Legislature(2001 - 2002)

04/24/2002 01:42 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 519                                                                                                            
                                                                                                                                
     An Act  authorizing priority treatment under  the Right-                                                                   
     of-Way  Leasing Act  for an Alaska  North Slope  natural                                                                   
     gas project;  expanding the scope  for the kinds  of gas                                                                   
     development projects that  may become qualified projects                                                                   
     under   the  Alaska   Stranded   Gas  Development   Act;                                                                   
     extending  the  deadline   for  submitting  applications                                                                   
     under   the  Alaska   Stranded   Gas  Development   Act;                                                                   
     exempting  an Alaska  North  Slope  natural gas  project                                                                   
     from state  property tax and all municipal  taxes during                                                                   
     construction; and providing for an effective date.                                                                         
                                                                                                                                
Co-Chair  Mulder MOVED  to  ADOPT the  committee  substitute,                                                                   
#22-LS1651\R, Chenoweth, 4/23/02,  as the version of the bill                                                                   
before  the Committee.    There being  NO  OBJECTION, it  was                                                                   
adopted.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  PETE  KOTT,  SPONSOR,  provided  a  sectional                                                                   
analysis  of the  proposed draft.    He noted  that the  bill                                                                   
would   amend  various   statutes  in   furtherance  of   the                                                                   
construction and  operation of  the Alaska North  Slope (ANS)                                                                   
natural gas project.                                                                                                            
                                                                                                                                
Representative Kott  pointed out that the bill  would provide                                                                   
an incentive to the industry by  allowing a tax exemption for                                                                   
local property and  sales tax for the period  of construction                                                                   
plus two years, which is the most  critical provision.  Also,                                                                   
the bill would require that:                                                                                                    
                                                                                                                                
     ·         The State Commissioner and officials act in                                                                      
               an expeditious manner to the right of way                                                                        
               leases;                                                                                                          
     ·         To add the natural gas pipeline as one of the                                                                    
               qualifying projects in the bill; and                                                                             
     ·         To provide strong language to secure that                                                                        
               Alaskans are given a better opportunity to                                                                       
               participate in the fabrication, construction                                                                     
               and operation of the project.                                                                                    
                                                                                                                                
Representative Kott explained  that the State of Alaska is no                                                                   
closer than  it was  two years  ago to a  gas pipeline.   The                                                                   
current Administration  has had the opportunity  to negotiate                                                                   
for the past seven years.  He  emphasized the great potential                                                                   
for gas on the North Slope.                                                                                                     
                                                                                                                                
Representative  Kott   commented  that  members   would  hear                                                                   
testimony that the legislation  is too costly.  He noted that                                                                   
the  existing  tax scheme  would  remain  in place  and  that                                                                   
passage  of  the   bill  would  not  insure   anything.    He                                                                   
encouraged members  to look at  the long-term benefits.   The                                                                   
State will be  getting between $250-$300 million  dollars per                                                                   
year and the cost would be $700  million for the construction                                                                   
period.  HB 519 would be a good  way to diversify the State's                                                                   
economy.                                                                                                                        
                                                                                                                                
Representative  Kott stressed  that  HB 519  is an  important                                                                   
piece of  legislation and  is an  incentive to the  industry.                                                                   
He  emphasized  that the  bill  would  bring clarity  to  the                                                                   
producers.  He  reiterated that it is an important  "piece of                                                                   
the pie".  The producers are ready  to negotiate these terms.                                                                   
                                                                                                                                
Representative  Kott discussed  that HB  519 is about  Alaska                                                                   
and its' future.   The bill would  be a step to  the economic                                                                   
future of Alaska.  He claimed  that there would be no loss in                                                                   
revenue to the  State and that the money could  be negotiated                                                                   
down the road.                                                                                                                  
                                                                                                                                
Representative Davies noted concern  with previous statements                                                                   
made by Representative Kott regarding tax exemptions.                                                                           
                                                                                                                                
Representative Kott advised that  the existing tax scheme was                                                                   
in place.                                                                                                                       
                                                                                                                                
Representative  Davies clarified  that  if there  were to  be                                                                   
construction  on  the pipeline,  the  bill would  remove  the                                                                   
taxes on the constructive product  off the table.  He pointed                                                                   
out  that  there  are  other  negotiations  that  could  move                                                                   
forward   under    the   Stranded   Gas   Act    for   future                                                                   
considerations.                                                                                                                 
                                                                                                                                
Representative Kott expected that could be part of the on-                                                                      
going  negotiations   between  the  Administration   and  the                                                                   
producers.                                                                                                                      
                                                                                                                                
Representative  Davies   voiced  caution  and   concern  that                                                                   
Fairbanks  would   experience  immediate  impacts   from  the                                                                   
construction and the "tax holiday"  and questioned the timing                                                                   
of the municipal concerns.  He  asked if the impacts had been                                                                   
discussed and  what the best  way to mitigate  those concerns                                                                   
would be.                                                                                                                       
                                                                                                                                
Representative  Kott  responded  that concern  had  not  been                                                                   
discussed.  He  reminded Representative J. Davies  that there                                                                   
will be "social costs" along side  the many benefits.  He did                                                                   
not know what the impact would be to the local communities.                                                                     
                                                                                                                                
Representative Davies explained  that most analysis indicates                                                                   
that   without  impact   aid,   the  net   impact  on   local                                                                   
governmental structures would be negative.                                                                                      
                                                                                                                                
Representative   Kott  acknowledged   that  could   be  true,                                                                   
however, he had not heard those concerns voiced before.                                                                         
                                                                                                                                
Representative  Davies agreed that  there could be  long term                                                                   
benefits  but questioned  how could the  State could  receive                                                                   
the short-term benefits also.                                                                                                   
                                                                                                                                
Representative Croft understood  that the federal legislation                                                                   
would  defer  rather than  providing  a  "tax holiday".    He                                                                   
inquired why a  choice of a tax holiday had  been made rather                                                                   
than requesting a deferral.                                                                                                     
                                                                                                                                
Representative Kott  advised that the bill would  provide the                                                                   
clarity  producers want  in order  to move  forward with  the                                                                   
project.   The  State  has received  zero  gain  for all  the                                                                   
discussion that  has occurred over  the last ten years.   The                                                                   
industry will be receiving nothing without the tax holiday.                                                                     
                                                                                                                                
Vice-Chair  Bunde interjected  that the  State would  like to                                                                   
see the gas  pipeline happen "sooner rather than  later".  He                                                                   
asked about the 2004 application deadline.                                                                                      
                                                                                                                                
Representative  Kott commented that  it would be  appropriate                                                                   
to shorten that  time frame in order to get  the project "off                                                                   
the ground".                                                                                                                    
                                                                                                                                
Vice-Chair Bunde  referenced Page 7, Line 6,  and asked about                                                                   
the "annual" base.                                                                                                              
                                                                                                                                
Representative  Kott replied  that would  be left  up to  the                                                                   
Department of Revenue Commissioner  to determine the date for                                                                   
regulation based on when the project begins.                                                                                    
                                                                                                                                
Representative  Harris   voiced  his  appreciation   for  the                                                                   
legislation  and the  incentives that  it would  create.   He                                                                   
echoed concerns voiced by Representative  J. Davies about the                                                                   
impact  to  local  services.   He  voiced  concern  with  the                                                                   
timeline of when the actual construction  ends on the project                                                                   
and  recommended that  the definition  be further  clarified.                                                                   
Representative Harris suggested that there be a project-                                                                        
labor agreement.                                                                                                                
                                                                                                                                
