  the state.  How                                                               
will they deal with that?                                                                                                       
COMMISSIONER  HOFFBECK responded  that the  Revenue Sources  Book                                                               
projects  revenues  separate   from  expenditures.  The  cashable                                                               
credits  are not  going  to show  up as  a  negative against  the                                                               
revenues. A line item shows them as an expenditure.                                                                             
MR.  ALPER  added for  example,  last  year when  the  department                                                               
anticipated more credits than there  was money appropriated, that                                                               
$200 million  shows up  in this  year's forecast  as part  of the                                                               
$775 million. Should something similar  happen at the end of this                                                               
year when  they are  doing the revenue  forecasting in  the fall,                                                               
that  one-time   carry-over  number  will  roll   into  the  FY18                                                               
forecast.  It is  hard to  forecast  credits more  than one  year                                                               
ahead, he said.                                                                                                                 
4:44:37 PM                                                                                                                    
SENATOR WIELECHOWSKI  went back  to his  same question  about how                                                               
much more the state  is paying out than it is  taking in and said                                                               
it looks like in FY15 the  state paid $628 million in tax credits                                                               
and  brought in  production tax  of $363  million. So,  the state                                                               
lost money  in FY15/16, and  it is projected  to pay out  more in                                                               
production tax credits  than it receives in  production taxes all                                                               
the way out to 2024. Is that correct?                                                                                           
MR. ALPER answered yes; that is the way the chart reads.                                                                        
SENATOR WIELECHOWSKI said then in  2025 the state is projected to                                                               
pay out  $250 million and  to receive $275 million  in production                                                               
taxes,   but  then   when  the   credits   are  applied   against                                                               
liabilities, the  state is  still projected to  have a  loss that                                                               
year. Is he reading that correctly?                                                                                             
MR. ALPER  answered no,  and explained that  the $275  million is                                                               
after  subtracting the  credits against  liabilities. The  reason                                                               
for that  is the column  to the right  of that has  $370 million,                                                               
which is the tax liability based  on the calculation and then the                                                               
$95 million  would come  off of that  in various  credits against                                                               
liabilities, and $275  million would actually be  received by the                                                               
CHAIR GIESSEL asked what percent of decline is being projected.                                                                 
MR. ALPER  answered if  the production is  at 300,000  barrels in                                                               
2025, the difference between 500,000 and 300,000.                                                                               
COMMISSIONER  HOFFBECK  added  that  amounts  to  a  4-5  percent                                                               
decline per year.                                                                                                               
CHAIR GIESSEL asked if he  based the projection on the assumption                                                               
that  companies  that  are  losing money  now  will  continue  to                                                               
invest, and that the state  will have the projected 4-5-6 percent                                                               
decline, when in fact if companies  stop work, the state would be                                                               
looking  at  12-15  percent  per   year  decline  rate.  Has  the                                                               
commissioner  taken  any of  those  "rational  decisions" that  a                                                               
company losing money would make into account?                                                                                   
4:47:27 PM                                                                                                                    
COMMISSIONER HOFFBECK  answered some of that  is already embedded                                                               
in the forecasted  decline. They only project  investment that is                                                               
currently  ongoing or  that is  planned and  sanctioned. Any  new                                                               
investment is  not part of  the forecast.  As for the  15 percent                                                               
decline, he  explained that fields  decline at a  hyperbolic rate                                                               
and kind  of flatten out  as they age.  He didn't know  where the                                                               
field is on that decline curve.                                                                                                 
4:48:24 PM                                                                                                                    
CHAIR GIESSEL said  before SB 21, the state was  experiencing a 6                                                               
percent decline and that was  with significant investment to keep                                                               
that  decline at  only 6  percent. With  the withdrawal  of three                                                               
rigs, which she didn't know  was in his calculation, that decline                                                               
