Legislature(2013 - 2014)HOUSE FINANCE 519

04/15/2014 01:30 PM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
--Delayed to 2:15 p.m. Today--
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 385 PERS/TRS STATE CONTRIBUTIONS TELECONFERENCED
Moved Out of Committee
+= SB 138 GAS PIPELINE; AGDC; OIL & GAS PROD. TAX TELECONFERENCED
Heard & Held
CS FOR SENATE BILL NO. 138(FIN) am                                                                                            
                                                                                                                                
     "An Act  relating to the  purposes, powers,  and duties                                                                    
     of   the   Alaska  Gasline   Development   Corporation;                                                                    
     relating  to  an  in-state  natural  gas  pipeline,  an                                                                    
     Alaska  liquefied natural  gas project,  and associated                                                                    
     funds; requiring  state agencies and other  entities to                                                                    
     expedite  reviews and  actions related  to natural  gas                                                                    
     pipelines  and projects;  relating  to the  authorities                                                                    
     and  duties of  the commissioner  of natural  resources                                                                    
     relating to a North Slope  natural gas project, oil and                                                                    
     gas and gas only leases,  and royalty gas and other gas                                                                    
     received  by  the  state   including  gas  received  as                                                                    
     payment for the production tax  on gas; relating to the                                                                    
     tax on oil  and gas production, on  oil production, and                                                                    
     on  gas  production;  relating to  the  duties  of  the                                                                    
     commissioner  of  revenue  relating to  a  North  Slope                                                                    
     natural  gas project  and gas  received as  payment for                                                                    
     tax;  relating to  confidential information  and public                                                                    
     record  status of  information provided  to  or in  the                                                                    
     custody  of the  Department of  Revenue (DNR)  and DOR;                                                                    
     relating  to apportionment  factors of  the Alaska  Net                                                                    
     Income Tax Act; amending  the definition of gross value                                                                    
     at the  'point of production'  for gas for  purposes of                                                                    
     the  oil and  gas production  tax; clarifying  that the                                                                    
     exploration incentive  credit, the oil or  gas producer                                                                    
     education credit,  and the  film production  tax credit                                                                    
     may not  be taken against  the gas production  tax paid                                                                    
     in gas; relating  to the oil or  gas producer education                                                                    
     credit;  requesting   the  governor  to   establish  an                                                                    
     interim  advisory  board  to  advise  the  governor  on                                                                    
     municipal  involvement in  a  North  Slope natural  gas                                                                    
     project; relating to  the development of a  plan by the                                                                    
     Alaska Energy  Authority for  developing infrastructure                                                                    
     to  deliver affordable  energy to  areas  of the  state                                                                    
     that  will not  have  direct access  to  a North  Slope                                                                    
     natural gas pipeline and a  recommendation of a funding                                                                    
     source    for   energy    infrastructure   development;                                                                    
     establishing   the  Alaska   affordable  energy   fund;                                                                    
     requiring  the commissioner  of  revenue  to develop  a                                                                    
     plan  and   suggest  legislation   for  municipalities,                                                                    
     regional corporations,  and residents  of the  state to                                                                    
     acquire ownership  interests in  a North  Slope natural                                                                    
     gas  pipeline  project; making  conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
2:50:58 PM                                                                                                                    
                                                                                                                                
Co-Chair Austerman  noted that  the department was  asked to                                                                    
come  before  the  committee  to   discuss  the  concept  of                                                                    
transitioning from  a tax  base to a  profit base  in taking                                                                    
tax as gas. He wanted information on offtake points      and                                                                    
potential  plans  to  meet future  demands  for  anticipated                                                                    
growth.                                                                                                                         
                                                                                                                                
MICHAEL PAWLOWSKI,  DEPUTY COMMISSIONER,  STRATEGIC FINANCE,                                                                    
DEPARTMENT  OF  REVENUE,  discussed  the  Black  and  Veatch                                                                    
PowerPoint  presentation:  "State   Participation  in  AKLNG                                                                    
Project Presentation  to House  Finance Committee"  (copy on                                                                    
file). He commented that the  slide was put together to help                                                                    
talk about the  change from tax in-value  to royalty in-kind                                                                    
and taking tax as gas.                                                                                                          
                                                                                                                                
2:52:47 PM                                                                                                                    
                                                                                                                                
Mr.  Pawlowski started  with slide  2:  "State Revenue  From                                                                    
Sale  of  Royalty  and  Tax  Gas:"  He  indicated  that  the                                                                    
illustration detailed the inferred  tariffs for each section                                                                    
of the  project. He identified  some of the acronyms  on the                                                                    
slide: PBU/PT  referred to  Prudhoe Bay/Point  Thompson, GTP                                                                    
referred to  gas treatment  plant, and  LNG referred  to the                                                                    
liquefaction  plant. The  slide  denoted  the general  value                                                                    
chain.  The  way  the traditional  royalty  and  tax  system                                                                    
worked was  that private companies built  the infrastructure                                                                    
and were  entitled to recover, through  deductions, the cost                                                                    
of each one  of the components which came in  a tariff. In a                                                                    
typical  calculation the  department  would  start with  the                                                                    
price of LNG in Asia and  subtract the cost of shipping. For                                                                    
example, it  would start with an  LNG price in Asia  of $16,                                                                    
subtract $1 for shipping, subtract  $4 to go through the LNG                                                                    
plant, subtract $2 to go  through the pipeline, and subtract                                                                    
$2 to  go through the  gas treatment plant. The  state would                                                                    
be left  with roughly  $7 per  one thousand  British thermal                                                                    
units (MMBTU) point of production  or wellhead value. In the                                                                    
traditional  royalty   system,  the   state  would   take  a                                                                    
percentage  of the  wellhead value,  which  would equal  the                                                                    
royalties. A production tax would  be taken after taking the                                                                    
$7 and subtracting lease expenditures  in the production tax                                                                    
equation.                                                                                                                       
                                                                                                                                