Representative  Kott  responded   that  if  the  State  wants                                                                   
something,  they must  be  willing to  give  something.   The                                                                   
communities will  receive a large  benefit from  the proposed                                                                   
legislation.                                                                                                                    
                                                                                                                                
PAT POURCHOT, COMMISSIONER, DEPARTMENT  OF NATURAL RESOURCES,                                                                   
advised  that the  Administration opposes  the provisions  of                                                                   
the  bill  that  would  unilaterally  grant  a  property  tax                                                                   
exemption that could be worth  up to $700 million dollars, in                                                                   
the  absence  of  a  negotiating   framework.    Commissioner                                                                   
Pourchot maintained that the Administration  does support the                                                                   
provisions  of  the  bill  that  would  expand  the  existing                                                                   
Stranded Gas Act.                                                                                                               
                                                                                                                                
Commissioner  Pourchot stated that  expanding that  act would                                                                   
address many issues regarding  issues of the State and issues                                                                   
of  tax  and  royalty  provisions.    The  stranded  gas  tax                                                                   
specifically provides  for a municipal  input component.   He                                                                   
explained  the bill's  date.   He  noted that  there are  two                                                                   
separate items in the bill that are unrelated.                                                                                  
                                                                                                                                
     ·         Granting of the property tax exemption is an                                                                     
               absolute exemption.                                                                                              
                                                                                                                                
There is  no date provided  regarding when the  project would                                                                   
begin or how long that tax exemption  would be in place.  The                                                                   
date referred  to in the bill,  only addresses the  fact that                                                                   
if one  avails themselves to  a negotiated process  under the                                                                   
Stranded  Gas  Act,  they  would  need to  apply  now.    The                                                                   
committee substitute  places that date  at April 2004.   That                                                                   
date does not mean  that an agency has to apply,  nor does it                                                                   
mean that  it would have any  relationship to a  property tax                                                                   
exemption.                                                                                                                      
                                                                                                                                
He  explained  that  is  important  because  there  has  been                                                                   
discussion  about   "recouping  costs"  in   the  negotiating                                                                   
process.   Once  the State  gives something  away, the  State                                                                   
would have to  "give something very valuable" to  get back or                                                                   
there would  need to be  other types  of trade offs  on other                                                                   
kinds of taxes.                                                                                                                 
                                                                                                                                
Commissioner  Pourchot  provided   a  quick  history  of  the                                                                   
legislation.     During   the   1990's,  the   Administration                                                                   
contracted  a  study  of  Alaska   State  tax  laws  and  the                                                                   
incentives and  disincentives of  gas development  in Alaska.                                                                   
One  of  the  conclusions  of that  study  was  that  indeed,                                                                   
property  tax was  the  single most  important  aspect as  an                                                                   
incentive  or disincentive  for a  gas line  development.   I                                                                   
advised that was  a front-loading problem, and  perhaps there                                                                   
could be a  way to back-load taxes  to recoup.  That  was the                                                                   
idea envisioned when the Legislature  passed the Stranded Gas                                                                   
Act.                                                                                                                            
                                                                                                                                
Commissioner  Pourchot recommended  that the Legislature  not                                                                   
trust the  Administration or the  industry, but  instead look                                                                   
at the  information and how it  could best contribute  to the                                                                   
economic liability of the project.                                                                                              
                                                                                                                                
Co-Chair  Mulder questioned  where  the  $700 million  dollar                                                                   
figure originated.                                                                                                              
                                                                                                                                
Commissioner  Pourchot   deferred  those  questions   to  the                                                                   
Department  of   Revenue,  as   they  developed   the  fiscal                                                                   
information.                                                                                                                    
                                                                                                                                
Co-Chair Mulder  commented that there are two  key provisions                                                                   
in HB 519, the property tax holiday  and the reapplication of                                                                   
the Stranded  Gas Act  passed through HB  393.  He  suggested                                                                   
that they  do not act totally  separate, because HB  393 puts                                                                   
in  place  the   negotiation  for  royalty,   severance,  and                                                                   
corporate  tax.  He  said that  ultimately, it  is up  to the                                                                   
Commissioner to negotiate for the State.                                                                                        
                                                                                                                                
Commissioner Pourchot  pointed out that the  producers or the                                                                   
pipeline sponsors  would "think  long and hard"  about giving                                                                   
back something that  they already had.  The  next question is                                                                   
what  would that  be worth.   If  it was  worth $700  million                                                                   
dollars,  the State  would have  to  provide quite  a lot  of                                                                   
benefit.                                                                                                                        
                                                                                                                                
Co-Chair  Mulder  inquired why  it  could not  be  negotiated                                                                   
back.                                                                                                                           
                                                                                                                                
Commissioner Pourchot understood  that would be determined on                                                                   
the  State's objectives.   If  the State  were attempting  to                                                                   
negotiate back $700 million dollars,  the State would need to                                                                   
offer a royalty reduction.                                                                                                      
                                                                                                                                
Co-Chair  Mulder  pointed  out   that  a  royalty  only  gets                                                                   
negotiated at the back-end.                                                                                                     
                                                                                                                                
Commissioner  Pourchot advised that  the royalty  starts when                                                                   
the production  begins.   He stated  that it  was not  in the                                                                   
State's best  interest to take  $500 million dollars  off the                                                                   
table  and then  put  back on  for  more negotiations  for  a                                                                   
royalty.   He  interjected  that was  not  necessary for  the                                                                   
project.                                                                                                                        
                                                                                                                                
Co-Chair Williams  noted that it was only his  intent to take                                                                   
public testimony on the bill at this meeting.                                                                                   
                                                                                                                                
                                                                                                                                
TAPE HFC 02 - 93, Side A                                                                                                      
                                                                                                                              
                                                                                                                              
Representative  Davies questioned how  the State  would enter                                                                   
into the negotiations.                                                                                                          
                                                                                                                                
Commissioner  Pourchot  explained  that  it  begins  with  an                                                                   
application   from  the   project  sponsor,   not  from   the                                                                   
Administration.                                                                                                                 
                                                                                                                                
Representative   Hudson  asked   what  caused  the   original                                                                   
Stranded Gas Act to terminate.                                                                                                  
                                                                                                                                
Commissioner  Pourchot advised  that the  bill called  for an                                                                   
application to  be submitted by  2001; the time  expired with                                                                   
no applications.                                                                                                                
                                                                                                                                
LARRY PERSILY,  DEPUTY COMMISSIONER,  DEPARTMENT OF  REVENUE,                                                                   
spoke to  HB 519.   He stated that  the Stranded Gas  Act was                                                                   
passed  in  1998.   It  clarified  that  the purpose  of  the                                                                   
chapter  was  to  encourage new  investment  to  develop  the                                                                   
State's   stranded   gas   resources    by   authorizing   an                                                                   
establishment of  fiscal terms related to the  investment and                                                                   
to  allow  the  fiscal terms  applicable  to  that  qualified                                                                   
sponsor and  tailored to  the particular economic  conditions                                                                   
of  the  project.  Also,  it was  intended  to  maximize  the                                                                   
benefit to the people of the State.                                                                                             
                                                                                                                                
Mr. Persily  stated that the  Department of Revenue  supports                                                                   
authorizing  the Stranded  Gas  Act, which  expired June  30,                                                                   
2001.   He said  that when  giving billons  of dollars  for a                                                                   
project,  there  would  be a  problem  for  the  construction                                                                   
period when there are substantial  property taxes and no cash                                                                   
flow.   Given  the  purpose of  the gas  flow  act, it  seems                                                                   
excessive to waive  $760 million dollars or  more in property                                                                   
taxes until  it is  known how  much is  needed to be  waived.                                                                   
The  Stranded Gas  Act  clearly states  how  to maximize  the                                                                   
benefit for the people of Alaska for gas development.                                                                           
                                                                                                                                