curve will accelerate.                                                                                                          
MR.  ALPER  responded  that the  spring  forecast  does  somewhat                                                               
account for  the withdrawal of  the three rigs  announcement made                                                               
by the Prudhoe Bay operator earlier this spring.                                                                                
SENATOR COSTELLO  said at some point  with companies experiencing                                                               
net operating losses,  that the amount of revenue  the state will                                                               
get from  royalty will  exceed the production  tax, and  asked if                                                               
that was correct.                                                                                                               
MR. ALPER answered that is currently the case.                                                                                  
SENATOR  COSTELLO  asked  since   companies  are  paying  income,                                                               
royalty, and property  tax in addition to the  production tax, if                                                               
it would  be possible to have  a column showing the  complete tax                                                               
picture of what the state is receiving from the companies.                                                                      
MR.  ALPER answered  yes, and  added  that the  numbers had  been                                                               
"thrown  around" in  the last  couple of  weeks since  the spring                                                               
forecast  and  there had  been  some  controversy over  what  the                                                               
appropriate numbers  are, and  he wanted to  make sure  they have                                                               
the  right ones.  Some attention  has been  paid to  the idea  of                                                               
total unrestricted  general fund  petroleum revenue,  because for                                                               
the first  time that number  is below the credit  forecast. There                                                               
is also  the entirety of  petroleum revenue, which  includes such                                                               
things as the Permanent Fund  deposits from royalty, CBR deposits                                                               
from assessments  and that kind  of thing and his  preference was                                                               
to put both of those additions into columns.                                                                                    
CHAIR GIESSEL  said members have  the document that  was released                                                               
this afternoon on  their desks and revenue coming in  from all of                                                               
those things was on page 14.                                                                                                    
MR. ALPER responded  yes, and added that the  number shouldn't be                                                               
terribly different from  what they had a couple of  weeks ago. He                                                               
just hadn't had time to look at them today.                                                                                     
4:51:27 PM                                                                                                                    
SENATOR STEDMAN said  in 2012 under Alaska's  Clear and Equitable                                                               
Share (ACES),  SB 21 wasn't  even a concept; testimony  in Senate                                                               
Finance during  that time stated  production was  approaching the                                                               
2-3  percent decline  rate,  and there  was  testimony in  Senate                                                               
Finance  about  the parabolic  curve.  No  testimony was  brought                                                               
forward to the  committee at that time about getting  off of that                                                               
parabolic curve.  The geology  of the basin  can't be  changed by                                                               
changing  tax  codes, he  said.  This  parabolic curve  has  been                                                               
studied for  decades and it can  be brought forward in  time, but                                                               
no more oil can be created  in the ground. As policy has changed,                                                               
production  has increased  in the  near  years, but  the rate  of                                                               
decline also increased, and that has  become a problem with a lot                                                               
of sovereigns around  the planet. That 2-3  percent decline curve                                                               
was forecasted in  testimony in Senate Finance in  2012 and maybe                                                               
2011, because  they spent  two years having  hearings on  ACES as                                                               
they tried to restructure it.                                                                                                   
SENATOR  WIELECHOWSKI  recalled  the many  advertisements  saying                                                               
that the  "drop was stopped"  after passing  SB 21. In  fact, the                                                               
bill was  labelled the "More  Alaska Production  Act." Production                                                               
in  the  last  year  of  ACES  (2012)  was  579,000  barrels  and                                                               
production is  forecast to be  302,100 barrels in 2025.  He asked                                                               
if it  is fair to  say under the  More Alaska Production  Act the                                                               
drop was neither stopped nor production added.                                                                                  
COMMISSIONER HOFFBECK  responded that  the decline  has continued                                                               
but it is  not justifiable to say production has  not been added.                                                               
There has been  added production, but not enough  to totally stop                                                               
the decline.                                                                                                                    
CHAIR  GIESSEL asked  if he  was comfortable  with the  committee                                                               
