Legislature(2007 - 2008)SENATE FINANCE 532
04/24/2007 03:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| SB104 | |
| Start | |
| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 104 | TELECONFERENCED | |
| + | TELECONFERENCED |
CS FOR SENATE BILL NO. 104(JUD)
"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."
This was the third hearing for this bill in the Senate Finance
Committee.
Co-Chair Stedman noted that today's sectional analysis
discussion would include the issue of rolled-in verses
incremental rates.
3:06:51 PM
Chapter 90. Alaska Gasline Inducement Act.
Article 1. Inducement to Construction of a Natural Gas
Pipeline in this State.
Section 43.90.130. Application requirements.
subsection (7),(page 1, line 9)
MARCIA DAVIS, Deputy Commissioner, Department of Revenue
continued the sectional analysis of Chapter 90, added to AS 43
by Section 1 of the bill. [NOTE: To view the initial sectional
analysis of CSSB 104(JUD), see SFIN 042407 0905 AM Time Stamp
9:09:49 AM.]
Ms. Davis directed attention to Section 43.90.130(7), page 6,
line 11. This subsection is a "continuation of the list of
items" a pipeline company must include in their Alaska Gasline
Inducement Act (AGIA) application. Subsection (7) specifically
addresses "the manner" through which an entity should manage the
costs associated with future expansions of the line.
Ms. Davis informed the Committee there were two ways through
which expansion "costs could be incurred" and assessed to
shippers in a pipeline. The incremental cost approach would
spread expansions costs only onto new shippers; costs to
existing shippers would be unaffected. The second option,
referred to as the rolled-in rate approach, would combine the
cost of the existing structure with the cost of the new
structure. That combined cost would then be "re-divvied" between
both new and existing shippers.
3:08:56 PM
Ms. Davis informed the Committee that, in an effort to provide
an atmosphere that would encourage future pipeline expansion,
particularly if an incremental rate mechanism was in effect, the
original version of the bill specified a maximum limit on the
expansion costs that would be borne by shippers.
Ms. Davis explained that the original bill permitted "the
pipeline company to agree to allow a certain amount of cost-
sharing with existing shippers" via a rolled-in rate approach
"up to a point". Once that point was reached, any extra costs
would be addressed via either an incremental or rolled-in rate
mechanism as elected by the pipeline company and approved by the
Federal Energy Regulatory Commission (FERC).
Ms. Davis reminded the Committee that FERC's regulations would
supersede any State position, "no matter what we write in this
bill … or ask a pipeline company to commit to propose to FERC".
While a pipeline company's proposal or shippers' arguments would
"carry some weight", FERC would be the final authority on costs
"borne by the shipper in a pipeline structure".
Ms. Davis compared the expansion assessment language proposed in
the Judiciary committee substitute to that of the original bill.
The Judiciary bill would require "a pipeline company to come
forward and agree to allow rolled-in rate treatment for
expansion costs up to 15 percent of a number. The original bill
made that number 15 percent of the maximum initial recourse
rate" or, in pipeline company terminology "the rack rate".
Ms. Davis likened a pipeline rack rate to the rate a person
walking into a hotel after driving all day would pay for a room
that night. In other words, it would be the maximum rate.
Ms. Davis disclosed that pipeline companies expressed concern
about utilizing the maximum recourse rate in the equation
because of their preference to negotiate rates: "we like to
encourage people to come in and ship gas on our pipeline by
negotiating rates." Setting "the cap at 15 percent of the higher
rack rate" might "dissuade people or take some of the oomph out
of our negotiated rates". As a result of this concern, the
original bill's language was revised.
3:12:19 PM
Ms. Davis communicated that the decision was made "to divvy that
maximum recourse rate into three categories": 15 percent of the
rack rate for those paying the rack rate; 15 percent of the
negotiated rate for those with negotiated rates; and "a weighted
blend" of the first and second categories for shippers in
neither of those categories. The latter category could include a
shipper who participated after the initial pipeline construction
in, perhaps, the first expansion effort.
Ms. Davis stated that the language specific to these three
categories is located in subsection (7)(B)(i),(ii), and (iii)
beginning on page 6, line 21 through page 7, line 12.
3:13:36 PM
Co-Chair Stedman considered this an opportune time to discuss
the "special treatment" this project would receive from FERC as
compared to the "historic methodology" applied to other states.
Ms. Davis deferred this discussion to the Department of Natural
Resources.
3:13:48 PM
ANTHONY SCOTT, Commercial Analysis, Division of Oil and Gas,
Department of Natural Resources, informed the Committee that
until the mid 1990s, "FERC's favored policy" in the contiguous
United States (U.S.) was the rolled-in rate structure. That
position changed to the incremental rate approach in recognition
of "an increasingly competitive pipeline sector with producing
and final demand markets being served by multiple pipelines".
Mr. Scott stated that in the case of the Alaska pipeline
project, FERC adopted rebuttal presumption Orders 2005 and
2005A. Those orders supported utilizing "rolled in rates for
this project in recognition of the fact that there would be no
competition, almost certainly, for moving gas out of Alaska by
pipeline".
Mr. Scott noted that FERC's support of the rolled-in rate
structure for Alaska was influenced by U.S. "Congress' desire to
ensure that the pipeline promoted exploration and development of
North Slope resources."
Mr. Scott pointed out that the rolled-in rate structure has been
the standard in Canada for decades. It has "led to enormous
growth of the pipeline grid" as well as "gas exploration and
development in Alberta".
Mr. Scott asked whether this information had sufficiently
addressed Co-Chair Stedman's request to discuss how FERC treated
operations in Alaska.
3:15:39 PM
Co-Chair Stedman replied "part way". While his remarks had not
been to Canada's situation, he understood "that Canada has a
different required rate of return on some of their investments".