2:54:40 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski  discussed the  red box on  slide 2.  He noted                                                                    
that instead of  taking the residual value,  the state would                                                                    
take a  certain amount  of value  in energy.  The department                                                                    
did a rough calculation of  the percentage of what was being                                                                    
produced.  He referenced  the example  of 350,000  MMBTU per                                                                    
day for the royalty share  and roughly 320,000 MMBTU per day                                                                    
for  the tax  share. The  state would  have the  gas at  the                                                                    
point of production going into  the gas treatment plant. The                                                                    
gas would then move through the  system and would be sold in                                                                    
Asia for  the same price  of $16.  The state would  have the                                                                    
revenue of  $16 of the  sales of the  LNG and would  use the                                                                    
revenue to pay  the same costs, i.e., $1 in  shipping, $4 in                                                                    
the LNG plant, $2 in the  pipeline tariff, and $2 in the gas                                                                    
treatment plant  tariff. The  state would  ultimately arrive                                                                    
at the same  value at the wellhead. The  real difference was                                                                    
that  rather than  relying on  a third  party to  deduct the                                                                    
costs in  the filings with  the state, the state  would have                                                                    
full control and  full vision of the costs  because it would                                                                    
own  the infrastructure.  Slide 3  addressed the  reason the                                                                    
state  started  to  focus  on  the need  to  invest  in  the                                                                    
infrastructure  and  where  in-kind  offered  value  to  the                                                                    
state. He  mentioned that the  tariffs in the  examples were                                                                    
rounded to the nearest fifty cent.                                                                                              
                                                                                                                                
2:56:22 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski detailed slide 3:  "State Revenue From Sale of                                                                    
Royalty and Tax Gas,  25 percent State/TransCanada Ownership                                                                    
of  AKLNG  Project With  Capital  Structure  Change for  LNG                                                                    
Plant."  He  explained  that  in   the  second  example  the                                                                    
department changed  the financing of  the LNG plant.  In the                                                                    
first example  the LNG  plant was financed  at a  70 percent                                                                    
debt, 30 percent equity with  a 12 percent return on equity.                                                                    
In the  second example the  LNG was financed at  100 percent                                                                    
equity with  a 15 percent return  on the equity for  the LNG                                                                    
plant. The  royalty study, published by  DNR, listed several                                                                    
large  integrative  projects  around  the  world  that  were                                                                    
financed at  100 percent  equity. The  LNG plant  under FERC                                                                    
section 3  would not be  subject to economic  regulation. If                                                                    
an investor  chose to take  profit as 100 percent  equity in                                                                    
the  LNG plant,  the tariff  would change  in the  LNG plant                                                                    
from $4  to $8 and the  state value would reduce  from $7 to                                                                    
$3.                                                                                                                             
                                                                                                                                
Mr. Pawlowski  communicated that in  the past the  state was                                                                    
able, either  through disputes  in front of  FERC or  in the                                                                    
state's  tax  statutes,  to  fight over  the  value  in  the                                                                    
deductibility of  returns on tariffs  in the  midstream. The                                                                    
way LNG projects  were structured the state did  not see the                                                                    
same  opportunity in  what  was roughly  50  percent of  the                                                                    
project, the  LNG plant. The  decision to co-invest  to take                                                                    
the  gas and  have  transparency of  what  those costs  are,                                                                    
would put  the state in a  similar place as it  would be in-                                                                    
value but  with greater transparency and  greater protection                                                                    
for  the state.  It would  also depend  on on  achieving the                                                                    
same value  in the market through  the marketing agreements.                                                                    
Through  the value  chain  the  state's co-investment  would                                                                    
protect the  state. With the  change in the royalty,  as the                                                                    
price went  up, costs would  stay the same in  the midstream                                                                    
leading to the same value to  the state going up, whether in                                                                    
an  in-value or  in-kind  arrangement. He  referred back  to                                                                    
slide 2 suggesting  that if the price in Asia  went from $16                                                                    
to $18  and the costs  did not  change, the value  per MMBTU                                                                    
would increase  from $7  to $9.  If the  price in  Asia went                                                                    
down from $16 to  $14 it would decrease from $7  to $5 - not                                                                    
changing the value in the  midstream. Consultants have given                                                                    
presentations  to the  House Finance  Committee that  showed                                                                    
the value  of in-kind, particularly in  co-investment at low                                                                    
price environments.  He appreciated a  lot of the  work that                                                                    
some of the  state's consultants had done  to illustrate how                                                                    
in-kind  actually  provided more  revenue  to  the state  at                                                                    
lower prices than in-value did along with co-investment.                                                                        
                                                                                                                                
Co-Chair Austerman  expressed concerns about knowing  how to                                                                    
proceed  with  conversations  with the  general  public.  He                                                                    
stated  that  the  two-year  time   frame  would  allow  the                                                                    
legislature  to  make a  commitment.  His  objective was  to                                                                    
allow the public to have a voice.                                                                                               
                                                                                                                                
3:01:52 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski stated  that DNR would manage the  sale of the                                                                    
energy value.  There would  be a daily  value of  energy for                                                                    
royalty and  for gas. The  commissioner of DNR  would manage                                                                    
the revenues  of the sale of  gas, of which a  portion would                                                                    
be  deposited   into  the   Permanent  Fund.   The  enabling                                                                    
legislation  set up  the relationship  between  DNR and  DOR                                                                    
where the  DNR commissioner  would take  the $320  MMBTU per                                                                    
day times  the value as  tax revenue. The tax  revenue would                                                                    
then be directed to the  general fund by the commissioner of                                                                    
DNR. The tax share would  become public information in order                                                                    
for people  to see the  value the state received  from taxed                                                                    
gas. He  made one  final point that  there were  other taxes                                                                    
that the  state would  receive from  the project  apart from                                                                    
the  ones that  have  been discussed.  The additional  taxes                                                                    
included the  corporate income tax of  9.4 percent statutory                                                                    
rate and the  property tax, a very substantial  piece of the                                                                    
$45 billion to $65 billion  the state would be investing. He                                                                    
summarized  that the  state would  receive corporate  income                                                                    
tax,  property  tax,  and  taxed gas  in  royalty  from  the                                                                    
advancement  of the  Alaska  Liquefied  Natural Gas  (AKLNG)                                                                    
project.                                                                                                                        
                                                                                                                                
Vice-Chair Neuman  discussed the  value to  the state  of $7                                                                    
per MMBTU. He  noted that the value did not  account for the                                                                    
costs  for the  lease  expenditures  for standard  allowable                                                                    
deductions. He referred  to the Point Thomson  unit and used                                                                    
a $5  billion investment  as an example.  He asked  if $1.75                                                                    
billion was the  correct lease amount that would  have to be                                                                    
paid.                                                                                                                           
                                                                                                                                