checking the  Division of Oil  and Gas on that  statement related                                                               
to production.                                                                                                                  
COMMISSIONER  HOFFBECK  answered  absolutely,  but  he  was  just                                                               
trying to parse the difference between the two.                                                                                 
SENATOR  WIELECHOWSKI  said  virtually   all  production  is  new                                                               
production  and asked  Commissioner  Hoffbeck if  he would  agree                                                               
that 302,000 barrels  of oil being produced in 2025  is less than                                                               
579,000 barrels  that were produced  in the year before  the More                                                               
Alaska Production Act was passed.                                                                                               
COMMISSIONER HOFFBECK answered yes.                                                                                             
CHAIR GIESSEL asked  Commissioner Hoffbeck how certain  he was of                                                               
the production forecast out to 2024.                                                                                            
COMMISSIONER HOFFBECK  answered that the  forecast uses a  lot of                                                               
conservative assumptions.                                                                                                       
CHAIR  GIESSEL asked  if he  had considered  the Repsol/Armstrong                                                               
field that is potentially coming on line in the next five years.                                                                
COMMISSIONER HOFFBECK responded that it is not in the forecast.                                                                 
SENATOR COSTELLO  asked if he  knows the opportunity cost  to the                                                               
state of capping  the Tax Credit Fund and  not providing cashable                                                               
4:56:27 PM                                                                                                                    
MR.  ALPER answered  that it's  hard  to project  what might  not                                                               
happen.  Later  in  this  presentation   they  show  how  project                                                               
economics  might affect  a particular  project  going forward  or                                                               
not. However,  the opportunity cost  is only a cost  if something                                                               
doesn't happen and that is what becomes very hard to calculate.                                                                 
SENATOR COSTELLO  asked if  he was suggesting  that there  are no                                                               
opportunity costs in some scenarios.                                                                                            
MR. ALPER answered no; he was  just saying that on one hand there                                                               
is  the  opportunity  cost  of spending  money  on  credits  that                                                               
weren't necessary if the project  was going to happen anyway, and                                                               
then a  cost in the  other direction is  when the state  has paid                                                               
money that it is going to get  the same revenue on in the future.                                                               
He was just  saying there are too many  variables to conclusively                                                               
say what will  and will not happen with the  changes. That is why                                                               
they have a deliberative process.                                                                                               
CHAIR  GIESSEL asked  Mr. Alper  if he  feels that  hardening the                                                               
floor will  help or  exacerbate the  carry-forward issue  that is                                                               
illustrated on his chart.                                                                                                       
4:58:12 PM                                                                                                                    
MR. ALPER answered  that hardening the floor was  conceived of as                                                               
an issue last  year when the department  realized significant NOL                                                               
credits were going to be used  against the floor. Other states in                                                               
a gross  tax regime (like  Alaska) actually get their  gross tax,                                                               
and Alaska  might be  getting to  a place where  it might  not be                                                               
getting it.  Now suddenly,  they are seeing  a new  variable: the                                                               
stacking  up  of carry-forward  losses.  To  answer her  question                                                               
directly, no,  hardening the  floor actually  makes it  worse. If                                                               
company X  earns $500  million in  carry-forward losses  and they                                                               
can use  $200 million to  offset their minimum tax  and therefore                                                               
carry forward  $300 million,  the state would  be asking  them to                                                               
carry forward all  $500 million, and therefore the  impact in the                                                               
future when prices go up would  be even more. This larger problem                                                               
of the NOLs is not being addressed in this legislation.                                                                         
4:59:13 PM                                                                                                                    
SENATOR  STEDMAN  commented the  he  thought  he saw  a  marginal                                                               
increase in  production since 2011/12  versus what  was expected,                                                               
but it would be interesting to  measure how much and compare that                                                               
to what was going  to be done anyway. That is  hard to do because                                                               
corporate  politics  are  involved  in  slowing  down  particular                                                               