3:15:59 PM
Mr. Scott communicated that because rates of return are
revisited each year in Canada they "tend to be lower because of
that", as a pipeline company "faces less risk of recovering
their investment". As a result, the rates of return allowed by
Canada's regulatory body, the National Energy Board (NEB) "are
lower than those provided by the FERC".
Co-Chair Stedman asked for a "reasonable assumption" of the
range of return that would be expected on the Alaska gasline
project as compared to a similar one in Canada.
Mr. Scott was unable to provide such a comparison as he was
unfamiliar with conditions in Canada. However, such data could
be compiled.
Mr. Scott advised however, that in the U.S., "in initial
certification proceedings, a 14 percent rate of return for the
maximum recourse rate for the first several years of pipeline
operation … would be the norm given the kind of debt equity
ratios" being discussed.
Mr. Scott stated that oftentimes, "some years into a pipeline's
operation one often sees those rates of return numbers come
down" to around 12 percent due to "litigated rate outcomes".
Mr. Scott thought that "the rates of return on Canadian pipes
tend to be" slightly lower than that. This information would be
affirmed.
3:18:05 PM
Co-Chair Stedman expressed that the Committee has heard
conflicting testimonies regarding the impact that expanding the
pipeline, first by compression and then by looping, would have
on the pipeline tariff. Some believe tariffs would increase,
others believe they would decrease, and others believe they
would be unaffected.
Co-Chair Stedman understood that the Department of Natural
Resources was developing modeling that would "provide a more in-
depth analysis on what would be a reasonable expectation on the
tariff" were a 4.5 billion cubic feet capacity (BCF) pipeline
expanded to a six BCF capacity line.
3:18:56 PM
Mr. Scott expected that a multitude of modeling scenarios could
be developed within a week's time. The likely impact on the rate
of returns due to expansion would depend on several things
including the cost and timing of the expansion. The Department
estimates that the further into the future expansion occurs, the
more expensive it would be.
Mr. Scott stated that this position is based on several factors.
For instance, compression activities over the past 15 years have
experienced "significant and real price escalation" in
comparison to the "economy as a whole". Thus, a one BCF
expansion on day one would be less than one occurring after two
years. One occurring five years out would be even more
expensive.
Mr. Scott stated that the price of fuel at the time of expansion
is also a cost factor, particularly in consideration of the 15
percent tariff limitation specified in subsection (7)(B)(i)
through (iii).
Mr. Scott recalled testimony from TransCanada Corporation in
which "they said, 'You don't need to worry about rolled-in
rates, it's a sunny day; we can get through looping without any
rate increase compared to the initial rate'."
Mr. Scott noted however, that Tony Palmer with TransCanada
Corporation would also explain that that assumption, in terms of
rate impacts, presumes that all of the expansions occur when the
pipeline first goes into service.
Mr. Scott pointed out that the Department's modelings are based
on the assumption that expansion would occur over time, rather
than immediately.
Before concluding his remarks on expansions and rate impacts,
Mr. Scott reviewed the consequence of high gas prices and the
subsequent affect of those prices on the pipeline tariff.
3:22:37 PM
Ms. Davis resumed the discussion pertaining to the application
criteria requirements specified in AS 43.90.130. The requirement
in subsection (8) page 7, line 29 was added to the original
bill, which solely focused "on the construction of a pipeline",
to ensure that the discussion included having a gas treatment
plant (GTP) on the North Slope. While the application would not
require the pipeline builder "to supply" a GTP, an evaluation
process was deemed necessary in case they did construct one,
"or, in order to assess the likelihood of success of the
project, where would the plant come from?".
Ms. Davis specified therefore, that subsection (8) was added to
require the applicant "to disclose what their plans were with
respect to having a gas treatment plant".
Ms. Davis spoke to this point as follows.
….because there's a distinct possibility that a GTP on the
North Slope would in some way engage or involve
infrastructure that already exists there on the Slope,
particularly at Prudhoe Bay, we wanted to also ensure that
if an applicant was putting in gas treatment plant
facilities that included facilities that already existed,
there's a provision in here on line 6, page 8 that requires
that if assets are committed, the gas treatment plants that
are already owned, that they'll be committed at net book
value so that they aren't put in at replacement value, in
other words brand new costs that would then have to be put
against the tariff rate.
3:24:26 PM
Co-Chair Stedman identified another issue associated with a GTP;
that being whether the 20 percent tax credit provision included
in the Petroleum Profits Tax (PPT) adopted by the Legislature in
2006 would apply to the facility.
To this point, Co-Chair Stedman requested that the Governor
Sarah Palin Administration provide a definitive answer to this
question.
Co-Chair Stedman declared that the Legislature spent a
significant amount of time discussing how a GTP would be
affected by the PPT. While the concept discussed differed from
AGIA, it was the Legislature's understanding that a GTP would
not qualify as a credit under the PPT.
Ms. Davis assured the Committee that the requested information
would be provided. This issue had already been "flagged" as an
area of concern.
Mr. Scott informed the Committee that the economic modelings
provided to date on AGIA have "assumed that the GTP did not
qualify for PPT credits".
3:25:31 PM
Senator Thomas asked whether language in subsection (8) would
also apply to existing gathering lines that might "be used in
conjunction with" the GTP.
Ms. Davis thought Senator Thomas raised "a good point". The GTP
provisions in this bill were drafted from the view it would be
"post-production treatment". She tended "to think of gathering
lines as going from wellhead to a processing center and, in most
fields, that processing is an initial processing that wouldn't
be considered part of the gas treatment plant. However, one
could envision gas going from another unit to this location
where it would have already undergone processing for the initial
processing and that a line would transit to the gas treatment
plant." There could be "a question as to whether that line
should be considered a FERC line or not." This issue would be
reviewed in the application process.