3:04:44 PM                                                                                                                    
                                                                                                                                
JOE BALASH,  COMMISSIONER, DEPARTMENT OF  NATURAL RESOURCES,                                                                    
replied that the  deductions were realized in  the year that                                                                    
the expenditure  was made.  It would depend  on how  much of                                                                    
the $5 billion was spent over which years.                                                                                      
                                                                                                                                
Vice-Chair Neuman  clarified that the Point  Thomson example                                                                    
had been  used because the  related lease expenditure  was a                                                                    
cost the  state was currently incurring.  He reiterated that                                                                    
the  lease expenditures  and  standard allowable  deductions                                                                    
were  not  taken from  the  value  as  seen in  the  example                                                                    
provided (in  the Black and Veatch  presentation). He opined                                                                    
that  the number  in  front  of the  committee  was a  gross                                                                    
value. He wanted to see a netback value for the state.                                                                          
                                                                                                                                
3:06:07 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski  offered to supply Representative  Newman with                                                                    
additional information  from work  done by Black  and Veatch                                                                    
to answer his question. He  indicated that the intent was to                                                                    
illustrate the value  chain. He conveyed that  in the larger                                                                    
project  there were  other  costs  associated upstream  that                                                                    
were  deducted as  well as  additional  oil production  that                                                                    
counted as an  additional value. He mentioned  that when the                                                                    
department ran  the equations, the  internal rate  of return                                                                    
for  the state  investment  metric exceeded  20 percent.  He                                                                    
noted  that  there  were additional  tens  of  thousands  of                                                                    
barrels  of  oil that  came  with  the  build out  of  Point                                                                    
Thomson as well as the gas  production that came with it. He                                                                    
stated  that some  work by  Black  and Veatch  was done  and                                                                    
could be  circulated to committee members.  The consultation                                                                    
information was not provided by DNR.                                                                                            
                                                                                                                                
Co-Chair  Austerman asked  if there  was a  price per  MMBTU                                                                    
associated  with Point  Thomson to  the gas  treatment plant                                                                    
(GTP)  that the  state  would pay.  Mr. Pawlowski  responded                                                                    
that it was rolled into the  GTP tariff. He reported a small                                                                    
cost for the  pipe moving the gas from Point  Thomson to the                                                                    
GTP just as  there was a cost already  incorporated into the                                                                    
tariff for  the pipe moving from  Prudhoe Bay to the  GTP in                                                                    
the Prudhoe  Bay unit geographically.  He restated  that the                                                                    
numbers used in the presentation were rounded.                                                                                  
                                                                                                                                
3:08:06 PM                                                                                                                    
                                                                                                                                
Representative  Gara requested  that  the department  return                                                                    
with  the  answers. He  mentioned  the  corporate tax  of  9                                                                    
percent. He clarified  that it was not 9 percent  of the oil                                                                    
industry's  profits in  Alaska, it  was 9  percent of  their                                                                    
world-wide profits which has been 5 percent in some years.                                                                      
                                                                                                                                
Mr.  Pawlowski   pointed  out  that   the  March   10,  2014                                                                    
presentation to  the Senate Finance Committee  contained the                                                                    
answers  to Representative  Gara's inquiries.  Mr. Pawlowski                                                                    
confirmed that  the department modeled  a lower  number than                                                                    
9.4 percent, which was a statutory number.                                                                                      
                                                                                                                                
3:09:16 PM                                                                                                                    
                                                                                                                                
Representative  Gara specified  a change  made in  the House                                                                    
Resources  Committee  that   included  the  qualifier  "best                                                                    
interest  finding"  when   considering  royalty  in-kind  or                                                                    
royalty  in-value. He  suggested that,  based on  everything                                                                    
presented by  DOR, it  was in the  state's best  interest to                                                                    
receive its  royalty in-kind. He asked  for the department's                                                                    
position.                                                                                                                       
                                                                                                                                
Commissioner  Balash replied  that the  assumptions used  in                                                                    
the state's  materials supposed that  the state  was getting                                                                    
the same  price as  the producers. Either  the state  made a                                                                    
satisfactory arrangement  with the  producers to  dispose of                                                                    
the state's gas on the same terms or they would receive in-                                                                     
value. He  noted that, for  purposes of doing  the analysis,                                                                    
the department  relied on a  reasonable set  of assumptions.                                                                    
The state's agreement  with the other parties,  the Heads of                                                                    
Agreement,  stipulated that  the state  reached satisfactory                                                                    
resolution on the sale or  disposition of the state's gas in                                                                    
order  to take  payment in-kind.  However, he  mentioned the                                                                    
challenge of  satisfying the state.  He emphasized  that the                                                                    
purpose  of publishing  the royalty  study in  November 2013                                                                    
was to let  all parties (the public, the  companies, and the                                                                    
legislature)  know that  there  were  real risks  associated                                                                    
with the state opting for  royalties in-kind. The parties in                                                                    
the best position to help  mitigate risks for the state were                                                                    
the  other producers.  He  felt the  notion  that the  state                                                                    
would have  to bargain hard  was misplaced. He  opined that,                                                                    
in  essence, the  parties had  already agreed.  He indicated                                                                    
the  difficult  task  would   be  fashioning  the  necessary                                                                    
agreements with  each company individually and  also keeping                                                                    
everything fair  relative to  the federal  and international                                                                    
anti-trust statutes. The state  would need to protect itself                                                                    
and   the  interest   of  Alaskans   while  protecting   the                                                                    
information  of competitors  from other  competitors at  the                                                                    
same time.                                                                                                                      
                                                                                                                                
3:12:27 PM                                                                                                                    
                                                                                                                                
Representative  Gara stated  that Ms.  Poduval of  Black and                                                                    
Veatch  testified about  a concern  he had  raised that  the                                                                    
state would  be paying  for full capacity  without receiving                                                                    
full capacity.  Her response was  that more than  90 percent                                                                    
of capacity was usually filled.  He asked if the state would                                                                    
owe TransCanada for any unused capacity with in-kind value.                                                                     
                                                                                                                                
Commissioner  Balash replied  that  the  state would  assume                                                                    
some  risks   regardless  of  the  in-kind   acceptance.  He                                                                    
continued that  underutilized capacity,  the state's  or the                                                                    
producers',  would impact  revenues. The  revenues generated                                                                    
would be based on the throughput.  If the project was not at                                                                    
100  percent every  day,  the  underutilized capacity  would                                                                    
still have to be paid for  upfront. It would be reflected in                                                                    
the  deductions through  the value  chain and  impacting the                                                                    
total revenue, whether in-kind or in-value.                                                                                     
                                                                                                                                
