Legislature(2007 - 2008)

2007-03-05 House Journal

Full Journal pdf

2007-03-05                     House Journal                      Page 0384
HB 177                                                                                                                        
HOUSE BILL NO. 177 by the House Rules Committee by request of                                                                   
the Governor, entitled:                                                                                                         
     "An Act relating to the Alaska Gasline Inducement Act;                                                                     
     establishing the Alaska Gasline Inducement Act matching                                                                    
     contribution fund; providing for an Alaska Gasline Inducement                                                              
     Act coordinator; making conforming amendments; and providing                                                               
     for an effective date."                                                                                                    
was read the first time and referred to the House Special Committee on                                                          
Oil & Gas and the Resources and Finance Committees.                                                                             
The following fiscal note(s) apply:                                                                                             
1.  Zero, Dept. of Administration                                                                                               
2.  Zero, Dept. of Commerce, Community, & Economic Development                                                                  
3.  Zero, Dept. of Natural Resources                                                                                            
4.  Fiscal, Dept. of Natural Resources                                                                                          
5.  Fiscal, Dept. of Revenue                                                                                                    
The Governor's transmittal letter dated March 2, 2007, follows:                                                                 
"Dear Speaker Harris:                                                                                                           
Under the authority of Article III, Section 18, of the Alaska                                                                   
Constitution, I am transmitting a bill that facilitates commercialization                                                       
of Alaska's North Slope natural gas resources and promotes continued                                                            
exploration and development of those resources.  The bill will induce                                                           
expeditious construction of a natural gas pipeline to transport Alaska's                                                        
North Slope natural gas to market using a process that is fair,                                                                 
transparent, and competitive.  Our nation's energy markets are hungry                                                           
for Alaska's gas resources, and Alaskans have waited for decades to                                                             
see these resources developed.                                                                                                  
Earlier this week I had several successful meetings with federal                                                                
officials in Washington, D.C., including the distinguished members of                                                           
Alaska's Congressional delegation.  These meetings affirmed for me                                                              
that it is time for Alaska's natural gas resources to be developed in                                                           
order to meet the energy demands of our nation.  The Chairman of the                                                            

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Federal Energy Regulatory Commission, Joseph Kelliher, made the                                                                 
statement that my plan does "represent the best hope for building a                                                             
pipeline to bring Alaska's vast natural gas resources to the energy                                                             
consuming lower 48 states."                                                                                                     
This bill sets forth the following: (a) midstream inducements to                                                                
encourage companies to identify development benchmarks and build                                                                
the gas pipeline; (b) upstream inducements that will encourage the                                                              
holders of North Slope gas reserves to commit their gas to the project;                                                         
(c) terms that an application must contain to qualify to compete for an                                                         
exclusive license to the midstream inducements; (d) evaluative criteria                                                         
by which competing applications will be measured; (e) a public                                                                  
process for reviewing the applications; (f) a procedure by which the                                                            
applications will be reviewed and a notice of intent to issue a license                                                         
that will be transmitted to the legislature; and (g) auditing and                                                               
enforcement tools to protect state contributions and interests.                                                                 
The midstream inducements will include a matching contribution of                                                               
up to $500 million paid out during the highest risk phase of the                                                                
project, which is the period the licensee is completing the work                                                                
necessary to obtain a certificate from either the Federal Energy                                                                
Regulatory Commission (FERC) or the Regulatory Commission of                                                                    
Alaska (RCA).  The licensed project will also benefit from a state                                                              
program that provides training to Alaskans for gas pipeline jobs.                                                               
The bill offers explicit requirements that state permits and                                                                    
authorizations relating to the pipeline be expedited and coordinated in                                                         
order to avoid complicated, time-consuming and conflicting state and                                                            
federal permitting processes.  In order to facilitate a successful project                                                      
and an expedient process, the bill will empower the governor to                                                                 
appoint a gas pipeline coordinator to oversee the state permitting                                                              
process and work with the federal pipeline coordinator to integrate the                                                         
state and federal permitting processes.                                                                                         
The upstream inducements will encourage those who hold gas reserves                                                             
under lease to commit that gas to the pipeline licensed under the bill.                                                         
Under the "royalty inducements," the state will develop regulations to                                                          
provide predictability in the determination of royalty value and the                                                            
exercise of its right to take its royalty share in kind (as gas) or in value                                                    
(as money).  A "gas production tax exemption" will give shippers of                                                             

2007-03-05                     House Journal                      Page 0386
gas an exemption from production tax equal to the difference between                                                            
the tax obligation based upon the tax rate in affect at Open Season, and                                                        
any higher rate that becomes effective in the ten years following                                                               
commencement of the gas pipeline commercial operations.  These                                                                  
provisions address leaseholders' concerns that they need to know how                                                            
their royalty and tax obligations will be measured for a reasonable                                                             
period into the future before they irrevocably commit to ship their gas                                                         
at an Open Season.  The benefits will be available to all leaseholders                                                          
who commit gas to the licensed gas pipeline project during the initial                                                          
Open Season.                                                                                                                    
The bill will accomplish six primary goals: (1) initiate an application                                                         
process open to any project sponsor; (2) take clear steps to promote the                                                        
construction of a gas pipeline as quickly as possible, (3) ensure the                                                           
North Slope basin is open to long-term gas exploration and                                                                      
development, (4) ensure reasonable tariff rates are available to                                                                
transport Alaska's natural gas to market, (5) ensure North Slope                                                                
natural gas is available to Alaskans, and (6) ensure Alaskans are                                                               
trained and ready for the natural gas pipeline jobs and those jobs are                                                          
made available to Alaskans.                                                                                                     
To accomplish the first goal, applications will be welcomed from any                                                            
entity or a coalition of entities interested in constructing the gas                                                            
pipeline.  However, only those applications that fulfill the "qualifying                                                        
application requirements" will be considered for the license to the                                                             
midstream inducement package.                                                                                                   
To accomplish the second goal, the bill will require that applications                                                          
provide a detailed description of the applicant's proposed project,                                                             
including route, size, design capacity, timeline and budget.  Applicants                                                        
must agree to hold an Open Season (to solicit firm commitments to                                                               
ship gas on the pipeline) within three years of getting the license, and                                                        
will detail steps toward obtaining a Certificate of Public Convenience                                                          
and Necessity from FERC or the RCA.  The state gas pipeline                                                                     
coordinator will also ensure an expeditious regulatory process.                                                                 
To accomplish the third goal, applicants must commit to expanding                                                               
the pipeline project when new gas is available.  There is currently                                                             
more than 35 trillion cubic feet (Tcf) of proven reserves of natural gas                                                        
on Alaska's North Slope.  However, most geologists agree that there is                                                          