3:26:59 PM
Ms. Davis stated that subsection (9) page 8 lines 11 through 13,
required the applicant to specify the percent, dollar amount,
and timeframe they would seek in regards to the State's matching
contribution for the proposed project. This is commonly referred
to as the State's $500 million dollar contribution.
3:27:34 PM
Ms. Davis identified subsection (10) page 8 lines 14 through 17
as one of the Administration's "must haves". It "is the
obligation on the part of the applicant to commit that, for rate
making purposes, they will only include a 70 percent debt
structure". This level of debt would assist in insuring
"reasonable tariffs".
Ms. Davis announced that language specifying "not less than 70
percent" would allow an applicant to propose "a higher debt
element that would essentially lower the rates".
Co-Chair Stedman asked the reason an 80 percent debt structure,
rather than the 70 percent, had not been specified. It would
further the goal of having lower tariffs. Cost overruns could be
separately addressed.
3:28:46 PM
Ms. Davis expanded on the 80/20 debt/equity ratio as follows.
…80/20 is the construct or the presumption for the federal
loan guarantees. However, in our reviews we felt that we
wanted to cast as broad a net as we could and not keep
people from coming in the door simply because we set the
threshold too high for their particular structure. We
recognize that obviously 80/20 is better for the State from
an NPV analysis if you look at the tariff structure than a
70/30; however, we felt 70/30 would have a broader net and
we would still have be in a position to evaluate which
applicant would be superior. And it's certainly something
that would cause someone to assume that everybody's coming
in at 70/30. Someone's going to be at 75 and somebody's
going to be at 80. So, we still have the competitive forces
that would force them up from 70 if they're concerned.
Ms. Davis summarized that the State arrived at the 70 percent
debt structure level in an effort "to be broader than narrower".
Co-Chair Stedman voiced a different perspective. Identifying the
70 percent debt structure as an Administration "must have" could
also be viewed as requiring "an equity position no more than
30". He asked whether the Legislature could change the equity
position to 20 or 25 percent.
Ms. Davis responded that the term "not less than 70, which is
the countervailing of not more than 30" would allow a 25 or 20
percent equity position.
Co-Chair Stedman clarified his question to be whether the
Legislature could alter the percentages.
Ms. Davis considered that to be the "prerogative of the
Legislature". The Administration is, however, recommending a
70/30 debt/equity ratio.
3:30:34 PM
Co-Chair Stedman asked FERC's authority in regard to "the debt
to equity rate setting", specifically in regards to the "actual
calculation of the tariff" as opposed to internal financing or
construction rates.
Ms. Davis could not address the question until after she had an
opportunity to discuss this with a Department FERC specialist.
She understood that FERC conducts "a multi-factored analyses"
when determining debt/equity and developing a tariff structure.
Co-Chair Stedman also asked whether FERC could set a rate
without consideration of a project's specific debt/equity ratio.
For example, FERC might decide "to only count 25 percent of the
equity even though there was 30 percent put in".
Ms. Davis understood that FERC would have such authority. She
stated that this is the reason "we've limited this for rate
making purposes."
It's my understanding that an applicant could, in fact, in
reality, have a debt structure that might be 50 percent
debt and 50 percent equity, in reality on their books and
how they're structuring their deal. But when they go to
FERC, they would represent it as a 70 percent debt. In
other words, they would only offer up, for recovery for
return on their equity, the 30 percent equity that they
have notwithstanding the fact that they actually have 50
percent equity in the project.
3:32:14 PM
Senator Huggins pondered how requiring a 70 percent debt
structure on the pipeline project meshed with AGIA's stated
purposes, specifically subsection (3) of Sec. 43.90.101.
Purpose. page 2 lines 1 and 2 that reads "(3) maximized benefits
to the people of this state of development of oil and gas
resources in this state; and ". It would appear that "the debt
equity is such an important piece to the maximum value of the
people" that an entity proposing an 80 percent debt and 20
percent equity position "would almost have to win assuming they
are halfway functionally adequate in the rest of their
contract".
3:32:51 PM
Ms. Davis agreed that this is one of the key elements of
consideration: the debt/equity ratio structure might be the
"core swing in terms of where the NPV [net present value} value
is to the State". However, other elements of the application
would also affect the NPV; some of which might not even be a
consideration at the moment.
Ms. Davis reminded the Committee that "these are minimum
requirements". An applicant might offer additional structures or
benefits to the State beyond these that might "counter balance a
difference in the debt equity rate".
3:33:34 PM
Senator Huggins asked whether the State could "set the threshold
as low as 70 percent" even though a higher number might be
warranted" in consideration of the importance of this element.
Ms. Davis informed the Committee that the State's gasline team
based their NPV calculations on a 70 percent debt structure.
Economic modeling comparisons of 70 and 80 percent debt
structures could be provided.
3:34:19 PM
Senator Huggins thought such modeling would help the Committee
avoid "violating the maximum benefit".
3:34:36 PM
Ms. Davis directed attention to subsection (11) page 8, line 18.
This provision requires applicants to provide their strategy for
managing cost overruns. In addition to the importance of seeing
an applicant's "cost containment capabilities", this issue is
important because "part of the negotiated approach to bringing
in shippers may involve the sharing of the risk of cost
overruns". How cost overruns are managed will likely be a key
element in a shipper's decision to participate in an open
season.
Ms. Davis advised that the requirement in subsection (12) page 8
line 21 "is the commitment by the applicant to provide a minimum
of five delivery points of natural gas in the State". The
applicant is not required to specify the location of those
offtake points in the application as the determination was that
"the sizing and the location of those will need to be flushed
out subsequent to the application process in negotiation with
various in-State users".