3:15:02 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski offered to reach out to Ms. Poduval.                                                                              
                                                                                                                                
Representative Gara  was interested  to know if  DNR's model                                                                    
was satisfied  whether it reflected 100  percent capacity or                                                                    
less. Mr. Pawlowski  responded that he would  follow up with                                                                    
Ms. Poduval and get back to Representative Gara.                                                                                
                                                                                                                                
Co-Chair  Stoltze appreciated  the detailed  questions asked                                                                    
by committee members in spite  of the limited time schedule.                                                                    
He  added  that  the  amendments  were  due  by  4:00pm  the                                                                    
following day. He wanted to  make sure committee members had                                                                    
the opportunity  to ask questions  and make  suggestions. He                                                                    
hoped  that   the  vetting  process  would   help  committee                                                                    
members.                                                                                                                        
                                                                                                                                
Representative Gara  asked if 4:00  pm was the  deadline for                                                                    
submitting amendments or debating them in committee.                                                                            
                                                                                                                                
Co-Chair Stoltze replied that 4:00  pm the following day was                                                                    
the deadline for submitting amendments to his office.                                                                           
                                                                                                                                
3:17:17 PM                                                                                                                    
                                                                                                                                
Representative  Gara   suggested  that  if  the   state  was                                                                    
shipping gas at 95 percent  capacity, the cost would be much                                                                    
greater taking  royalty in-kind versus royalty  in-value. He                                                                    
surmised that  not only  would the  state receive  less than                                                                    
full capacity,  it would  owe TransCanada  shipping charges,                                                                    
which were never  owed when taking royalty  in-value. In the                                                                    
instance of  taking royalty in-value,  the lower  the amount                                                                    
of gas shipped,  the higher a company's tariff  would be and                                                                    
the less taxes the state  would receive. In other words, the                                                                    
cost of  paying for empty  shipping charges would  be higher                                                                    
to the  state than if  the state  only filled it  95 percent                                                                    
and took  its royalty in-value.  He asked whether  they were                                                                    
the same amount of money.                                                                                                       
                                                                                                                                
Commissioner  Balash explained  that throughput  utilization                                                                    
was one of the associated  risks of the project, whether the                                                                    
state  received   its  royalty   in-value  or   in-kind.  He                                                                    
clarified  Representative  Gara's  concern about  the  state                                                                    
either receiving  less gas  than it  planned or  choosing to                                                                    
drop  off  gas   in-state,  thus,  not  taking   it  to  the                                                                    
liquefaction plant  or to market.  He affirmed that  in such                                                                    
cases there  were greater  risks to  the state.  He asserted                                                                    
that the state  would need to mitigate such  risks by making                                                                    
sure the state received the amount  of gas it needed to fill                                                                    
its capacity  outlining terms in  the offtake  and balancing                                                                    
agreements.  He  indicated  he was  unwilling  to  take  out                                                                    
capacity  on any  infrastructure  without  knowing that  the                                                                    
state  would  receive gas  to  put  into the  capacity.  The                                                                    
lending institutions that would  be setting up the financing                                                                    
for  the project  would  not let  the  state engage  without                                                                    
sufficient security  to ensure  that gas would  flow through                                                                    
the infrastructure.                                                                                                             
                                                                                                                                
Commissioner  Balash brought  up  his second  point. If  the                                                                    
state's  demand  suddenly  and  drastically  increased,  the                                                                    
state would  be faced  with deciding  whether to  divert its                                                                    
gas and underutilizing the  pipeline and liquefaction plant.                                                                    
He added that the scenario was unlikely.                                                                                        
                                                                                                                                
3:20:21 PM                                                                                                                    
                                                                                                                                
Commissioner Balash continued  that in the terms  of the MOU                                                                    
with  TransCanada,   the  state  had  assumed   100  percent                                                                    
utilization of the capacity in  order to establish rates and                                                                    
tariffs. However,  the state  knew it would  not be  at full                                                                    
capacity  all  of  the  time.  Maintenance  turnarounds  and                                                                    
unforeseeable circumstances would  influence utilization. In                                                                    
the  event  that  TransCanada was  able  to  find  customers                                                                    
willing to  take interruptible service,  they would  be able                                                                    
to move  more gas per  day resulting in revenue  credits for                                                                    
the state. The  department planned for mitigation  in all of                                                                    
the  state's  agreements. He  claimed  that  there would  be                                                                    
additional steps  to mitigate against  risks to  protect the                                                                    
state's interest.                                                                                                               
                                                                                                                                
Representative  Wilson asked  about current  royalty in-kind                                                                    
contracts.  Commissioner  Balash  replied  that  there  were                                                                    
currently  two   contracts;  the  first  with   Flint  Hills                                                                    
Resources which  would expire  by the end  of the  year, and                                                                    
the second with Tesoro.                                                                                                         
                                                                                                                                
Representative Wilson  asked if  there were any  royalty in-                                                                    
value  contracts at  present.  Commissioner Balash  answered                                                                    
that the state  had settlement agreements with  all three of                                                                    
the major  North Slope  producers to  value the  state's oil                                                                    
produced under the DL1 lease form.                                                                                              
                                                                                                                                
Representative Wilson asked  about rectifying the difference                                                                    
between the  prices at  which the  producers sell  their gas                                                                    
versus the prices  at which the state sells  its in-kind gas                                                                    
in the same Asian market.                                                                                                       
                                                                                                                                
3:24:03 PM                                                                                                                    
                                                                                                                                
Mr.  Pawlowski   replied  that   the  state   would  receive                                                                    
royalties in tax  gas as gas was produced prior  to going to                                                                    
market. The  gas would  be sold  at the  same price,  in the                                                                    
same day,  and in  the same  way. It  was not  a calculation                                                                    
that came back and then created  a volume of gas. Rather, 13                                                                    
to 14 percent of the gas  produced would belong to the state                                                                    
through  royalty. Another  13 percent  of  the gas  produced                                                                    
would be the state's tax  share. In other words, the state's                                                                    
share was 25 percent of what came out of the unit.                                                                              
                                                                                                                                