Through  HB 519, property  taxes would  be waived  throughout                                                                   
the construction  and then for  two full years  following the                                                                   
construction.   The $760  million dollars  is one quarter  of                                                                   
all the property tax revenue estimated  to be received on the                                                                   
35-year project.                                                                                                                
                                                                                                                                
Mr.  Persily  observed that  there  is  no link  between  the                                                                   
property  tax waiver and  the Stranded  Gas Development  Act.                                                                   
Under the  Stranded Gas  Development Act,  the Department  of                                                                   
Natural Resources  would negotiate contracts payment  in lieu                                                                   
of taxes.   Approval  of the contract  would remain  with the                                                                   
Legislature.                                                                                                                    
                                                                                                                                
Mr. Persily  spoke to the $500  to $760 million dollars.   He                                                                   
observed that  originally, the  State looked at  what portion                                                                   
of the  property would  be subject  to property  tax and  how                                                                   
many  of  those  miles  would   be  located  in  Alaska.  The                                                                   
estimated  average cost  for that  project  was $500  million                                                                   
dollars.   Probably, it  will cost  more to  built a  mile of                                                                   
pipe in  Alaska than it  would in the  flat lands  of Canada.                                                                   
The  $760   million  dollar  estimate   was  based   on  that                                                                   
projection.                                                                                                                     
                                                                                                                                
Vice-Chair Bunde  asked if there is anything  in the proposed                                                                   
legislation  that would  prevent  a future  legislature  from                                                                   
raising taxes.                                                                                                                  
                                                                                                                                
Mr.  Persily  acknowledged  that   in  any  given  year,  the                                                                   
Legislature could change tax rates.                                                                                             
                                                                                                                                
Representative  Hudson   asked  if  the  contract   would  be                                                                   
required to include Alaskan and Canadian taxing authority.                                                                      
                                                                                                                                
Mr. Persily emphasized that Alaska  cannot dictate tax policy                                                                   
in Canada.   It is  possible that  project sponsors  could be                                                                   
asking for  similar incentives or  waivers in Canada.  He was                                                                   
not aware of any discussions regarding that.                                                                                    
                                                                                                                                
Representative  Davies asked for  more information  regarding                                                                   
the Department's  property tax  calculations and how  the tax                                                                   
holiday would be affecting the numbers.                                                                                         
                                                                                                                                
Mr.   Persily  discussed   that  the   $760  million   dollar                                                                   
assumption was that  production would begin in 2006.   In the                                                                   
first two  full years of  production, taxes would  be waived.                                                                   
Regarding  the $17 billion  dollar pipeline,  30% percent  of                                                                   
scheduled the cost  would be in Alaska and  70% percent would                                                                   
be in Canada.   There would also  be a $3 billion  dollar gas                                                                   
conditioning  line on  the North  Slope.   The lost  property                                                                   
revenue  estimate  is  based on  an  understanding  that  the                                                                   
intent was to provide that tax  waiver.  He observed that the                                                                   
committee  substitute  attempts to  clarify  Page 5,  Section                                                                   
2(c).                                                                                                                           
                                                                                                                                
DAVID MARQUEZ,  ATTORNEY, VECO CORPORATION,  ANCHORAGE, spoke                                                                   
in support of HB 519.                                                                                                           
                                                                                                                                
Mr. Marquez noted that a year  ago when gas prices were high,                                                                   
everyone  thought the  pipeline was just  around the  corner.                                                                   
Now reality  has set  in and  the project's  costs and  risks                                                                   
make it doubtful that it would  be built, unless quick action                                                                   
is taken to keep it alive.  He  noted that the producers have                                                                   
indicated  that  work  would  proceed  if  three  legislative                                                                   
actions to reduce risks were taken:                                                                                             
                                                                                                                                
 (1)      Federal enabling legislation;                                                                                         
 (2)      Federal legislation that would help to reduce the                                                                     
          risk of low gas prices; and                                                                                           
 (3)      Alaskan legislation.                                                                                                  
                                                                                                                                
Mr.  Marquez discussed  that  some  believe that  no  federal                                                                   
assistance  should be provided  if Alaska  is not willing  to                                                                   
step forward.  HB 519 sends a  clear signal that the State is                                                                   
willing to participate.  He noted  that VECO believes that if                                                                   
the  Legislature does  take action  to reduce  the risks  and                                                                   
costs of the project, the pipeline will happen.                                                                                 
                                                                                                                                
Mr.  Marquez pointed  out  that  HB 519  takes  two steps  to                                                                   
reduce  the risks  associated with  the project.   Given  the                                                                   
incentive,  it would  help to  reduce  risks associated  with                                                                   
construction  costs.    Additionally,   by  revitalizing  the                                                                   
Alaska  Stranded  Gas Development  Act,  it  would lower  the                                                                   
risks associated  with tax and royalty uncertainty  and would                                                                   
protect the State and the municipalities.                                                                                       
                                                                                                                                
Mr. Marquez  stated that the  incentive would help  to reduce                                                                   
construction costs.   HB 519 grants a temporary  exemption to                                                                   
the project  from State property  taxation and  all municipal                                                                   
taxes  for  a  period  from  commencement  of  the  project's                                                                   
construction through the first  two years of operation of the                                                                   
pipeline.   He stressed  that it is  temporary and  would not                                                                   
apply  to any  taxes  currently being  collected.   The  bill                                                                   
would  not affect  present  revenues.   The  amount of  money                                                                   
saved through  the temporary tax  exemption would  reduce the                                                                   
cost of  construction, thus reduce  the tariff  and increases                                                                   
to the royalty  and severance tax.   When the tax  holiday is                                                                   
finished,  the  State  and local  governments  would  have  a                                                                   
pipeline on  which to levy taxes  for many decades and  a new                                                                   
gas industry would have been created.                                                                                           
                                                                                                                                
Mr.  Marquez pointed  out  that the  bill  would require  the                                                                   
producers to  meet certain  pro-Alaska conditions  before the                                                                   
temporary  tax exemption.   First,  it would  be a  southern-                                                                   
route  pipeline.    The  bill   indicates  other  conditions,                                                                   
including  compliance  with  the  federal  acts  relating  to                                                                   
natural gas pipelines.  Also included  is an Alaska hire, buy                                                                   
and build requirement.                                                                                                          
                                                                                                                                
Mr. Marquez  stated that the bill  puts back into  action the                                                                   
Alaska Stranded  Gas Development Act that expired  last June.                                                                   
That Act contemplates that the  State and the producers would                                                                   
sign  a contract  that covers  everything the  State and  the                                                                   
producers would  need to have  for a successful project.   It                                                                   
was enacted after substantial  effort by the Legislature, the                                                                   
industry   and   the   Administration,   to   encourage   the                                                                   
development of  an LNG project  and guarantee that  the State                                                                   
and the municipalities were protected in the process.                                                                           
                                                                                                                                
The committee substitute  makes the Act also  applicable to a                                                                   
North Slope  gas line, as well  as an LNG project,  and would                                                                   
extend the date until April 1,  2004, the deadline for filing                                                                   
an application for a contract with the State.                                                                                   
                                                                                                                                
Mr. Marquez  noted that  just as important  to the  State and                                                                   
municipalities, the  Stranded Gas Development Act  provides a                                                                   
great process  for the State  and producers to  negotiate the                                                                   
total fiscal  regime for  the pipeline that  would be  in the                                                                   
long-term fiscal  interest of the State,  while accommodating                                                                   
affected  municipalities.   The Act  very specifically  gives                                                                   
the municipalities  an important  role through the  formation                                                                   
of a municipal advisory group under AS 43.82.500-520.                                                                           
                                                                                                                                