Co-Chair Stedman asked what criteria was utilized in the
decision to specify five takeoff points.
3:36:15 PM
Ms. Davis communicated that the gasline team decided on that
number after reviewing the minimum number of instate offtake
locations identified in other gas pipeline project proposals and
studies.
Co-Chair Stedman recalled that the Stranded Gas Act legislation,
which had been considered the previous year, included three
identified and one unidentified takeoff locations.
Ms. Davis affirmed that a minimum of five instate takeoff
locations was deemed appropriate.
3:37:05 PM
Senator Thomas asked for further information about the takeoff
points, specifically whether identifying their location would
suffice or whether a structure of some sort would be required.
3:37:26 PM
Ms. Davis stated that an applicant must simply commit to a
minimum of five takeoff points in their application. Their
location would not be required. An applicant might have "aligned
themselves with a spur project" and, in that case, that project
would contain "specific offtake points". It would depend on the
applicant and their project as to whether "specific offtake
points would be identified or not".
Senator Thomas asked whether consideration had been given to any
"engineering differences" between oil and a natural gas offtake
points.
Ms. Davis expressed that the focus of this bill was a gasline. A
minimum of five takeoff points was specified in the bill in
recognition of "the engineering and technical challenges"
associated with a gas offtake point.
3:38:43 PM
Ms. Davis informed the Committee that subsection (13) page 8
lines 23 through 27, addressed the obligation of the applicant
to offer firm transportation service to instate delivery points
as part of their tariff.
Ms. Davis addressed this provision as follows.
[This provision would] ensure that when gas is taken off in
the State, it obviously is along for the ride for a very
short part of the ride compared to gas that goes all the
way to Chicago for instance, or Alberta, and from Alberta
down into the Lower 48. And so this is an obligation on the
part of the pipeline company to help us negotiate distance
sensitive rates that ensure that the shipper of gas instate
bears only their fair share for proportion of costs under
the federal requirements for that transport so that they
don't get loaded on and in essence end up paying some of
the costs for other shippers for longer distances.
Ms. Davis advised that it will be "more expensive for gas to
come off in the State because you have occupied capacity to that
point in the State and essentially required re-engineering or
smaller pipe". There could be ways "to mitigate the extra
engineering costs", but if not, there is realization that some
space in the pipe was occupied due to this activity.
3:40:43 PM
Ms. Davis next discussed subsection (14) page 8 lines 28 and 29.
This is "the obligation of the applicant to establish" an
instate headquarters, such as a construction headquarters, for
the proposed project.
3:41:03 PM
Ms. Davis stated that subsection (15), page 8 line 30 through
page 9 line 7, "has been improved" as the bill advanced through
the committee process. This is the Jobs for Alaskans section of
the bill which requires the successful applicant to hire
Alaskans and utilize Alaska businesses and hiring facilities
such as job centers and Department of Labor and Workforce
Development programs "within boundaries as permitted by law".
Ms. Davis noted that subsection (16), page 9 lines9 through 11,
was added by the Senate Judiciary Committee. It pertains "to the
waiver by the applicant of the right to appeal the issuance of a
license and the appeal of the determination that no license
should be issued". This language was developed to address the
Judiciary Committee's concern that litigation might delay the
project.
Ms. Davis reviewed subsection (17) page 9 lines 12 through 16.
"This is a commitment by the applicant to negotiate a project
labor agreement, and a project labor agreement here is defined
as a comprehensive collective bargaining agreement between the
licensee or its agent and the appropriate labor representatives
to ensure expedited construction with labor stability for the
project by qualified residents of the State."
3:42:59 PM
Senator Elton asked whether subsection (17) would be limited to
the initial construction phase of the project and thereby not
apply to looping or other construction activities that might
occur later.
Ms. Davis responded that in its current form, the language would
apply to the commitment to negotiate for labor prior to project
construction. The manner in which subsequent labor agreements
were made would be at the discretion of the pipeline company.
3:43:53 PM
Ms. Davis explained that the purpose of subsection (18), page 9
lines 17 through 19, was to ensure that the State would receive
a benefit from the matching contribution money it paid to the
pipeline company. The money should "be applied and reduce equity
and therefore lower the tariff costs for the State".
3:44:23 PM
Co-Chair Stedman asked that an analysis reflecting the benefit
provided by this action be provided. He recalled that such an
analysis had been provided to both the Senate Resources and
Judiciary Committees.
Ms. Davis acknowledged the request.
Co-Chair Stedman opined that this analysis would assist in
determining whether applying the $500 million "to offset the
tariff" would "maximize the bang for our buck for Alaskans"
since a lower tariff would best benefit "whomever has most of
the gas in the line, which won't be the State". He suggested
that applying the State's contribution of "to offset the cost of
a line into Anchorage or down into the Peninsula" might better
meet the objective.
Ms. Davis acknowledged Co-Chair Stedman's concern. While it was
true that other shippers would benefit from the tariff relief,
its benefit to the State could amount to $200 million over the
course of the project's life.
Ms. Davis pointed out that the State would also benefit from
"the add-on effect that, once the other party has the reduced
tariff costs, that in turn increases the State's royalty and tax
take as well because there's lower deductions against them".
3:45:33 PM
Ms. Davis concluded that the State would experience direct and
indirect benefits from a tariff reduction.
Co-Chair Stedman also noted that the discussion about the $500
million State contribution has included changing the State's
contribution into either "an equity position or an equity
option". This would allow the State "to recoup its capital and
then apply it," for example, to subsidize a spur line to benefit
Alaskans.