Representative Wilson asked if the  tax would be paid in gas                                                                    
at 13  percent no matter what  the value. She also  asked if                                                                    
the  transparency that  Mr. Pawlowski  referred  to was  the                                                                    
price of the day at the wellhead.                                                                                               
                                                                                                                                
Mr.  Pawlowski responded  that the  state  would receive  13                                                                    
percent in  gas for its  tax share,  the same way  the state                                                                    
received royalty  in-kind. Once  the state took  delivery of                                                                    
its  gas  it would  be  sold  at  a  price determined  in  a                                                                    
contract.  In  terms of  transparency,  the  state would  be                                                                    
deducting or paying the state  or an agent like TransCanada.                                                                    
In the  in-value situation the producer  elected how, where,                                                                    
and  when   the  state's  gas   was  sold,  which   was  the                                                                    
misalignment discussed  in the  royalty study.  He continued                                                                    
that  (in the  example  on  slide 3)  the  producer had  the                                                                    
incentive  because   its  tax   would  earn  money   in  the                                                                    
liquefaction  plant and  drop the  dollar amount  that taxes                                                                    
and royalties  were based off  of from  $7 to $3.  The state                                                                    
would be getting 25 percent of  $3 rather than 25 percent of                                                                    
$7.                                                                                                                             
                                                                                                                                
Representative  asked if  it  was good  for  the state.  Mr.                                                                    
Pawlowski avowed  that it was  bad for the state.  He stated                                                                    
that the transparency  was important in order  for the state                                                                    
to have control of what  was being deducted. All the parties                                                                    
would  earn what  they earned  based on  their share  of the                                                                    
project.                                                                                                                        
                                                                                                                                
3:26:859 PM                                                                                                                   
                                                                                                                                
Representative  Wilson concluded  that the  companies wanted                                                                    
assurance that  the state would  not consistently  alter the                                                                    
tax regime. If the state  wanted the project to move forward                                                                    
the tax  regime would have  to be  based on a  percentage in                                                                    
order to guarantee a level  of certainty for the other three                                                                    
parties.   Mr.  Pawlowski   concurred  that   certainty  was                                                                    
imperative for the other parties.  He added that it was also                                                                    
about  placing  the  state  in a  position  to  control  the                                                                    
state's  destiny and  to protect  the  state's interest.  He                                                                    
furthered that whether the  state partnered with TransCanada                                                                    
was a separate question.                                                                                                        
                                                                                                                                
Representative Wilson expressed her  concerns that the state                                                                    
would be  giving up revenue  because the terms  were defined                                                                    
in  percentages rather  than dollar  amounts.  In the  past,                                                                    
fall and  spring revenues were  distinct dollar  values. Her                                                                    
main  concern was  that the  project would  bring affordable                                                                    
energy to her district. She expressed her doubts.                                                                               
                                                                                                                                
Co-Chair  Austerman discussed  the  offtake  points and  the                                                                    
amount of gas  that would be available for  in-state use. He                                                                    
wanted to  know how  the state  would determine  current and                                                                    
future  demand, which  he  suspected would  play  a role  in                                                                    
determining pipe size specifications.                                                                                           
                                                                                                                                
3:29:52 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski referenced  Page 3, Recital I of  the HOA. The                                                                    
HOA described  the progression of  thought that  the parties                                                                    
of the HOA went through in  laying out the project. He noted                                                                    
that  the  governor  and  the  administration  recognized  a                                                                    
synergy  between the  instate project  under Alaska  Gasline                                                                    
Development   Corporation  (AGDC)   and  the   larger  AKLNG                                                                    
project. The  work that  AGDC was  doing, moving  towards an                                                                    
open season  in FY 14 into  the first quarter of  FY 15, was                                                                    
looking for  gas in the  field and  the demand for  gas from                                                                    
Alaskans along  the right-of-way. Sub I  recognized that the                                                                    
administration  would work  with AGDC.  In turn,  AGDC would                                                                    
participate in and cooperate with the AKLNG project.                                                                            
                                                                                                                                
Mr. Pawlowski  continued with  page 12  of the  HOA, Article                                                                    
6.5. He noted  that AGDC was tasked with  the small in-state                                                                    
line and  getting gas  to Alaskans, a  core mission.  In the                                                                    
current legislation  some of  AGDC's missions  were defined.                                                                    
In  the near-term,  the project  would include  five offtake                                                                    
points  between the  North Slope  and  Nikiski. The  offtake                                                                    
locations would be determined in  consultation with AGDC who                                                                    
would  assist in  addressing in-state  gas demand.  He noted                                                                    
that DNR would assess the work of AGDC.                                                                                         
                                                                                                                                
3:33:02 PM                                                                                                                    
                                                                                                                                
Co-Chair Austerman  asked for  clarification about  the role                                                                    
of AGDC.  He asked if  AGDC would  do the work  to determine                                                                    
the  state's potential  use of  in-state gas.  Mr. Pawlowski                                                                    
responded that AGDC was currently  doing the work as part of                                                                    
advancing  the  smaller  project.  By  building  cooperation                                                                    
between the  large and small projects  information was being                                                                    
shared back and forth. The  state would transfer AGDC's work                                                                    
to the larger project should it progress.                                                                                       
                                                                                                                                
Co-Chair Austerman  asked about  the price value  of offtake                                                                    
gas prior to  LNG. He assumed that the price  value would be                                                                    
appraised at less than gas processed at the LNG facility.                                                                       
                                                                                                                                
Mr. Pawlowski  agreed with Co-Chair  Austerman's assumption.                                                                    
He elaborated  that the  terms of  the MOU  with TransCanada                                                                    
stated the gas  entering the LNG plant going  north was less                                                                    
expensive  because the  transportation costs  were less.  He                                                                    
reported that there was a  mileage sensitive tariff and that                                                                    
the  tariff of  transporting  gas from  the  North Slope  to                                                                    
Fairbanks  would  be  lower  than   the  tariff  imposed  on                                                                    
transporting gas  to Southcentral Alaska. He  noted that the                                                                    
gas  going  north was  worth  less.  The  tariff to  get  to                                                                    
Fairbanks would be lower than to Southcentral.                                                                                  
                                                                                                                                
Co-Chair Austerman  supposed that if  the state sold  its 25                                                                    
percent of gas in-state it should  be priced at the same end                                                                    
value as in the Asian market.                                                                                                   
                                                                                                                                