He  added that  there  is an  additional  protection for  the                                                                   
municipalities.    The Act,  at  AS 43.82.020,  empowers  the                                                                   
Department  of  Revenue Commissioner  to  negotiate  contract                                                                   
terms that  provide for  periodic payments  in lieu  of taxes                                                                   
that  otherwise   would  be  imposed   by  the  State   or  a                                                                   
municipality.     Under  AS  43.82.200,  210   and  500,  the                                                                   
Commissioner  has to  include  a term  in  the contract  that                                                                   
would provide for a portion of  the periodic payments made in                                                                   
place   of  the   tax  go   to   the  economically   affected                                                                   
municipalities.   Under AS 43.82.120 and 130,  the producers'                                                                   
contract  application  must  contain  a  description  of  the                                                                   
satisfactory terms  under which the producers  would make gas                                                                   
available to the meet the State's  reasonable gas demand, and                                                                   
must include rules  regarding expansion.  The  producers must                                                                   
also  furnish a  detailed description  of  how the  increased                                                                   
demand for public services and  other negative effects caused                                                                   
by the project will be mitigated.                                                                                               
                                                                                                                                
Mr.  Marquez advised  that  there is  disagreement  regarding                                                                   
what point  the incentive  should be  granted.  He  commented                                                                   
that there  is concern  regarding the  "give away"  and that;                                                                   
instead,  the  State  should  negotiate  with  the  producers                                                                   
before any incentives  are given.  VECO does have  a sense of                                                                   
"urgency" and strongly believes  that the incentive should be                                                                   
granted now.  If the action is  not taken this year, the only                                                                   
opportunity  for a  significant  boost to  the State  economy                                                                   
could  be   lost.    He   stressed  that  the   Stranded  Gas                                                                   
Development Act  would protect the long-term  fiscal interest                                                                   
of the State  and municipalities.  VECO urges  that action be                                                                   
taken this year to keep the project alive.                                                                                      
                                                                                                                                
Mr. Marquez advised that VECO  does not consider HB 519 to be                                                                   
a  producer bill.    HB  519 is  an  Alaska bill  that  would                                                                   
provide for a  short-term investment by Alaska  that will pay                                                                   
off  in a  project  that  could  be shipping  gas,  employing                                                                   
citizens and  contractors, and  boosting the State's  economy                                                                   
for a hundred years.                                                                                                            
                                                                                                                                
Vice-Chair  Bunde  asked  if   this  type  of  incentive  had                                                                   
previously ever been used in the  development of oil and gas.                                                                   
                                                                                                                                
Mr. Marquez responded that it  had been used around the world                                                                   
for  encouraging  development.    These  incentives  are  not                                                                   
front-end loaded.  He was not  aware of any project like this                                                                   
in the United States.                                                                                                           
                                                                                                                                
Vice-Chair Bunde inquired about the negotiation process.                                                                        
                                                                                                                                
Mr. Marquez  responded that  there is a  great prize  for the                                                                   
producers  on   this  risky  project.    The   producers  are                                                                   
compelled  to  enter  into negotiations  with  the  State  of                                                                   
Alaska  to achieve  the prize.   Mr. Marquez  stated that  of                                                                   
most value  would  be the prize  of the  possibility of  "tax                                                                   
certainty" for a  30-year project, which will  give the State                                                                   
leverage during the negotiations.                                                                                               
                                                                                                                                
Vice-Chair  Bunde  requested  that Mr.  Marquez  address  the                                                                   
concern  that  Alaska  might  be "leaving  too  much  on  the                                                                   
table".                                                                                                                         
                                                                                                                                
Mr. Marquez replied  that it was the intent  of the producers                                                                   
to  have  the  opportunity  under  the  Act  to  provide  the                                                                   
opportunity  of stability for  the life of  the project.   If                                                                   
that can be negotiated and approved  by the Legislature, then                                                                   
subsequent legislatures would  have legal difficulty changing                                                                   
the terms.                                                                                                                      
                                                                                                                                
Representative   Davies   referenced    the   "Alaska   hire"                                                                   
provisions.   The problem with  Alaska hire is that the State                                                                   
cannot require  it; consequently, those  laws are weak.   The                                                                   
only effective  way to implement  the Alaska hire  provisions                                                                   
would be  through a project labor  agreement.  He  asked what                                                                   
VECO's stand would be on that.                                                                                                  
                                                                                                                                
Mr.  Marquez explained  that  there will  be  more jobs  than                                                                   
Alaskans  can fill during  the construction  of the  project,                                                                   
with  many  jobs for  skilled  labors.    He thought  that  a                                                                   
project  labor  agreement  would  not be  necessary  for  the                                                                   
project and  that it could put  another burden on  an already                                                                   
risky project.                                                                                                                  
                                                                                                                                
Representative  Croft   asserted  that  it  would   help  the                                                                   
economics  of the  project if  Alaska agreed  to give up  its                                                                   
severance tax as well.                                                                                                          
                                                                                                                                
Mr.  Marquez replied  that  relinquishing  the severance  tax                                                                   
would help  the economics.   He added  that it would  be good                                                                   
during  the negotiations  to  look  at the  long-term  fiscal                                                                   
interest of the State in order  to determine the factors that                                                                   
need to be balanced.   Experts have indicated that  it is the                                                                   
property tax that will leverage the project forward.                                                                            
                                                                                                                                
Representative  Croft asked  why  VECO choose  a tax  holiday                                                                   
rather than a deferred tax credit.                                                                                              
                                                                                                                                
Mr. Marquez  explained that  there would  be a mechanism  for                                                                   
repayment.   The Stranded  Gas Development  Act provides  the                                                                   
mechanism  whereby the  total long-term  fiscal interests  of                                                                   
the  State  and  the  municipalities  are  protected  by  the                                                                   
negotiated terms  of the contract.   Mr. Marquez  argued that                                                                   
everything important  is "on the  table" in the  legislation.                                                                   
VECO wants  the leveraging  start in  order that the  project                                                                   
can continue.                                                                                                                   
                                                                                                                                
Representative Croft questioned  if the items outlined by Mr.                                                                   
Marquez  would  come through  the  negotiations  such as  the                                                                   
local hire issues.                                                                                                              
                                                                                                                                
Mr.  Marquez  expounded  that  they would  come  through  the                                                                   
negotiations.     These  are   opportunities  for   voluntary                                                                   
programs.                                                                                                                       
                                                                                                                                
Representative  Croft noted  that the  State of Alaska  would                                                                   
retain no constitutional power when making requests.                                                                            
                                                                                                                                
Mr. Marquez replied  that under the Stranded  Gas Development                                                                   
Act, there remain provisions for the Alaska hire.                                                                               
                                                                                                                                
Representative  Croft inquired  if he  should move  to add  a                                                                   
severance holiday to the legislation.                                                                                           
                                                                                                                                
Mr. Marquez replied  that was not necessary.   However, every                                                                   
incentive offered  would increase the chance  for the project                                                                   
to get off the ground.                                                                                                          
                                                                                                                                
Representative  Croft asked  when the  State would know  that                                                                   
they had offered too much.                                                                                                      
                                                                                                                                
Mr. Marquez responded that there would be two indications:                                                                      
                                                                                                                                