Ms. Davis affirmed that the requested analysis would be
provided.
3:46:18 PM
Ms. Davis stated that subsection (19) page 9 lines 20 through
27, would require the applicant to clearly indicate the entities
that would be participating in the application. This would
assist in "evaluating the economic impacts" of the proposal,
including such things as entities' levels of participation and
the amount of new capital "infusion" into the State.
3:47:22 PM
Senator Dyson identified one area of concern to be the
"financial viability" of the entities involved in the
partnership; specifically whether the parent company of a
subsidiary would be "on the hook".
3:47:47 PM
Ms. Davis communicated that the bill contained provisions to
address this concern. Language in Section 43.90.130. Application
requirements., subsection 2(C) on page 4 lines 1 and 2, required
"an analysis demonstrating the project's economic and technical
viability".
Ms. Davis qualified that the evaluation criteria would include a
review of the "financial solvency and integrity of the
applicant". The requirement that all participants be identified,
as specified in subsection (19), would allow the State to
evaluate the solvency of all of the participants in this
application. The evaluation would ensure that solid companies
would be participating and avoid the inclusion of "shell
companies that can't stand behind the obligations they make".
3:48:54 PM
Ms. Davis then addressed the last of the 20 applicant
requirements. Subsection (20) page 9 lines 28 through 30 would
require a listing of other ways the applicant could "demonstrate
that they are ready and able to perform their plan".
Ms. Davis stated that each of the 20 requirements was "important
in its own right".
Co-Chair Stedman asked what action would be taken were an
application to fail to address all 20 requirements.
3:49:41 PM
Ms. Davis communicated that if an application was remiss in
addressing all 20 requirements, the commissioners would request
the applicant to provide the pertinent information. If that
information was not forthcoming, the application would be
considered incomplete and would not be considered.
Co-Chair Stedman asked whether this approach would occur even if
the Net Present Value (NPV) to the State in that proposal was
substantially higher than other applications.
Ms. Davis clarified that the NPV "could not be calculated until
you get a complete application". Continuing, she noted that even
if the project had merit, it would not be considered if all 20
requirements were not addressed.
3:50:46 PM
Co-Chair Stedman asked whether the Legislature would be able to
review any application that was disqualified.
Ms. Davis replied in the affirmative. If Legislators signed the
confidentially provision included in the bill, they would be
allowed "from the very beginning to look at all information that
is supplied by applicants to the Commissioners … from the get
go. That would include applications that were subsequently
determined incomplete".
3:51:24 PM
Senator Elton asked whether the State's traditional Request for
Proposals (RFPs) standards would apply to this evaluation
process. For example, there could be numerous definitions of the
term "detailed" as specified in subsection (19). That section
requested a detailed listing of the entirety of partners who
would be involved in the project.
Ms. Davis affirmed that the AGIA evaluation process would be
handled in a manner similar to other State RFPs. "An above-board
fair process" must be the goal. "The Administration would issue
an RFA [Request for Applications] which will identify all of the
information in fuller detail than is set forth in this bill of
what needs to be in the application."
Ms. Davis continued. The expectation is that after the RFA is
released, potential applicants would present questions to
clarify the information. The anticipation is that the
commissioners of the Department of Revenue and the Department of
Natural Resources would establish a process to receive and
respond to questions. This would likely include a website which
would disseminate information on a widespread scale.
3:53:17 PM
Section 43.90.140. Initial application review;
additional information requests; complete applications.
(page 9 line 31 though page 10, line 14)
Ms. Davis stated that this section would establish the process
through which the commissioners would receive, review, and
determine whether an application was complete. In the event an
application was deemed incomplete, the commissioners could
request missing information and specify the timeframe in which
it should be received.
Ms. Davis informed that this language had been amended to
address an earlier concern that the bill "did not tie the
information request to the application", and as a result, "there
was concern that this could be used as a fishing expedition".
Co-Chair Stedman asked regarding language on page 10 line 4 that
stated that "the commissioners shall reject any application that
does not meet those terms and requirements." He suggested that
replacing the word "shall" with "may" might allow the
commissioners to consider a proposal which would provide the
State the highest NPV.
3:54:53 PM
Ms. Davis stated that amending the language as suggested by Co-
Chair Stedman had been discussed. The reason the Department
supports the word "shall" in this case, "is because when you put
'may' you've essentially put a discretion upon the commissioners
to decide when they will decide to reject an application for
being incomplete and when they will not". Not having a written
standard to guide that decision could result in a "lawsuit" that
could delay the project.
3:56:05 PM
PAT GALVIN, Commissioner, Department of Revenue, contending that
Co-Chair Stedman's question "drives at the heart of AGIA", spoke
as follows.
It's a question of whether the State is actually going to
have must have provisions in the bill or whether they're
going to be mere recommendations or requests.
We feel that its imperative that AGIA contain the State's
must have provisions. That if you fail to meet these
requirements you're not going to be considered. It is part
of the communication that is set up by AGIA, that the State
through this vehicle is saying this is our bottom line,
this is what we have to have in order for a participant to
be considered.
We do not believe that there is a provision within our must
have list that is commercially unreasonable, or is not
appropriate for the State to request in response to what
we're putting out there on the table. And we believe that
it would strike at the heart of the purpose of AGIA if we
were to soften the message when it comes to our initial
request. And to say that there are certain things that the
State has to have unless you feel that we should consider
something else.
And it's the nature of discussion and negotiation as you
say, this is our bottom line and that's it. As opposed to
this is our bottom line and we can continue to talk about
it.
Within the context of AGIA, the State has to have must
haves. If there's something within that list of 20 items
that the Legislature feels is inappropriate; is potentially
a hurtle to getting the applications that we want; then
lets talk about those provisions. But we do not believe
that there is one within the list that should be negotiated
or amended if the Legislature and the Administration
decided it is a must have.