3:36:01 PM                                                                                                                    
                                                                                                                                
Commissioner  Balash responded  that  there was  a point  at                                                                    
which the state would be  indifferent to whether it sold its                                                                    
gas  in-state  or  in  Asia.  He remarked  that  it  was  an                                                                    
interesting economic analysis because  the state had to also                                                                    
consider  the  costs  associated   with  the  risks  of  the                                                                    
liquefaction  plant and  the counter  party  risks with  the                                                                    
state's buyers. He  referred to slide 3 and  the $3 netback,                                                                    
the  value of  the  gas  at the  slope  after deducting  all                                                                    
costs. He  suggested that the  first two $2 figures  for the                                                                    
GTP and pipeline  tariffs plus the $3  netback price equaled                                                                    
$7/MMBTU. Arguably, a  sale of the gas of  $7 MMBTU in-state                                                                    
would bring just  as much revenue to Alaska as  would a sale                                                                    
of LNG  overseas. Exactly whose  gas would  satisfy in-state                                                                    
demand was undetermined at present.                                                                                             
                                                                                                                                
3:37:38 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski stated:                                                                                                           
                                                                                                                                
     This  goes  to a  term  in  the MOU  that  Commissioner                                                                    
     Designee Balash talked about yesterday  is you can look                                                                    
     at  the gas  in Fairbanks  as a  coming from  the North                                                                    
     Slope  then coming  south. Or  looking at  the backhaul                                                                    
     provision in the MOU, look  at a Cook Inlet price going                                                                    
     north for  free. and so  that was  put into the  MOU to                                                                    
     provide that sort of benefit  to the Interior and being                                                                    
     able to look  at which is the better  price compared to                                                                    
     what is going on in the Cook Inlet Region.                                                                                 
                                                                                                                                
3:38:23 PM                                                                                                                    
                                                                                                                                
Co-Chair  Austerman asked  about the  anticipated length  of                                                                    
contract for gas sold in the Asian market.                                                                                      
                                                                                                                                
Mr. Pawlowski  reported that the initial  contracts would be                                                                    
20 years  or more in  duration. The contracts would  have to                                                                    
reflect a  long-term commitment that  allowed the  state and                                                                    
the other  parties to obtain  financing and to make  a final                                                                    
investment  decision in  the project.  Also, there  would be                                                                    
other   interim   agreements   that  would   provide   other                                                                    
opportunities  in additional  capacity.  However, the  state                                                                    
would need  to look for the  long term agreement to  be able                                                                    
to make a final investment decision with any confidence.                                                                        
                                                                                                                                
Co-Chair Austerman  pointed out  that the state  should make                                                                    
sure to determine the in-state  demand correctly up front to                                                                    
avoid selling off  any of the state's  supply. Otherwise, it                                                                    
could experience some in-state problems as well.                                                                                
                                                                                                                                
Commissioner  Balash believed  it  was important  to have  a                                                                    
midstream  partner like  TransCanada  who knew  how to  make                                                                    
money  moving additional  gas. He  felt  the state  agencies                                                                    
lacked the needed  expertise to expand the  pipeline to meet                                                                    
the in-state  demands. The incentive  to make an  extra buck                                                                    
moving an extra metric of gas  is something that would be in                                                                    
TransCanada's interest  and ultimately  serve the  people of                                                                    
Alaska very well.                                                                                                               
                                                                                                                                
3:40:32 PM                                                                                                                    
                                                                                                                                
Vice-Chair Neuman  discussed reducing  the state's  risk. He                                                                    
noted that  he looked at  the LNG facility and  shipping gas                                                                    
to  the  market in  Asia.  He  concluded that  depending  on                                                                    
foreign-flagged vessels  for shipping  could be a  huge risk                                                                    
for  the State  of Alaska.  His concerns  regarding shipping                                                                    
began  after reading  an article  in the  Alaska Journal  of                                                                    
Commerce  or Business  Monthly Magazine  that discussed  the                                                                    
topic.  Apparently, there  were  currently  375 LNG  tankers                                                                    
world-wide.  In  2008,  there   were  300  LNG  tankers.  In                                                                    
comparison there were  5,700 oil tankers. At a  cost of $150                                                                    
million  to $200  million each,  the  most expensive  tanker                                                                    
built was about  $300 million. He wondered if  the state had                                                                    
looked into  purchasing 1  or 2 tankers  to ensure  flow and                                                                    
reduce  the state's  risk.  Since there  were  no other  LNG                                                                    
vessels  the state  could potentially  make a  share in  the                                                                    
profits. He further suggested that,  with an LNG vessel, the                                                                    
state could  ship to other  places in America. He  wanted to                                                                    
know  how to  reduce risk  and get  the best  value for  the                                                                    
state.  He  wondered  about   the  opportunity  to  purchase                                                                    
tankers to allow for a share in the profits.                                                                                    
                                                                                                                                
3:42:12 PM                                                                                                                    
                                                                                                                                
Commissioner  Balash replied  that  the  department had  not                                                                    
looked  at his  question specifically.  What the  department                                                                    
had  considered was  the relationship  of  ownership of  the                                                                    
vessels to the nature of  the sales contract. There were two                                                                    
significant  categories   of  contracts;  those   that  sold                                                                    
product  free-onboard and  those  that  sold decimation  ex-                                                                    
vessel.  The first  category meant  that title  was changing                                                                    
hands  at  the  outlet  of  the LNG  plant.  The  other  was                                                                    
changing title at the dockside  destination in Asia. The way                                                                    
in which the department  examined the question, the shipping                                                                    
costs would  be approximately  $1. However, the  sales price                                                                    
was  a dollar  higher  or lower,  depending  on whether  the                                                                    
state owned  or chartered  the vessel  or whether  the buyer                                                                    
owned or chartered the vessel.                                                                                                  
                                                                                                                                
Vice-Chair Neuman  suggested placing a  provision concerning                                                                    
reducing risk in the HOA. He  noted that the biggest risk he                                                                    
anticipated would be an interruption in flow.                                                                                   
                                                                                                                                
Representative Wilson  asked why  the state was  building an                                                                    
LNG plant on  the North Slope when it knew  it could get gas                                                                    
in  Cook Inlet  and would  build an  LNG plant  in the  same                                                                    
location. She  inquired why the  state was building  two LNG                                                                    
plants.                                                                                                                         
                                                                                                                                