     ·         If there is no project, then you would know                                                                      
               that you had not given enough; or                                                                                
     ·         If there is a project, the State would know                                                                      
               what  the economics are because  under Article                                                                   
               4  of the  Stranded Gas  Act, it is  indicated                                                                   
               what  the opportunity  for  the Department  of                                                                   
               Revenue will be.                                                                                                 
                                                                                                                                
Representative Croft  argued that the State  would never know                                                                   
that  they had  given  too much  because  of the  disclosures                                                                   
listed in Section 4.                                                                                                            
                                                                                                                                
Mr. Marquez  agreed  that there  is some risk  to the  State.                                                                   
That  risk must  be  balanced  against the  non-tax  benefits                                                                   
which come from the project.                                                                                                    
                                                                                                                                
Representative  Harris asked about  "access" to the  pipeline                                                                   
and the provisions to tap the line.                                                                                             
                                                                                                                                
Mr. Marquez understood  that there would be  federal managers                                                                   
on the pipeline.   There is  a provision in the  Stranded Gas                                                                   
Act that  would allow  for the producers  to come  forward in                                                                   
their application  and during  the negotiations of  the plan.                                                                   
That door provides the opportunity to negotiate.                                                                                
                                                                                                                                
Co-Chair Mulder  indicated that he understood  that there was                                                                   
concern  regarding the  smaller producers  who might  want to                                                                   
tap into  it.  He  asked if under  the Stranded Gas  Act, and                                                                   
the expansion  rule, if  the State would  be able  to protect                                                                   
the interest  of those  smaller producers  for accessing  and                                                                   
placing their gas through the pipeline.                                                                                         
                                                                                                                                
Mr. Marquez  responded  that access is  an extremely  complex                                                                   
issue.    He  understood  that Act  would  "rule"  and  would                                                                   
provide an "open door" for the State.                                                                                           
                                                                                                                                
Representative Hudson  asked how the ballot  initiative would                                                                   
be affected.                                                                                                                    
                                                                                                                                
Mr. Marquez  believed that the  initiative could  empower the                                                                   
State to  determine if  the project was  feasible.   He added                                                                   
that  the beauty  of  the gas  pipeline is  that  once it  is                                                                   
constructed, there would be opportunity for more lines.                                                                         
                                                                                                                                
BILL ALLEN,  CHAIRMAN, CHIEF  EXECUTIVE OFFICIER  (CEO), VECO                                                                   
CORPORATION, ANCHORAGE, requested  that the Vice President of                                                                   
VECO, Mr. Rick Smith, read his  testimony.  He explained that                                                                   
they were  his words but because  of an accident,  his speech                                                                   
had been impeded.                                                                                                               
                                                                                                                                
Mr.  Allen added  that he  was  not before  the Committee  to                                                                   
speak for  the producers but rather  he was in  attendance as                                                                   
an Alaskan.  An  Alaskan who has fought for  local hire, jobs                                                                   
and the State's future.                                                                                                         
                                                                                                                                
RICK  SMITH,  VICE PRESIDENT,  VECO  CORPORATION,  ANCHORAGE,                                                                   
read the comments of Mr. Allen.                                                                                                 
                                                                                                                                
Mr. Smith addressed  the differences, which involve  how best                                                                   
to maximum the benefits for Alaska.   He acknowledged that it                                                                   
is a complex issue.                                                                                                             
                                                                                                                                
The  benefits cannot  be  measured simply  in  terms of  "net                                                                   
revenues" to the  State and local governments.   The benefits                                                                   
are  the taxes  collected minus  the incentives  given.   The                                                                   
formula  must  include  a  valuation for  new  jobs  and  new                                                                   
economic activity  that the gas industry will  generate.  Mr.                                                                   
Smith explained  that the  legislation is  about a  whole new                                                                   
industry for Alaska through the economic diversification.                                                                       
                                                                                                                                
Mr. Smith stated that there is  enough gas on the North Slope                                                                   
to fill  a pipeline  for the  next fifty  years.  A  pipeline                                                                   
that  could generate  between  $250-$300  million dollars  in                                                                   
revenues each  year for the  State.   He added that  over the                                                                   
life of  the project,  it would  ultimately generate  between                                                                   
$12 and $30 billion dollars for Alaska.                                                                                         
                                                                                                                                
Mr. Smith  pointed out  that Governor  Knowles has  tried for                                                                   
years  to  "negotiate"  terms  that  would  get  the  project                                                                   
underway.   Many  legislators  have devoted  their effort  in                                                                   
finding a way to make the gas line a reality.                                                                                   
                                                                                                                                
He  pointed  out  that instead,  Prudhoe  Bay  is  declining.                                                                   
Alaska's traditional mainstay  industries, timber, mining and                                                                   
fishing, are locked up in a struggle  for their survival.  In                                                                   
short, the State's economic prospects are looking grim.                                                                         
                                                                                                                                
                                                                                                                                
TAPE HFC 02 - 93, Side B                                                                                                      
                                                                                                                                
                                                                                                                                
Mr.  Smith contended  that  Alaska  desperately  needs a  gas                                                                   
pipeline and  the jobs  and economic  stability that  it will                                                                   
bring.   A  number  of years  ago,  with prices  soaring,  it                                                                   
seemed that  the project  was a  sure thing.   Unfortunately,                                                                   
now the  economics have  changed and  because of the  current                                                                   
prices, the  project does  not appear  feasible.  He  pointed                                                                   
out that international competition increases each year.                                                                         
                                                                                                                                
Mr. Smith pointed out that producers  have made it clear that                                                                   
without  State and  federal incentives,  they cannot  justify                                                                   
investing the $20  billion dollars in a project  that carries                                                                   
such a tremendous risk.                                                                                                         
                                                                                                                                
Mr. Smith pointed out that Alaska's  congressional delegation                                                                   
is working hard to pass the necessary  federal incentives and                                                                   
have implied  that  it is very  important that  the State  of                                                                   
Alaska quickly  do the same.   Producers have  indicated that                                                                   
the incentives in HB 519 combined  with federal action, would                                                                   
be enough  to get  the project  started.   Passage of  HB 519                                                                   
would send a  clear signal to producers and  Washington D.C.,                                                                   
that Alaska is  willing to "step up to the plate"  and invest                                                                   
in our future.                                                                                                                  
                                                                                                                                
Mr.   Smith  concluded   that  as   elected  officials,   the                                                                   
legislators must decide what incentives  are appropriate.  He                                                                   
suggested they bear  in mind the value of the  project to the                                                                   
State.  He  recommended that legislators consider  the number                                                                   
of jobs,  the tremendous  long-term economic  growth  and the                                                                   
future prosperity such a project could bring.                                                                                   
                                                                                                                                
KEN  KONRAD,  (TESTIFIED  VIA  TELECONFERENCE),  SENIOR  VICE                                                                   
PRESIDENT,  GAS FOR  BP EXPLORATION  ALASKA INC.,  ANCHORAGE,                                                                   
testified that creating a supportive  government framework is                                                                   
an essential  ingredient toward  developing a successful  ANS                                                                   
gas project.   He acknowledged that an  international project                                                                   
of such  magnitude brings many  risks adding that  government                                                                   
working constructively  with the industry could  play a major                                                                   
role  in  reducing  those risks  by  establishing  clear  and                                                                   
predictable rules under which the project is undertaken.                                                                        
                                                                                                                                
Mr. Konrad stated that BP, with  their partners, has laid out                                                                   
key   government  actions   that   would  facilitate   future                                                                   
investment  on  such  an  undertaking.     It  would  provide                                                                   
specifically:                                                                                                                   
                                                                                                                                