And so, we feel very strongly that AGIA would not be what
it is if we were to change that provision.
Co-Chair Stedman pointed out that subsection (16) in the list of
requirements would require the applicant to waive their right to
appeal the issuance of a license.
3:58:53 PM
Co-Chair Stedman asked whether this requirement would address
the litigation issue raised by Ms. Davis.
Ms. Davis clarified that "Constitutional arguments can't really
be waived." While it might be appropriate for someone to waive
their right to appeal regarding such things as an applicant's
claim that the State made a decision based on an incorrect NPR
evaluation or a failure to consider certain aspects of the
proposal, an entity could file a claim on a Constitutional
basis.
Commissioner Galvin stated that "the question about
Constitutionality and the discretionary authority of the
commissioners in going from 'shall' to 'may' is not the driving
factor in our insistence on it being 'shall'. It's strictly, as
I stated, we have to have must haves in this bill in order to be
able to get what we want out of this process."
4:00:12 PM
Senator Thomas agreed it would be impossible to preclude someone
from suing. They could always find a way.
Senator Thomas asked whether a procedure had been developed to
notify an applicant in the case their application was either
rejected or incomplete.
Ms. Davis stated that Section 43.90.140(b), page 10 line 6,
specifies that during the application evaluation process, the
commissioners could request "additional information from the
applicant". It is envisioned that this provision would be
utilized "to reach out and try to save applications that are
missing critical information by requesting additional
information".
Ms. Davis pointed out that an application proposing a 50 percent
debt component rather than the required minimum 70 percent debt
requirement would be a sign that the applicant deliberately
choose not to comply with the State's must-have criteria.
4:01:33 PM
Senator Thomas stated that the intent of his question was to
clarify whether language in Section 43.90.140(b) specifically
referred to an application that was not rejected under (a) of
this section.
Ms. Davis acknowledged that the wording could be confusing. The
language could be reworked to clarify that "no application is
rejected because of some inadvertency on the part of an
applicant or a belief that they adequately treated a topic and
we determined we needed more information."
Senator Elton revisited the "'shall' verses 'may' reject"
question by asking whether the use of the word "shall" would
"preclude the State, after a license is awarded," to discussing
with the licensee, adding a provision included in another
application to their proposal.
4:02:49 PM
Ms. Davis stated that once the State "selected an application
and made the determination it is ranked first", based on the
ranking criteria included in the bill, both the State or the
licensee could "modify a project plan if" that modification
would improve, for instance, the NPV to the State. She was
unsure "what leverage the State would have on an applicant who's
successful and has won, to make further changes that would
further enhance the State's position unless it could do so
without resulting in harm or loss of value to itself".
Ms. Davis deemed "going to an applicant before we've made the
selection" and asking them to "change the application to make it
better" to be "improper".
4:03:50 PM
Section 43.90.150. Proprietary information and trade
secrets. (page 10 line 15)
Ms. Davis stated that this section "would allow applicants to
provide information in their application" they deemed important
in the evaluation and to "their competitive standing". This
might include commercially sensitive or trade secret
information.
Ms. Davis remarked that this provision would allow the applicant
to label information they wanted treated as proprietary or trade
secrets. After reviewing the information, the commissioners
would decide whether to grant that status to the information.
The commissioners would notify the applicant if they did not
agree with the request and the applicant would be permitted to
either withdraw the information or keep it in the application
"knowing that it would not be treated as confidential".
Ms. Davis noted that the entirety of the information submitted
by the winning applicant would be made public, including their
proprietary or trade secret information.
Ms. Davis specified that information of any entity choosing to
challenge the award would also be made public. She noted that
this provision might require reworking in consideration of the
fact that an applicant must waive their right to appeal the
issuance of a license.
4:05:27 PM
Senator Dyson asked for further clarification regarding the
extent of the information that would be made public if an
applicant was awarded the license. His particular concern was to
whether proprietary information relating to the business
affiliates would be made public.
Ms. Davis explained that the experience to date in FERC and
other pipeline related activities is that the type of
information an unsuccessful applicant would desire to keep
private would be that associated with "the commercial
arrangements that a pipeline company enters into and makes with
shippers that enables them, that they feel gives them a
competitive advantage in lining up and acquiring shippers."
Ms. Davis explained that these and other types of arrangements
and information would be made public in the case of the
successful applicant since it would be included in a number of
required public filings, such as the information submitted to
FERC.
4:06:49 PM
Ms. Davis emphasized that the release of this type of
information is particularly worrisome to unsuccessful applicants
who might desire to use a similar arrangement when bidding
another project.
Ms. Davis addressed Senator Dyson's concern about the release of
information pertaining to affiliates and other types of business
relationships. The understanding is that this is the type of
information "that they'd be worried about".
4:07:16 PM
Section 43.90.160. Notice, review, and comment. (page
11 lines 1 through 18)
Ms. Davis explained that this section specifies that "the
commissioners shall publish notice and provide a 60-day period
for public review and comment on all applications determined
complete under AS 43.90.140."
Ms. Davis specified that completed applications are not made
public until after they are ranked and evaluated by the
commissioners.
Ms. Davis stated that language in subsection (c) of this
section, page 11 lines 12 through 18, is important. It would
allow "Legislators to become engaged in this process from the
get go" by specifying that they could access the entirety of the
information submitted to the commissioners.
Section 43.90.170. Application evaluation and ranking.
(page 11, line 19 through page 12 line 27)
Ms. Davis deemed this section to be an extremely important
provision as it specifies the ranking criteria for the submitted
projects. A key element is that the commissioners would utilize
"two different sets of criteria" to evaluate and rank the
projects: one would be the NPV to the State and the other the
likelihood of the success of the project.