projects  to get  a benefit  in  the tax  structure. Clearly  the                                                               
numbers  are going  down  and  even if  production  were flat  at                                                               
490,000  or 500,000  barrels it  would  still lead  to the  state                                                               
taking carry forward  OL credits very seriously and  there has to                                                               
be some sort of plan to deal with them.                                                                                         
COMMISSIONER HOFFBECK  responded that in regards  to the forecast                                                               
of production, they need to be  cognizant of the fact that laying                                                               
down the rigs  and those kinds of things are  being driven by the                                                               
oil  price.  The  state  can  do  very  little  with  credits  to                                                               
overwhelm $38  oil. The decisions  being made are  simply because                                                               
companies can't produce with a  profit at $38/oil. It has nothing                                                               
to do with the state's tax policy.                                                                                              
5:01:43 PM                                                                                                                    
SENATOR STEDMAN said  it looks like laying down  rigs will impact                                                               
production at some point, and it  would be nice to get a briefing                                                               
on that just  for general knowledge. You can't lay  down rigs and                                                               
have it  be beneficial for  production; he also  understands that                                                               
getting them  up takes a  while. It looks  like what is  going on                                                               
today will affect  production four or five years out,  and at the                                                               
same time  the state is  trying to deal with  the NOLs -  "And we                                                               
end  up in  the pickle."   Maybe  that can  be mitigated  through                                                               
SENATOR STOLTZE apologized since his  question was not a hardball                                                               
question,  such  as whether  300,000  is  less than  500,000.  He                                                               
apologized further, since he forgot  the question in light of the                                                               
complexity of previous questions.                                                                                               
SENATOR MICCICHE  said the  decline rate  for 15  years following                                                               
FY14  is  an  absolute  flattening for  seven  years,  even  with                                                               
conservativism designed into  the model, and if that  is the most                                                               
they accomplish  in forward tax  policy dealing with some  of the                                                               
credits  and  hardening  the  floor  and  other  options,  it  is                                                               
certainly a better direction than where we are heading.                                                                         
CHAIR GIESSEL pointed to 2025  with 300,000 barrels and said, "We                                                               
will be in a really bad place regardless of what the price is."                                                                 
SENATOR WIELECHOWSKI  clarified he will not  ask anymore hardball                                                               
questions,  and asked  if companies  can  write off  the cost  of                                                               
laying down rigs or are they eligible for tax credits.                                                                          
MR.  ALPER  answered that  he  knows  the department  has  denied                                                               
credits for  rig standby fees  and his expectation is  that those                                                               
sorts of  costs won't be allowed  to be deductible, but  he would                                                               
find out the precise way that is done.                                                                                          
SENATOR STEDMAN said  as long as they were "digging  up old bones                                                               
and throwing  them around the  table," he  would like DOR  to run                                                               
the current tax  structure at $40 relative to  the economic limit                                                               
factor (ELF) and ACES at $40.                                                                                                   
MR.  ALPER replied  that  he  would do  that  and  that ELF  will                                                               
probably  win  at $40  oil.  But  one  thing the  department  has                                                               
stopped doing over the last couple  of years is track and project                                                               
what the  ELF multiplier is  on a field-by-field basis.  So, they                                                               
are left with a little bit of  theory about what the ELF tax rate                                                               
would have  been had  it been  in place all  these years.  To the                                                               
extent  they can  "fake that  a little  bit based  on past  trend                                                               
lines" they should be able to answer his question.                                                                              
5:07:46 PM                                                                                                                    
At ease                                                                                                                         
5:08:16 PM                                                                                                                    
CHAIR  GIESSEL called  the meeting  back to  order and  Mr. Alper                                                               
continued with slide 5.                                                                                                         
MR.  ALPER said  slides 4  and  5 were  both supplemental  slides                                                               
added after  questions after he  had gone through an  analysis of                                                               