     ·         A clear and efficient federal regulatory                                                                         
               process.  Progress is  being made with  Alaska                                                                   
               gas provisions  currently part of  the pending                                                                   
               U.S. Senate energy bill.                                                                                         
     ·         An efficient and predictable Canada/First                                                                        
               Nations  regulatory process.  BP  remains very                                                                   
               active  working in Canada to establish  such a                                                                   
               process and progress is being made.                                                                              
     ·         A simple, clear, and predictable fiscal                                                                          
               framework  in Alaska  such  that the  massive,                                                                   
               long  payout investments  being  contemplated,                                                                   
               could  be undertaken  with the knowledge  that                                                                   
               the rules will not change.                                                                                       
                                                                                                                                
Mr.  Konrad advised  that HB  519  could be  a positive  step                                                                   
toward achieving  the necessary  fiscal framework  in Alaska.                                                                   
The bill is modeled after HB 393, which was passed in 1998.                                                                     
                                                                                                                                
He continued that HB 519 and the Stranded Gas Act could:                                                                        
                                                                                                                                
     ·         Demonstrate leadership and intent by the                                                                         
               legislature  to  provide stable  fiscal  terms                                                                   
               that  encourage  development  of Alaska  North                                                                   
               Slope   (ANS)  gas  while  fully   and  fairly                                                                   
               compensating the people of the State.                                                                            
     ·         Establish a protocol, beginning with an                                                                          
               application,  and  followed  by a  process  to                                                                   
               exchange  information  between  investors  and                                                                   
               the State.                                                                                                       
     ·         Empower the State to enter into contract                                                                         
               negotiations  to achieve clear and  simple tax                                                                   
               royalty  terms.    Subsequently,  those  terms                                                                   
               would   need  to  be  approved  by   both  the                                                                   
               executive and the legislature branch.                                                                            
     ·         Provide a process for the State and investors                                                                    
               while providing for municipal input.                                                                             
     ·         Provide for contract review, approval, and                                                                       
               termination     provisions,    inclusive    of                                                                   
               municipal  input,  legislative  authorization,                                                                   
               and judicial review.                                                                                             
     ·         Provide for prioritization of State agency                                                                       
               support for a qualifying project.                                                                                
                                                                                                                                
Mr. Konrad suggested that these  guidelines would establish a                                                                   
thoughtful  and workable framework  important for  addressing                                                                   
fiscal  issues   subject  to   subsequent  approval   by  the                                                                   
legislature.                                                                                                                    
                                                                                                                                
Mr.  Konrad thought  that  the  bill could  encourage  Alaska                                                                   
hire, training, and  purchasing.  BP supports the  use of in-                                                                   
state  capabilities,  however, some  technical  modifications                                                                   
should be considered to ensure  that the bill's language does                                                                   
not draw legal challenge.  He  stated that the changes to the                                                                   
bill were  an improvement  and that passage  of HB  519 would                                                                   
send a positive message to investors.                                                                                           
                                                                                                                                
Vice-Chair Bunde asked how recent  Congressional action would                                                                   
impact the viability of the gas pipeline project.                                                                               
                                                                                                                                
Mr. Konrad  responded that action  was a vital step  and that                                                                   
it  moved  the  legislation  in a  positive  direction.    He                                                                   
anticipated  that the energy  bill could  pass from  the U.S.                                                                   
Senate and then be reconciled  in the House.  If approved, it                                                                   
would  complete  one of  the  three  legs of  the  government                                                                   
framework  provisions.    HB   519  addresses  the  State  of                                                                   
Alaska's portion.                                                                                                               
                                                                                                                                
Representative Croft asked if  there were provisions included                                                                   
in the  federal legislation to  address repayment of  the tax                                                                   
credits.                                                                                                                        
                                                                                                                                
Mr. Konrad  understood that the  tax credits would  "kick in"                                                                   
when there  are low prices.   He noted  that it is  not clear                                                                   
that the federal government would offer the tax benefits.                                                                       
                                                                                                                                
JOE MARUSHACK,  VICE PRESIDENT, ALASKA NORTH  SLOPE (ANS) GAS                                                                   
COMMERCIALIZATION,    PHILLIPS   PETROLEUM    COMPANY-ALASKA,                                                                   
ANCHORAGE, testified that there  are two major things that HB
519 could accomplish.                                                                                                           
                                                                                                                                
     ·         It would revive the stranded gas development                                                                     
               act    "process"   passed   by    the   Alaska                                                                   
               Legislature in 1998.                                                                                             
                                                                                                                                
That  process could  help progress  the  project.   It was  a                                                                   
negotiated  and   thoroughly  debated  process,   which  will                                                                   
provide an opportunity for fiscal  clarity and certainty that                                                                   
is essential  to move a gas  pipeline project forward.   That                                                                   
process  provides for  public notice  and comment.   It  also                                                                   
provides for  legislative approval  of any agreement  between                                                                   
the State and the project's sponsors.                                                                                           
                                                                                                                                
     ·         The second thing the proposed legislation                                                                        
               would  do is  provide  property tax  abatement                                                                   
               during  the construction period and  the first                                                                   
               two  years  of  operation  of a  gas  pipeline                                                                   
               project.                                                                                                         
                                                                                                                                
That  aspect  of  the  bill sends  a  clear  signal  to  U.S.                                                                   
Congress,  who  are  currently  considering  national  energy                                                                   
legislation.                                                                                                                    
                                                                                                                                
Mr. Marushack noted that for the  past several months most of                                                                   
Phillips Gas  emphasis has been  directed toward  the federal                                                                   
level in order  to achieve congressional  legislative changes                                                                   
needed to advance this project.  These items include:                                                                           
                                                                                                                                
     ·         New    federal   legislation    that   creates                                                                   
               permitting certainty and is part of a Senate                                                                     
               energy bill.                                                                                                     
     ·         A federal tax mechanism that could help                                                                          
               mitigate the market risk of a project this                                                                       
               large.  That would downside the mitigation.                                                                      
                                                                                                                                
Mr.  Marushack claimed  that  HB 519  could  send a  positive                                                                   
response to  Washington, D.C.   He spoke to the  property tax                                                                   
portion  of  the bill.    Mr.  Marushack stated  that  Alaska                                                                   
should clarify  that the property  tax abatement  proposed in                                                                   
HB 519, would  not be the single difference  in the economics                                                                   
of the project.   Clearly, it adds value and  would lower the                                                                   
tariff, increasing wellhead value  and increasing the State's                                                                   
royalty value.   Passage of HB 519 would let the  rest of the                                                                   
country know that  the elected representatives  of Alaska are                                                                   
willing  to do  what  they can  to try  to  make the  project                                                                   
happen.    Additionally,  it   could  improve  the  project's                                                                   
viability.                                                                                                                      
                                                                                                                                
Mr.  Marushack  noted  that  they   support  revival  of  the                                                                   
Stranded Gas  Act and the  declaration of support  implied by                                                                   
the property  tax abatement  in HB 519.   He urged  the House                                                                   
Finance Committee to quickly pass it from Committee.                                                                            
                                                                                                                                
RHONDA   BOYLES,  (TESTIFIED   VIA  TELECONFERENCE),   MAYOR,                                                                   
FAIRBANKS NORTH STAR BOROUGH,  FAIRBANKS, spoke in support of                                                                   
a  gas  pipeline  and  property  tax  exemptions  during  the                                                                   
construction period  to gain the  possibility of 35  years of                                                                   
property tax and some stability.   She stressed that Interior                                                                   
Alaska desperately needs natural  gas.  Ms. Boyles added that                                                                   
it  is  important   to  establish  an  environment   that  is                                                                   
conducive  to   economic  development  and   diversification.                                                                   
Decisions  must  be  made  with   the  idea  of  an  economic                                                                   
incentive.  Ms. Boyles stressed  that it is important to send                                                                   
a  message to  the  entire State,  that  Alaska  is open  for                                                                   
business.                                                                                                                       
                                                                                                                                