Ms. Davis continued. Subsection (b) of this section, page 11
lines 26 through 28, detailed the net present value or "project
economic" criteria that would be utilized in the net present
value evaluation. This evaluation would include "an analysis
that includes an undiscounted value and" minimum specifications
on discounted rates.
4:09:30 PM
Ms. Davis pointed out that the project economic criteria is
listed in subsection (b)(1) through (5) page 11 line 29 through
page 12 line 7. This considers such things as the project's
timeliness, net back to the State, cost overruns, pipeline
design capacity, and the amount of the matching contribution the
entity would request from the State.
4:10:07 PM
Ms. Davis stated that the second set of criteria, that relating
to the likelihood of the success of the project, is detailed in
subsection (c)(1) through (6), page 12 lines 8 through 25. This
evaluation would include professional experts' view of the
project, the financial resources of the applicant, and the
myriad of other considerations specified.
4:11:14 PM
Senator Huggins asked for examples of what an applicant might do
to "encourage shippers to participate in the first binding open
season", as specified in subsection (c)(1), page 12, line 13.
4:11:36 PM
Ms. Davis clarified that the focus of subsection (c)(1) is
primarily to cost overruns. It would evaluate how the applicant
would insulate shippers from such costs and thereby encourage
them to participate in the first open season. Shippers would
consider "the degree of specificity" and "the technical quality
of the design parameters of the pipeline" in determining "how
solid" the cost estimate of the project and thus "how solid" the
estimates on the tariff offered in the open season might be.
4:12:31 PM
Senator Huggins questioned whether shippers would be conferred
with to gauge their "perspective" on this aspect of the
proposal.
4:12:42 PM
Commissioner Galvin informed that extensive negotiations occur
between a pipeline company and shippers in the process of
conducting an open season. The discussion would include the
"types of arrangements that should be made within the open
season in order to increase the attractiveness of the open
season to those particular shippers".
Commissioner Galvin noted that the State would evaluate "the
plan that the pipeline company provides us in terms of how they
are going to get the most attractive open season terms that they
can provide at that time and some of it is going to be spelled
out in the application directly". This would include the
proprietary types of arrangements they are willing to offer to
the shippers that they've used in other places that have created
an attractive open season.
Commissioner Galvin informed that the pipeline company might
also explore other options with shippers. Some of those things
might not be shared with the State upfront because of the
uncertainty as to whether they would be ultimately offered; it
would depend on the response from the shippers.
Commissioner Galvin stated that the applicant would explore
additional "ideas with potential shippers as we move closer to
an open season". "It's going to be a combination of things that
they can tell us up front. We believe these things are going to
provide value".
4:14:24 PM
Senator Huggins surmised that an applicant who stated that
"under these conditions" they had an agreement with a shipper to
commit in the open season would win the license provided that
other considerations were equal.
4:14:54 PM
Ms. Davis stated that such a commitment "certainly increases the
evaluation of the likelihood of success of that project,"
assuming all things being equal. It would not be "the sole
element", there are other considerations.
Commissioner Galvin agreed. A commitment to "getting the gas" is
paramount.
Senator Huggins acknowledged the range of criteria that would be
considered. He inquired as to whether there were "other
elements" besides the work plan, timeline, and specified
criteria that might be "encouraging" to a particular proposal.
4:16:01 PM
Ms. Davis asked for time to consider this question.
Commissioner Galvin advised he could ask this question of
Department personnel, particularly those in the Department's
commercial section and Department consultants.
4:16:32 PM
Senator Huggins deemed it important to understand the range of
elements that might encourage a project and "seal a deal".
4:17:23 PM
Co-Chair Stedman asked for further discussion in regards to NPV
as it applied to the State.
4:17:38 PM
Ms. Davis directed attention to Section 43.90.170 subsection (d)
on page 12 lines 26 and 27 which defined NPV as "the discounted
value of a future stream of cash flow." For example, the income
stream associated with the royalties, taxes, and other income
generated by a project "would be offset by the costs experienced
by the State". The resulting net would be "discounted by a given
rate over time because the project happens over the course of
say 30 years" to provide the net present value to the State.
4:18:31 PM
Co-Chair Stedman asked how the NPV would be calculated for an
"applicant that has no gas".
Ms. Davis communicated that a range of gas flow assumptions that
"remains steady for all projects" would be applied.
4:19:04 PM
Commissioner Galvin explained that the evaluation process would
include "a blending" of the NPV analysis and the likelihood of
success. There would be a multitude of possible outcomes in the
NPV analysis depending on such things as the type of pipe and
the outcome of the open season. Some probability assumptions
would be required when determining the likelihood of that
particular outcome into the future.
4:20:36 PM
Co-Chair Stedman spoke to the provision in the bill that
specified "an 80/20 match past open season to the FERC
certificate". He asked how the risk factor or discount rate
would be affected by an application that had no gas.
4:21:23 PM
Commissioner Galvin stated that the likelihood of a project
being on time and meeting other requirements would be lower for
a project with a low likelihood of getting gas at an open
season. A project having "a greater likelihood of getting gas at
an open season, whether because its been pre-committed or
whether because we have confidence in the attractiveness of
their particular proposal, then its going to have a higher
probability of getting that cash flow in the timeframe that
provides the greatest value both to the State and to the
project".
Commissioner Galvin discussed a variety of project scenarios.
4:23:11 PM
Co-Chair Stedman asked what would happen were the State to only
have one applicant.
Commissioner Galvin advised that the commissioners would
determine whether it would be in the State's best interest to
move forward. The commissioners are not "obligated to issue a
license".