2007-03-05                     House Journal                      Page 0387
many times that amount of North Slope gas awaiting discovery.  By                                                               
ensuring that the pipeline will be expanded when more gas is                                                                    
discovered and ready to be shipped, the bill assures that Alaska's gas                                                          
will serve the nation's energy needs for decades.  Therefore, applicants                                                        
must commit to evaluate the demand for pipeline expansion at least                                                              
every two years, and to expand when there is sufficient quantities of                                                           
gas to ensure an economic expansion.  The costs of any expansions                                                               
will then be collected through "rolled-in" rates that pass those                                                                
expansion costs on to all shippers in the gas pipeline.  The AGIA will                                                          
cap the cost of rolled-in price increases at no more than 15 percent of                                                         
initial rates, in response to concerns regarding the predictability of                                                          
tariff rates.                                                                                                                   
To accomplish the fourth goal, applicants will have to commit to                                                                
propose and support tariff rates that would produce the lowest                                                                  
reasonable transportation costs in order to produce the highest price at                                                        
the wellhead.  Minimizing transportation costs result in the state                                                              
maximizing its royalty revenue stream as well as that of the producers.                                                         
To accomplish the fifth goal, applicants must provide for a minimum                                                             
of five off-take points in Alaska.  This, in conjunction with the                                                               
"distance sensitive tariff rates", will allow gas to be withdrawn from                                                          
the pipeline at reasonable transportation costs in order to serve                                                               
residential and business needs across the state.                                                                                
To accomplish the sixth goal, applicants must commit to establishing a                                                          
gas pipeline project headquarters in Alaska, establishing hiring offices                                                        
in Alaska, and hiring qualified Alaskans, thus giving Alaskans access                                                           
to the thousands of new pipeline jobs.                                                                                          
The bill requires the application process to commence no more than                                                              
three months after the bill passes, when the commissioners of Natural                                                           
Resources and Revenue issue a request for applications (RFA).                                                                   
Applications will be due under a deadline established by the                                                                    
commissioners; however, our intention is to allow applicants three (3)                                                          
months to respond to the RFA.                                                                                                   
Applicants will be deemed "qualified" by having fulfilled the bill's                                                            
requirements.  Qualified applications will then be evaluated by the                                                             
commissioners of Natural Resources and Revenue to determine which                                                               

2007-03-05                     House Journal                      Page 0388
application best meets the stated goals.  Before issuing a written                                                              
determination, the commissioners will publicly release complete                                                                 
applications and take comments for 60 days.  Applicants could apply                                                             
to keep confidential the proprietary information or trade secrets                                                               
included in their applications.                                                                                                 
The bill sets forth "evaluative criteria" to facilitate the selection                                                           
process.  The evaluative criteria are: the proposed project timeline, the                                                       
proposed method to manage cost overruns, the proposed tariff rates,                                                             
the ability of the project design to accommodate expansion, the                                                                 
percentage of the state matching fund that will be used, whether the                                                            
project is feasible, and the applicant's ability to perform.  The                                                               
commissioners will publish a notice of intent to issue a natural gas                                                            
pipeline project license with written findings, and forward the notice                                                          
of intent, with findings and supporting documentation, to the                                                                   
legislature. The legislature will have 30 days to disapprove the                                                                
commissioners' proposed action.                                                                                                 
The bill also provides that the licensee must commit to spend the                                                               
money necessary to build the pipeline within one year of receiving a                                                            
certificate from the FERC or the RCA if the project has credit support                                                          
adequate to finance construction of the project.  If necessary, the                                                             
licensee would have an additional four years to obtain financing, or                                                            
transfer the certificate and all associated work product to another                                                             
licensee designated by the state.  If the project becomes uneconomic                                                            
after the license is awarded, the bill provides a process for                                                                   
relinquishing the license that will enable the state to recover the                                                             
benefit of its investment in the project and issue another license.  To                                                         
encourage the licensee to spend its money working toward Open                                                                   
Season, and certification, and building the gas pipeline project, the                                                           
state will agree that if it provides financial benefits to another                                                              
company to encourage the construction of a competing pipeline                                                                   
project after the license is issued, the licensee will be entitled to                                                           
recover from the state three times the amount it spent on the project.                                                          
The bill identifies quantifiable values the state is willing to commit to                                                       
encourage early and appropriate development of an Alaska Gas                                                                    
Pipeline project.  It also identifies the elements necessary to protect the                                                     
state, and the nation's, long-term interests in development of additional                                                       
gas reserves.  The bill protects the state from untenable risks and will                                                        

2007-03-05                     House Journal                      Page 0389
induce expedited construction of a gas pipeline that powers the state                                                           
and the nation.  I urge your prompt and favorable action on the bill.                                                           
                                Sarah Palin