Ms. Boyles emphasized that she  supports economic incentives.                                                                   
She  commented  that  Alaska   should  not  assume  that  the                                                                   
municipalities would  be hesitant to come to the  table.  The                                                                   
municipalities  need a seat  at the  table to help  determine                                                                   
the  long-term decisions.   Ms.  Boyle  recommended that  the                                                                   
Committee set  aside any  agenda, territory issues,  personal                                                                   
desires and consider  the future of the State.   Alaska needs                                                                   
a gas line and viable project.                                                                                                  
                                                                                                                                
JOHN ELLWOOD, (TESTIFIED VIA TELECONFERENCE),  EXECUTIVE VICE                                                                   
PRESIDENT AND  CHIEF OPERATING OFFICER, FOOTHILLS  PIPE LINES                                                                   
LTD.,  ANCHORAGE,  commented that  because  of  the size  and                                                                   
complexity  of an  Alaska North  Slope  natural gas  project,                                                                   
issuance of  a right-of-way  lease for  such a project  under                                                                   
the  Alaska  Right-of-Way  Leasing Act,  AS  38.35,  involves                                                                   
unique  legal  and  administrative   considerations.    As  a                                                                   
result,  Foothills believes  that  certain statutory  changes                                                                   
are needed  in order  to provide clarity  to the  process for                                                                   
consideration  of a  right-of-way lease  application for  the                                                                   
Alaska North Slope gas project.                                                                                                 
                                                                                                                                
Mr.  Ellwood stated  that in  the  context of  the effort  to                                                                   
finalize a  State right-of-way  lease for the  Alaska Highway                                                                   
Project, certain issues have come  up with respect to getting                                                                   
a lease  for  a gas  conditioning facility  to condition  gas                                                                   
prior to its entering into the  linear pipeline.  In order to                                                                   
address the issues, Foothill's  has suggested an amendment to                                                                   
HB 519  that would clarify the  ability of the  Department of                                                                   
Natural  Resources   Commissioner  to  phase   administrative                                                                   
review, analysis  and findings under the  Alaska Right-of-Way                                                                   
Leasing  Act.   That action  would permit  action on  pending                                                                   
lease applications.   He noted that the change  was necessary                                                                   
to  clarify and  add  predictability.   It  would  be in  the                                                                   
State's best interest.                                                                                                          
                                                                                                                                
Mr. Ellwood discussed  that a lease application  is currently                                                                   
pending for  the use  of State lands  for a gas  conditioning                                                                   
facility for the  Alaska Highway Project under  the Right-of-                                                                   
Way  Leasing  Act.   He  added  that  lease  application  was                                                                   
separate from the lease application  for the linear pipeline.                                                                   
There  are  several reasons  for  pursuing  a lease  for  the                                                                   
conditioning facility separately  from a lease for the linear                                                                   
pipeline.   The  timing of  ground-disturbing activities  for                                                                   
the conditioning  facility differs from that  associated with                                                                   
the linear pipeline.  Moreover,  the stipulations appropriate                                                                   
for  the  linear pipeline  differ  significantly  from  those                                                                   
appropriate for the conditioning facility.                                                                                      
                                                                                                                                
Mr.  Ellwood  added that  considerable  uncertainties  remain                                                                   
with respect to the conditioning  facility.  Until commercial                                                                   
negotiations with  the producers  are concluded, it  will not                                                                   
be known:                                                                                                                       
                                                                                                                                
     ·         Who will construct and/or own the facility;                                                                      
     ·         Whether custody to the gas would be                                                                              
               transferred at the inlet or the outlet of the                                                                    
               facility; or                                                                                                     
     ·         To what extent the ANGTS could and/or will                                                                       
               utilize a portion of the producers' existing                                                                     
               North Slope facilities.                                                                                          
                                                                                                                                
Mr. Ellwood  continued, despite  those factors that  weigh in                                                                   
favor of prosecuting  the application for a  gas conditioning                                                                   
facility  separately  from  the application  for  the  linear                                                                   
pipeline,   the   lack   of  express   authority   to   phase                                                                   
administrative review,  analysis and findings under  AS 38.35                                                                   
for  an Alaska  North  Slope gas  project  could prevent  the                                                                   
Department  of  Natural  Resources  from  conducting  such  a                                                                   
phased review, even though it  might be in the best interests                                                                   
of  the  State.    Alternatively,   in  the  event  that  the                                                                   
Department  was  to  decide  to  prosecute  the  applications                                                                   
separately,   under  the  Alaska   Supreme  Court   case  law                                                                   
addressing the permissible use  of phasing or segmentation in                                                                   
the  State  permitting  and  land   disposal  decisions,  the                                                                   
Department could  be exposed to legal challenge  for improper                                                                   
phasing.                                                                                                                        
                                                                                                                                
Mr. Ellwood stated that in order  to address the issues, they                                                                   
proposed  an amendment,  which would  provide the  Department                                                                   
the  necessary   authority   to  limit   the  scope   of  its                                                                   
administrative review,  analysis and findings for  a proposed                                                                   
lease of land that pertains to  a discrete phase of an Alaska                                                                   
North Slope natural gas project,  following a southern route,                                                                   
and  providing   that  certain  conditions  are   met.    The                                                                   
conditions are:                                                                                                                 
                                                                                                                                
     ·         The only uses to be authorized by the                                                                            
               proposed  lease   are  part  of  the  discrete                                                                   
               phase;                                                                                                           
     ·         Before the next phase of the project may                                                                         
               proceed, public  notice and the opportunity to                                                                   
               comment  must  be provided  under  regulations                                                                   
               adopted   by   the   Department   of   Natural                                                                   
               Resources Commissioner  unless the pipeline is                                                                   
               subject  to  a  consistency  review  under  AS                                                                   
               46.40,  public notice  and the opportunity  to                                                                   
               comment are provided under AS 46.40.096©;                                                                        
     ·         The Commissioner's approval required before                                                                      
               the  next phase  of the  project may  proceed;                                                                   
               and                                                                                                              
     ·         The Commissioner describes the reasons for a                                                                     
               decision to phase.                                                                                               
                                                                                                                                
Mr. Ellwood  claimed that  the conditions  would ensure  that                                                                   
the  best  interests   of  the  State  were   served  by  the                                                                   
Department's decision to phase.                                                                                                 
                                                                                                                                
KEN  THOMPSON,  (TESTIFIED  VIA  TELECONFERENCE),  PRESIDENT,                                                                   
PACIFIC RIM LEADERSHIP DEVELOPMENT,  LCC., ANCHORAGE, advised                                                                   
that HB 519 would  apply to a tax incentive.   He stated that                                                                   
it   would  propose   authorizing   priority  treatment   and                                                                 
providing certain tax exemptions.                                                                                               
                                                                                                                                
Mr. Thompson voiced  support HB 519 if the  following changes                                                                   
were made:                                                                                                                      
                                                                                                                                
     ·         Ensure the application deadline be no later                                                                      
               than April 1, 2004.                                                                                              
                                                                                                                                
He noted  that originally, the  deadline was set as  June 30,                                                                   
2005.   If such  positive incentives  as the tax  exemptions,                                                                   
which are worth  millions of dollars, are indeed  approved by                                                                   
the State,  the State should  insist upon a quicker  decision                                                                   
to move  ahead with  the gas project  or pull the  incentives                                                                   
off the  table.  He added  that the producers may  argue that                                                                   
they cannot commit to reaching  an agreement by April 1,2004.                                                                   
                                                                                                                                