Mr. Pawlowski  replied that he  was the designee for  DOR on                                                                    
the AIDEA board. He indicated he  spent a lot of time on his                                                                    
favorite  immediate LNG  project compared  to the  other big                                                                    
LNG  project that  would take  longer. It  really had  to do                                                                    
with the timing.  The small LNG plant slated to  be built on                                                                    
the North Slope for the  Interior energy project was a near-                                                                    
term project  that would  provide the  ability to  build out                                                                    
the  infrastructure  to take  advantage  of  the larger  LNG                                                                    
project.  The  large LNG  project  was  not slated  to  come                                                                    
online  prior to  the early  2020s because  of the  scale of                                                                    
permitting and  the amount of  work that needed to  be done.                                                                    
The Interior  energy project had a  very near-term start-up.                                                                    
He elaborated  that loans were already  being authorized for                                                                    
build-out in the region at present.                                                                                             
                                                                                                                                
3:45:15 PM                                                                                                                    
                                                                                                                                
Representative Wilson recalled a  smaller LNG plant that was                                                                    
currently not  at capacity and  taking gas from  Cook Inlet.                                                                    
She  wondered  if it  would  be  smarter  for the  state  to                                                                    
reshape the  plant currently  in Cook  Inlet as  a temporary                                                                    
solution rather than  investing in another LNG  plant on the                                                                    
North Slope.                                                                                                                    
                                                                                                                                
Mr.  Pawlowski replied  that the  direction  to advance  the                                                                    
Interior  energy project  belonged  to  the legislature.  He                                                                    
expressed   his  confidence   in  the   work  in   progress,                                                                    
especially since  MWH [Global] was recently  selected as the                                                                    
preferred party.  The opportunity to use  the facility long-                                                                    
term was there. He stressed  to the committee to think about                                                                    
what  level of  state  resource would  get  stranded in  the                                                                    
smaller  project if  the larger  project moved  forward. The                                                                    
opportunity to  bring gas  to Fairbanks  was not  limited to                                                                    
supplying residents  but also  to possibly  supplying Golden                                                                    
Valley Electric Cooperative, that  had expressed interest in                                                                    
the  LNG trucking  project. The  project was  moving rapidly                                                                    
forward; however,  a final approval  of the project  has not                                                                    
been  issued.  He  opined  that  the  small  project  should                                                                    
continue  to advance  in order  to keep  the larger  project                                                                    
advancing as well. He highlighted  the importance of getting                                                                    
gas to the  Interior as soon as possible and  helping to lay                                                                    
the ground work for the demand for the AKLNG project.                                                                           
                                                                                                                                
Representative Wilson agreed that  she and Mr. Pawlowski had                                                                    
the same  goal in  mind. She  just wanted  to make  sure the                                                                    
state  was  not  passing  up a  more  expeditious  and  more                                                                    
affordable opportunity to bring gas to the Fairbanks area.                                                                      
                                                                                                                                
3:47:50 PM                                                                                                                    
                                                                                                                                
Representative    Guttenberg     discussed    the    state's                                                                    
relationship with  TransCanada. He relayed  that TransCanada                                                                    
would have a  25 percent interest in the  project. The state                                                                    
wanted the  ability to expand to  whatever capacity possible                                                                    
at  the   beginning  without  filling   the  line   up  with                                                                    
compression.  He suggested  that the  other three  investors                                                                    
may  want  to  minimize  the  cost  up  front  developing  a                                                                    
different  design strategy  that  had the  line at  capacity                                                                    
with compression.  He asked how  the state would  direct the                                                                    
remaining 75  percent interest  in the  line when  the state                                                                    
was in conflict with the other investors.                                                                                       
                                                                                                                                
3:49:53 PM                                                                                                                    
                                                                                                                                
Commissioner Balash  talked about  the unique  challenges of                                                                    
the project.  He indicated that  because of the size  of the                                                                    
project and  the length  of the financing  terms all  of the                                                                    
gas  at Point  Thomson  and  Prudhoe Bay  would  need to  be                                                                    
developed. He surmised  that every party at the  table had a                                                                    
veto. The likelihood that the  project would succeed or move                                                                    
forward without every party's  interests being satisfied was                                                                    
slim.  He pointed  out  that  the state  needed  to be  very                                                                    
thoughtful about  the agreements coming together  for review                                                                    
and approval. Inside the  equity arrangements and governance                                                                    
structure  the final  design would  be  very important.  The                                                                    
expansion principles  that were found  in appendix A  of the                                                                    
HOA  laid out  the  circumstances under  which an  expansion                                                                    
could not move forward. One  of the circumstances listed was                                                                    
when one of the other  parties could be harmed. He explained                                                                    
that once  the pre-FEED phase  was completed a  final design                                                                    
would be  taken to FERC  to file for  National Environmental                                                                    
Policy  Act (NEPA)  purposes.  The state  would  need to  be                                                                    
satisfied with  the design providing a  sufficient increment                                                                    
of capacity  available through compression. The  state would                                                                    
seek certifications  from the other parties  making sure the                                                                    
design  was   expandable  to  meet  the   state's  need.  He                                                                    
mentioned  having   discussions  about  building   the  pipe                                                                    
slightly  larger.  Forty-two  inches was  estimated  as  the                                                                    
correct number. However, the state  had not agreed to it, at                                                                    
present.                                                                                                                        
                                                                                                                                
Commissioner Balash suggested there  were scenarios where it                                                                    
would make sense  to pre-pay for a larger  pipe. He reported                                                                    
that the  department had  looked at  the difference  in cost                                                                    
between a  48-inch pipe and  a 42-inch pipe. The  pipe would                                                                    
cost  more but  the  compression  and associated  facilities                                                                    
would cost less; the difference  of about $600 million. Much                                                                    
like Representative Neuman's idea  of putting another vessel                                                                    
in  the  water,   the  idea  that  the   state  pre-pay  for                                                                    
additional   pipe  capacity   upfront   was  something   DNR                                                                    
investigated. He also pointed out  that, in Appendix A, when                                                                    
there was  a reallocation of  capital among the  parties, if                                                                    
the state  pre-paid money for  an expansion and did  not end                                                                    
up wanting  it the state  would have the opportunity  to get                                                                    
some  of its  capital  back. Such  a  provision was  already                                                                    
incorporated into Appendix A in the expansion principles.                                                                       
                                                                                                                                