the  credit applications  that were  before the  Tax Division  on                                                               
April 2. The  request was made to break them  out into Cook Inlet                                                               
and Middle Earth versus North  Slope, which was done. They worked                                                               
from the  number of  $675 million in  credits, consisting  of the                                                               
so-called  older   NOL  credits  versus  the   older  exploration                                                               
credits.  The big  pile  of credits  from the  end  of last  year                                                               
reverses a little bit of the  trend line for the prior two years,                                                               
which was  a very Cook  Inlet-heavy spend. In 2015,  $335 million                                                               
in credits were  NOLs from North Slope spending  and $217 million                                                               
from Cook Inlet  and Middle Earth, in general;  breaks into about                                                               
a 50/50 split. Companies that  get the drilling credits and can't                                                               
be split  out on  a chart,  because that  would impinge  on their                                                               
confidentiality, because there aren't too many of them.                                                                         
The last minute  exploration credits were tied to  the sunset and                                                               
were particularly  relevant in the  North Slope area,  because it                                                               
had 85  percent credit support for  a limited window of  time (40                                                               
percent  exploration  credits,  stackable  in CY15  with  the  45                                                               
percent NOL).  His sense was  that companies were saying  if they                                                               
were going  to drill an  exploration well  in the next  few years                                                               
they  might  as well  do  it  in  2015,  because the  system  was                                                               
calibrated to  their maximum  benefit. The  few credits  that are                                                               
going  to be  refiled  are  North Slope  heavy,  but the  general                                                               
thrust is  $422 million versus  $253 million. He offered  to keep                                                               
the committee updated  through the year, but that is  the best he                                                               
knew at the moment.                                                                                                             
5:10:56 PM                                                                                                                    
MR. ALPER  said slides  6 and 7  have the meat  and detail  of SB
130. Section 7 is on the topic  of interest rates, not an oil and                                                               
gas specific section, but general  statutes of the DOR describing                                                               
how interest is charged and  how delinquent taxes are dealt with.                                                               
The  historic  interest  rate  was quite  high,  11  percent  and                                                               
compounding in the 70s. SB 21  reduced it from a fixed 11 percent                                                               
to 3 percent above the  federal discount rate. However, there was                                                               
an awkwardness  with SB 21; it  did not have enough  votes in the                                                               
Senate  to pass  an effective  date clause.  That meant  when the                                                               
bill got to  the first House committee, they  needed something of                                                               
a  workaround, and  "applicability  language" was  used. It  said                                                               
production prior to January 1,  2014 is X; prior production after                                                               
January 1, 2014 is Y. The  new interest was in the after section,                                                               
but  meanwhile, even  though the  compounding language  found its                                                               
way  through   the  system  in   all  versions   including  House                                                               
Resources. There  was a technical  error in House  Resources. The                                                               
last committee substitute  (CS) in House Finance  (slide 8) fixed                                                               
that  technical  error, but  added  back  the higher  11  percent                                                               
language  that  was in  the  original  law with  the  compounding                                                               
He explained that  for most big bills after the  work draft CS is                                                               
put on  the table  there is  often a  technical amendment  by the                                                               
chair that cleans up a lot  of the smaller provisions in the bill                                                               
that are brought to the  chair's attention. This amendment was by                                                               
Chairman Austerman and contained  six or eight different changes,                                                               
miner things. But in doing  so, while eliminating the annual rate                                                               
of "11 percent  whichever is greater phrase" it  also deleted the                                                               
"compounded quarterly as  of the last day phrase."  No one caught                                                               
it  and the  bill passed  the House,  was concurred  with in  the                                                               
Senate, and became law, and low  and behold, Alaska no longer had                                                               
compound interest on  any of its taxes for the  first time in 30-                                                               
some years. So,  that is the state  Alaska is in now,  which is a                                                               
simple  interest  calculation  on   all  delinquent  taxes.  This                                                               
quarter,  the number  is 4  percent (1  percent federal  discount                                                               