Mr.  Thompson stressed  that the  bill should  not be  passed                                                                   
without a  firm "line in the  sand".  The producers  only get                                                                   
the benefits in return for acting  by the end of next year or                                                                   
                                th                                                                                              
in early  2004, which is the  25  anniversary of  the startup                                                                   
of Prudhoe  Bay.   He claimed  that the  State has given  the                                                                   
producers  more  than  a  "reasonable  length  of  time"  for                                                                   
meetings, studies  and speeches.   If the tax  exemptions are                                                                   
provided, then the  State should ask for one  thing in return                                                                   
and that is "An approved project  underway by April 1, 2004".                                                                   
                                                                                                                                
     ·         Grant the property and sales tax exemption                                                                       
               only to a well-defined gas project, i.e. only                                                                    
               to selected facilities and the main gas trunk                                                                    
               line.                                                                                                            
                                                                                                                              
Mr. Thompson stated  that the original draft  allowed for tax                                                                   
exemptions  for   "related  facilities".    He   stated  that                                                                   
language was too broad and suggested  wording to clarify what                                                                   
investment is granted:                                                                                                          
                                                                                                                                
     "The property  and sales  tax exemption granted  by this                                                                   
     Act applies  only to the  following facilities:  the new                                                                   
     natural gas  trunk line in Alaska downstream  of the new                                                                   
     Prudhoe Bay  natural gas conditioning plant  and related                                                                   
     new compressor stations;  and select components, but not                                                                   
     all,  of the new  Prudhoe Bay  natural gas  conditioning                                                                   
     plant that  specifically relate  to conditioning  of the                                                                   
     gas to remove  impurities to get 'pipeline  quality' gas                                                                   
    for pressurized shipment down the main trunk line."                                                                         
                                                                                                                                
Mr.  Thompson   advised  that   components  of  the   natural                                                                   
conditioning  plant  that  are used  for  ancillary  economic                                                                   
purposes  are  not  exempt  from  property  or  sales  taxes.                                                                   
Likewise,  other  secondary pipelines,  gathering  lines,  or                                                                   
other facilities  on the North  Slope, upstream from  the new                                                                   
Prudhoe  Bay gas  conditioning  plant,  are not  exempt  from                                                                   
property  or sales  tax  by the  bill  and  are considered  a                                                                   
stand-alone field or facility development.                                                                                      
                                                                                                                                
     ·         Limit the outright incentive exemption from                                                                      
               property and sales tax to the period of                                                                          
               pipeline construction only.                                                                                      
                                                                                                                              
He  added  that  consideration   should  be  allowed  for  an                                                                   
additional  two  years  of  tax   exemption  after  gas  line                                                                   
startup.                                                                                                                      
                                                                                                                                
Mr. Thompson pointed out that  the most controversial part of                                                                   
HB 519 was the  outright granting of hundreds  of millions of                                                                   
dollars of property tax and sales  tax exemptions without gas                                                                   
project investors having to show  economic data verifying the                                                                   
absolute need  for a tax  exemption to achieve  an acceptable                                                                   
investors'  rate-of-return.   Proponents  of  the bill  argue                                                                   
that the  State must grant outright  tax relief to  help make                                                                   
the project  viable and to send  a strong signal to  the U.S.                                                                   
Congress  that Alaska  is doing  its' share  to help the  gas                                                                   
project.                                                                                                                        
                                                                                                                                
He noted  that opponents  of the bill  as written  argue that                                                                   
the  State  should not  give  away  hundreds of  millions  of                                                                   
dollars of tax relief without  gas project investors actually                                                                   
showing economic  calculations that the relief  is needed for                                                                   
an  acceptable  return.    Perhaps   the  most  controversial                                                                   
portion of  HB 519 is the  outright granting of  property tax                                                                   
and  sales   tax  exemption   dollars  without  gas   project                                                                   
investors  having to  show any  economic  data verifying  the                                                                   
absolute  need for  tax exemption  to  achieve an  acceptable                                                                   
investors' rate-of-return.                                                                                                      
                                                                                                                                
Mr. Thompson  proposed a  compromise.   The State must  grant                                                                   
some  substantial  incentive to  help  "jump  start" the  gas                                                                   
project  with billions  of dollars of  investments at  stake.                                                                   
However,  there  should  not   be  tax  exemption  after  the                                                                   
calendar  year  of  gas  sales   startup,  without  proof  of                                                                   
economic  need.   To  compromise,  Mr.  Thompson  recommended                                                                   
allowing an outright grant of  property tax exemptions during                                                                   
construction and  through the calendar  year of the  gas line                                                                   
startup.   At the  time of startup,  if factors indicate  the                                                                   
project  rate-of-return  is  not  acceptable,  the  investors                                                                   
could apply  to the  DNR Commissioner  for an additional  two                                                                   
years  property and  sales tax  exemptions, conditioned  upon                                                                   
showing economic data indicating  the need for additional tax                                                                   
relief.   Mr.  Thompson stressed  that  now is  the time  for                                                                   
action.                                                                                                                         
                                                                                                                                
PAMELA  LA   BOLLE,  PRESIDENT,   ALASKA  STATE   CHAMBER  OF                                                                   
COMMERCE,  JUNEAU, testified  that the  Alaska State  Chamber                                                                   
represents  35 local  chambers  and 700  businesses, most  of                                                                   
whom are small businesses deeply  concerned with the economic                                                                   
future of  Alaska.  She  noted that  as the "Voice  of Alaska                                                                   
Business",  the   Chamber  appreciates  the   opportunity  to                                                                   
address bills  of importance to  the economic  development of                                                                   
the State.  The Chamber's top  five priorities include urging                                                                   
the Legislature  and the Governor to encourage  the producers                                                                   
to  proceed with  development of  a southern  gas line  route                                                                   
through Alaska.                                                                                                                 
                                                                                                                                
The  Chamber  supports  passage  of  HB  519  and  urges  its                                                                   
passage.  Alaska  needs a gas pipeline.  For  members to have                                                                   
business  thrive,  resources must  be  developed.   With  the                                                                   
defeat of Alaska National Wildlife  Refuge (ANWR) in the U.S.                                                                   
Congress,  there  are  no other  large  developments  on  the                                                                   
horizon that would spur the growth of the economy.                                                                              
                                                                                                                                
Ms. LaBolle  commented that the  State and local  governments                                                                   
would benefit greatly  for years to come if  we can encourage                                                                   
producers to take the risks inherent  in developing the North                                                                   
Slope gas  resources by  building a  project through  Alaska.                                                                   
The temporary  tax exemption provided  by the bill  should be                                                                   
looked  upon   as  an  investment   by  the  State   and  the                                                                   
municipalities  to encourage  the producers  to move  forward                                                                   
with   a   project,   which   will   create   jobs,   benefit                                                                   
municipalities, spur economic  opportunity for businesses and                                                                   
start a whole new gas industry.                                                                                                 
                                                                                                                                
Ms.  LaBolle  discussed  that   by  revitalizing  the  Alaska                                                                   
Stranded  Gas Development  Act  and having  it  apply to  the                                                                   
project,  the State  and producers  could  create a  contract                                                                   
that would  assure tax  clarity.   She encouraged passage  of                                                                   
the bill.                                                                                                                       
                                                                                                                                
Co-Chair Williams stated that HB 519 would be HELD in                                                                           
Committee for further consideration.                                                                                            

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