4:23:42 PM
Co-Chair Stedman stated "it would be interesting to look at the
calculations for the fellow that had no gas".
Commissioner Galvin acknowledged the challenges moving forward,
both in evaluating projects and in presenting the outcome of the
process to the Legislature.
4:24:19 PM
Section 43.90.180. Notice to the legislature of intent
to issue license; denial of license. (page 12 line 28
through page 13, line 19)
Ms. Davis resumed her analysis. This Section addressed "the
manner in which the commissioners, after taking into
consideration the public comments and after evaluating" the
applications, and determining project rankings, would determine
whether a project merited being issued a license.
Ms. Davis stated that if the commissioners determine that a
project merited being granted a license, that determination and
accompanying findings would be issued. A notice about the intent
to issue a license would be published and provided to the
Legislature for action as specified in the bill.
Ms. Davis stated that if the commissioners determine that no
project merited a license, they would also issue a written
notice and findings for that decision. No further agency action
would be required.
4:25:39 PM
Section 43.90.190. Legislative approval; issuance of
license. (page 13 line 19 through page 14 line 8)
Ms. Davis advised that this section has undergone numerous
revisions during its progress through committees. It would
require the Legislature to approve the license proposed by the
commissioners within 60 days of receipt.
4:26:24 PM
Senator Elton addressed language in Section 43.90.190(b) that
specifies that "the commissioners shall issue the license as
soon as practicable after the effective date of the Act
approving the issuance of the license." He asked how this would
be addressed were the Legislature to approve the bill without an
effective date; specifically whether there has been
consideration of waiving the standard 90-day effective date
delay applied to other legislation under similar circumstances.
4:27:25 PM
Commissioner Galvin remarked that the language in this provision
was drafted by the Judiciary Committee. No in-depth discussion
of its ramifications had occurred.
Commissioner Galvin elaborated. While the Administration did not
object to the Legislature's role in the process, they had raised
concern about the timeline as the Legislative approval
requirement provided the potential for there being multiple
delays as opposed to simply issuing the license. The scenario
described by Senator Elton was one example of the delays that
could be experienced.
4:29:00 PM
Commissioner Galvin pointed out that another concern evolving
from the Legislature' approval requirement is in respect to how
confident the licensee might be that the license was
forthcoming. They might be willing to spend the money necessary
to begin work and enter into contractual obligations or they
might not. A "field season" might be lost if this was considered
a hurtle. The State could not compel them to act until the
license was issued. This lack of control was worrisome.
4:30:40 PM
Co-Chair Hoffman expressed that there would be no problem with
the deadlines specified in the bill if the Legislature was in
session; it might be a problem otherwise.
Commissioner Galvin appreciated the Senate Judiciary Committee
specifying that the Legislature must address the commissioners'
licensee recommendation within 60 calendar days of its receipt
as opposed to 60 Legislative session days. This would include
calling, convening, and acting within the time constraints of a
30-day session. The State could not take any action until the
Legislative approval was obtained.
Commissioner Galvin characterized the 60 day timeframe "as a
self-imposed deadline that can be missed". The commissioners
would have the authority to begin the RFA process all over again
were that deadline missed.
4:32:53 PM
Senator Huggins considered this legislation to be "the largest
decision" he and other legislators would ever make on behalf of
the citizens of the State. "If we collectively cannot come to
that decision, it probably should not be had." Thus, he would
not be unsettled if the project was delayed until the time a
consensus was obtainable.
Senator Huggins contended that a good project would have the
support of both the Administration and the Legislature. Further
effort would be required otherwise.
4:34:20 PM
Commissioner Galvin did not disagree. The Administration has
presented AGIA because of their desire "that the process be one
that is accepted and endorsed by the Administration and the
Legislature together." This would apply to both the nature of
the bill and the licensee selected. If the selected licensee
"can't engender a majority of the Legislature, then we do need
to consider whether or not its appropriate for us to go forward
and how successful it could be if we have that kind of a split."
Commissioner Galvin communicated that the decision making
process could take a long time "even when everyone understands
the import and to a certain extent, the inevitability of a
particular result." It is important to be thorough.
4:35:38 PM
Commissioner Galvin voiced "that we must all be on the same
page". We have two goals. It is paramount that we get the right
licensee and that we give that licensee the opportunity to begin
work in the summer of 2008.
4:36:15 PM
Senator Huggins asked for further discussion about "what
actually comes to Legislature." He assumed that "at least one
license application" would be advanced by the commissioners. The
question was whether the ability of the Legislature to review
other applications needed to be further delineated.
4:36:39 PM
Ms. Davis clarified that the Administration would be presenting
justification as to "why it ranked" one project higher than
other qualifying applicants. Information on those applicants
would be provided as a "frame of reference".
Commissioner Galvin informed the Committee that two different
sets of rankings might be provided, "depending on what we
receive.
The first is the finding that will evaluate the qualifying
applications…that met the requirements. And, as part of
that, we are obligated to determine the net present value
along those different discount rates and you will receive
that information for all of the qualifying applications.
And then you will receive a discussion of the likelihood of
success elements for each of those. And, in the end, a
justification for how they ended up being ranked in the
particular order and the project that ranks the highest
will be submitted as the proposed licensee.
You will also have access to the applications that were
rejected because they were not-qualifying. They did not
meet the State's requirements. And those will be provided
to you or available to you, but they will not be part of
that evaluation process.
4:38:36 PM
Senator Huggins understood that the information would be
presented in a format similar to a "side by side" comparison.
4:38:48 PM
Co-Chair Stedman stated that the sectional analysis of the bill
would continue, and likely conclude, during the next Committee
hearing on the bill.
The Bill was HELD in Committee.
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