rate plus 3 percent).                                                                                                           
CHAIR  GIESSEL  asked if  this  interest  rate applies  to  other                                                               
industries as well as oil and gas.                                                                                              
MR.  ALPER answered  that  it  applies to  other  taxes as  well:                                                               
corporate income tax, tobacco, mining, fish, etc. etc.                                                                          
5:14:56 PM                                                                                                                    
He said the  intent of the legislation was to  find middle ground                                                               
(slide  9)  between  the  historic 11  percent  and  the  current                                                               
effective 4  percent. The underlying  idea is that right  now the                                                               
state  is funding  the budget  out of  its savings.  That is  the                                                               
reality;  therefore a  dollar that  is not  received in  taxes is                                                               
another  dollar  out of  those  savings.  Consequently, when  the                                                               
state finally gets  paid that dollar because it has  gone back to                                                               
the taxpayer  in whatever industry and  said this is the  tax you                                                               
owe plus  interest, the  interest should  in some  way compensate                                                               
the state for the  cost for not having had it  in savings for the                                                               
intervening  years,  effectively  the opportunity  cost.  So  the                                                               
intent of  section 7  was to  try to find  a number  that roughly                                                               
approximated  what the  Permanent Fund  expected to  earn on  its                                                               
money, because that is the  biggest savings account the state has                                                               
that  might in  the future  be  used to  fund ongoing  government                                                               
operations. The Permanent Fund estimates  that number to be about                                                               
7 percent right now.                                                                                                            
CHAIR  GIESSEL pointed  out that  the  same also  applies if  the                                                               
state has  collected too much  tax; the  state owes it  back plus                                                               
the interest.                                                                                                                   
MR. ALPER  agreed with  that and  said this  applies not  just if                                                               
someone overpays their  taxes but if someone pays  the amount the                                                               
state assessed  and contests it,  goes through the  process, wins                                                               
or even  partially wins, and the  state pays them back;  the same                                                               
rate of interest from the original assessment is used.                                                                          
COMMISSIONER HOFFBECK added that the intent  was not to make it a                                                               
revenue  source  or revenue  loss,  but  to  make it  as  revenue                                                               
neutral as possible.                                                                                                            
5:17:10 PM                                                                                                                    
MR.  ALPER  said  slide  10  attempts  to  model  that  with  the                                                               
expectation of  a July 1,  2016, effective date. For  example, if                                                               
the state had  $1 million in debt for the  first two quarters, at                                                               
4 percent  per year, that is  a straight $10,000 per  quarter. So                                                               
over the six quarters in the  current law, there would be $60,000                                                               
worth of  interest, but beginning  in the third quarter  of 2016,                                                               
with  the amended  version of  the language,  first the  interest                                                               
would  double to  roughly  8 percent  and,  second, the  interest                                                               
would be applied not to just  the original $1 million, but to the                                                               
$1 million-plus interest that was accruing.                                                                                     
MR.  ALPER  said the  committee  has  to  make two  decisions  in                                                               
addressing  section  7:  should  the  state  switch  to  compound                                                               
interest in  the first place,  the deletion of which  he believes                                                               
was  an inadvertent  technical error,  and secondly,  should they                                                               
increase the rates  to make interest something more  of a revenue                                                               
neutral phenomenon for the state.                                                                                               
CHAIR  GIESSEL asked  how the  interest  is compounded:  monthly,                                                               
quarterly, annually.                                                                                                            
MR. ALPER answered quarterly.                                                                                                   
5:18:44 PM                                                                                                                    
He said slide 11 summarized  the interest change section and that                                                               
it's hard  to quantify  revenue impact,  because they  don't know                                                               
what they are going to  assess. The department completed the CY09                                                               
production  tax assessments  last  week and  the  total was  $132                                                               
million, about one-third  of that was interest. This  is a change                                                               
that will  build up value over  time; there is very  little near-                                                               
term impact. When it  comes to oil and gas, it  doesn't go to the                                                               
General Fund (GF)  anyway. Any tax conflict/appeal  money goes to                                                               
the Constitutional Budget Reserve (CBR).  The only GF impact from                                                               
this change will  be the other industry taxes  the chair referred                                                               
to earlier.                                                                                                                     
CHAIR GIESSEL asked  if the Tax Division took  the full statutory                                                               
limit to complete 2009 audits.                                                                                                  
MR. ALPER answered  yes and explained that they had  to slow down                                                               
their audits for a few years to  build up to the new software and                                                               
catch  up  with  some  things.  They  are  doing  2010  and  2011                                                               
concurrently and should be caught up one year from now.                                                                         
SENATOR STEDMAN  said when they  take money  out of the  CBR they                                                               
are technically  borrowing it  and asked  when they  put interest                                                               
back in, does  that count as a partial repayment  back to the CBR                                                               
or  is the  whole  amount owed  from some  other  source. It's  a                                                               
nuance and he was curious.                                                                                                      
5:20:25 PM                                                                                                                    
COMMISSIONER HOFFBECK  answered that those would  be new deposits                                                               
to  the CBR,  so the  liability would  remain. However,  he would                                                               
confirm that.                                                                                                                   
CHAIR GIESSEL said she saw  another appropriation to upgrade that                                                               
software more.                                                                                                                  
MR. ALPER  answered that the  software contract was in  excess of                                                               
$25 million  originally; the full  appropriation was  $34 million                                                               
and change to cover other  costs involved with implementation and                                                               
consulting  services.  The fiscal  note  for  this bill  is  $1.2                                                               
million. He  explained that all DOR  bills have some degree  of a                                                               
fiscal note  involved in the  reprogramming and testing. It  is a                                                               
laborious process. This  one is bigger, frankly, because  it is a                                                               
more  comprehensive  bill,  and  because they  are  going  to  be                                                               
changing  the interest  rate formulas  in all  25 of  the state's                                                               
taxes makes it more of a comprehensive task.                                                                                    
5:21:40 PM                                                                                                                    
MR. ALPER said  slide 12 illustrates what  increasing the minimum                                                               
tax does.  A couple of different  sections of the bill  deal with                                                               
the minimum tax itself, but section  12 is purely about the raise                                                               
from 4  to 5  percent, as  proposed by  the governor.  This slide                                                               
shows the  35 percent  production tax  under SB 21  and both  a 4                                                               
percent and 5 percent minimum tax after credits for FY17.                                                                       
SENATOR STEDMAN asked if this slide takes the NOLs into account.                                                                
MR. ALPER answered no.                                                                                                          
SENATOR STEDMAN  said at  some point  they will  want to  see the                                                               
impact from the NOLs.                                                                                                           
MR. ALPER responded  that if the NOLs were accounted  for on this                                                               
slide, in  the second  or third  year of  low prices  the revenue                                                               
would turn out to be about zero.  This is a snapshot of the first                                                               
year. If  you start  using NOLs against  taxes, depending  on how                                                               
high  the stack  of  NOLs  is, it's  going  to  drag the  overall                                                               
revenue curve  down in  the future  years. That  would not  be so                                                               
much a function of this year's  price, but it would be a function                                                               
of last year's NOLs.                                                                                                            
SENATOR STEDMAN  said that he therefore  shouldn't expect revenue                                                               
in  the  millions because  at  some  point the  potential  couple                                                               
billion in credits are going to be accounted against the state.                                                                 
MR. ALPER  agreed and  said this graph  assumes there  isn't that                                                               
drag of the NOLs from the past.                                                                                                 
5:25:42 PM                                                                                                                    
He explained slide  13 was just more graphics  showing the fiscal                                                               
impact of  increasing the minimum  tax. Gross value at  the point                                                               
of production  is roughly  the equivalent  of market  price minus                                                               
$10  for the  transportation cost  to  get it  there. About  $160                                                               
million taxable  barrels per year  are produced, so 4  percent of                                                               
whatever  that would  be, and  then the  additional 1  percent at                                                               
$30/oil is about $20 million, and it  goes up as the price of oil                                                               
increases to upwards of $80 million  at $75/oil and then it drops                                                               
off. And the reason for that is  past $75 to $78/oil they are out                                                               
of the  minimum tax and  into the regular  tax, and so  at higher                                                               
prices there is  no impact from increasing the  minimum tax; it's                                                               
purely an academic exercise.                                                                                                    
He related  that for all the  years the state had  a minimum tax,                                                               
it never kicked in until the  last months of 2014. That's roughly                                                               
the  fiscal impact  of this  specific  section of  the bill;  for                                                               
simple terms they have called it  $50 million, but it is actually                                                               
a somewhat variable number tied to the price of oil.                                                                            
5:27:12 PM                                                                                                                    
Meanwhile, elsewhere in  the bill, Mr. Alper  explained that more                                                               
complex sections "harden"  the minimum tax. He  explained that SB
21 made the  minimum tax stronger than it previously  was, and it                                                               
did so  by saying  that the  sliding-scale zero  to $8/per-barrel                                                               
credit for legacy oil on  the North Slope (AS 43.55.024(j) cannot                                                               
go  below  the  floor  (slide 14).  However,  the  other  credits                                                               
(arrows)  can in  fact  under many  circumstances  go below  that                                                               
number all  the way down to  the so-called basement, to  the zero                                                               
percent  production tax.  Those  include the  Net Operating  Loss                                                               
Credit, the GVR  eligible per barrel credit  (fixed $5/barrel for                                                               
new  oil),  as  well  as  the  small  producer  credit,  and  the                                                               
alternative credit  (exploration credit).   All  of those  can go                                                               
below the  floor, and  the intent  of the bill  is to  harden the                                                               
floor, meaning  those credits  should also be  held to  4 percent                                                               
minimum tax rate.                                                                                                               
CHAIR  GIESSEL asked  if small  producer credits  and alternative                                                               
credits are both going away, true or false?                                                                                     
MR.  ALPER  answered  that  is   true;  the  small  producer  and                                                               
exploration  credits would  have  a very  limited short  duration                                                               
impact if the floor were hardened (slide 15).                                                                                   
5:28:30 PM                                                                                                                    
He explained that  the exploration credits will be  gone one year                                                               
from now except  for Middle Earth and the  small producer credits                                                               
will be  phased out  over the  next seven, eight,  or as  many as                                                               
nine, years.                                                                                                                    
MR. ALPER said there are  really three different policy decisions                                                               
before the committee and they all pertain to the North Slope:                                                                   
1. Should  the producers  who have an  net operating  loss credit                                                               
(NOL) be able to use those to  go below the floor and should this                                                               
be retroactive  to January 1 (the  only section of the  bill they                                                               
have asked to be retroactive  because of the current circumstance                                                               
this year  of receiving  payments below the  minimum tax  and are                                                               
hoping to backfill that (in the governor's original proposal))?                                                                 
2. Should new oil production be allowed to pay at the zero rate?                                                                
3. Should everyone be forced to  pay the minimum tax and not just                                                               
the major producers?                                                                                                            
CHAIR GIESSEL  thanked Mr.  Alper and  said slide  17 was  a good                                                               
breaking point.                                                                                                                 
[SB 130 was held in committee.]                                                                                                 

Document Name Date/Time Subjects
SB 130-Enstar Presentation to SRES-4-7-2016.pdf SRES 4/7/2016 3:30:00 PM
SB 130
SB130-Revised Slide #4 from DOR 4-4-16- Presentation 4-6-16.pdf SRES 4/7/2016 3:30:00 PM
SB 130
SB130-MEA Presentation to SRES-4-7-2016.pdf SRES 4/7/2016 3:30:00 PM
SB 130