3:54:26 PM                                                                                                                    
                                                                                                                                
Representative   Guttenberg  inquired   about  the   state's                                                                    
liability to  use the increased  capacity if  it contributed                                                                    
$600 million for a larger pipe.                                                                                                 
                                                                                                                                
Mr.  Pawlowski indicated  that the  state would  recover the                                                                    
extra  costs  in  the  tariffs.  With  the  reallocation  of                                                                    
capital, should a party use  the capacity, the state's rates                                                                    
would  go down  essentially  reimbursing the  state for  its                                                                    
initial outlay.                                                                                                                 
                                                                                                                                
Representative Guttenberg  clarified that he was  not asking                                                                    
about when the  pipe reached capacity for  expansion. He was                                                                    
referring to the larger pipe  when the gas initially started                                                                    
to flow. He  wondered if the state would  have to compensate                                                                    
TransCanada for unused gas.                                                                                                     
                                                                                                                                
Mr. Pawlowski replied that the  extra incremental cost would                                                                    
be rolled into  the capital costs that then  would be spread                                                                    
across the tariff. Less gas  would be moved through a larger                                                                    
pipe. The  extra cost  would be borne  by the  state because                                                                    
the  state   would  be  buying   the  opportunity   for  the                                                                    
expansion.                                                                                                                      
                                                                                                                                
Representative  Guttenberg  expressed  his approval  of  the                                                                    
idea.                                                                                                                           
                                                                                                                                
Co-Chair  Austerman commented  that  additional hearings  on                                                                    
the bill.  He mentioned  that government  take had  not been                                                                    
discussed.                                                                                                                      
                                                                                                                                
3:56:58 PM                                                                                                                    
                                                                                                                                
Representative   Thompson   discussed   the   expansion   of                                                                    
capacity.  He  mentioned  the provision  in  the  HOA  which                                                                    
provided for  at least 5  Offtake points. He asked  if there                                                                    
had  been any  provisions for  an in-take  point if  a large                                                                    
amount of gas was found.                                                                                                        
                                                                                                                                
Commissioner  Balash  replied  that   of  the  five  offtake                                                                    
points, at  least two of  them would potentially  be in-take                                                                    
points as  well. He believed one  of the points would  be at                                                                    
Nenana.                                                                                                                         
                                                                                                                                
Vice-Chair Neuman asked if there  were any further questions                                                                    
regarding slide 3.                                                                                                              
                                                                                                                                
3:57:52 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski reminded members  about the analysis regarding                                                                    
the state's expenditure with slide  4: "SOA Investment for a                                                                    
25  Percent Ownership  with TransCanada  is  Expected to  be                                                                    
$1.3-$4B  Lower  than  for  a  20  Percent  Ownership  Going                                                                    
Alone."  He   explained  that   the  slide   depicted  three                                                                    
different cost curves corresponding  to the state's level of                                                                    
investment options for  FY 18 through FY  23. Twenty percent                                                                    
state   ownership    would   require   an    investment   of                                                                    
approximately  $11  billion.  If  the  state  chose  not  to                                                                    
exercise  its equity  option with  a 25  percent TransCanada                                                                    
ownership the  state's investment requirement would  drop to                                                                    
approximately $7 billion.                                                                                                       
                                                                                                                                
Mr. Pawlowski  referred to slide  5: "SOA Revenues for  a 25                                                                    
percent ownership with TransCanada  are Expected to be $0.4-                                                                    
$0.5  billion  per  year  higher   than  for  a  20  Percent                                                                    
Ownership Going  Alone." He explained  that the slide  was a                                                                    
comparison of  potential revenues  depending on  the state's                                                                    
level of ownership.  The slide showed how  much more revenue                                                                    
the  state would  receive  with a  25  percent ownership  in                                                                    
partnership  with  TransCanada  compared  to  a  20  percent                                                                    
stand-alone ownership.  The state's  revenues would  go from                                                                    
$3.6  billion per  year  to  $4.1 billion  or  about a  $400                                                                    
billion benefit  to the state  as an owner  with TransCanada                                                                    
versus going it alone at  20 percent. He remarked that there                                                                    
was  a  balancing  of upfront  investment  versus  long-term                                                                    
return.                                                                                                                         
                                                                                                                                
Representative  Wilson asked  about  the  option to  proceed                                                                    
without a partner and about a preferred time frame.                                                                             
                                                                                                                                
4:00:56 PM                                                                                                                    
                                                                                                                                
Commissioner  Balash  replied  that  ending  Alaska  Gasline                                                                    
Inducement  Act (AGIA)  was  not  difficult. However,  DNR's                                                                    
main concern  was maintaining project  momentum with  all of                                                                    
the partners  the state  had worked  with over  the previous                                                                    
three  years.   He  noted  partnerships  were   planning  on                                                                    
TransCanada's involvement.  Summer fieldwork  was scheduled,                                                                    
as was the remaining pre-FEED  activity for the project. The                                                                    
activities  would be  populated  with TransCanada  employees                                                                    
with certain  skill sets and expertise.  If TransCanada were                                                                    
suddenly not  involved, there  would be  a scramble  to fill                                                                    
the  void left  behind. His  prediction was  that the  other                                                                    
three investors  would debate over  what company  would fill                                                                    
the void, possibly causing delays in the project.                                                                               
                                                                                                                                
4:02:47 PM                                                                                                                    
                                                                                                                                
Representative Wilson  asked if  there was  a list  of items                                                                    
that  should be  included in  order to  remain in  alignment                                                                    
with  the HOA  when  considering  amendments. Mr.  Pawlowski                                                                    
encouraged  members  to  review   sections  60  and  beyond;                                                                    
directions for  financing information,  a range  of options,                                                                    
and expansion policies.                                                                                                         
                                                                                                                                
Representative Wilson commented on avoiding another DNR.                                                                        
                                                                                                                                
Vice-Chair  Neuman asked  if the  13 percent  production tax                                                                    
rate was locked in.                                                                                                             
                                                                                                                                
Commissioner Balash replied in  the negative. He stated that                                                                    
SB 138 set a production tax,  but the bill did not allow the                                                                    
administration  to execute  long-term  agreements. The  bill                                                                    
gave  the  administration  the authority  to  negotiate  and                                                                    
execute agreements of  less than two years  in duration. Any                                                                    
agreement longer  than two years  had to be approved  by the                                                                    
legislature prior to execution.                                                                                                 
                                                                                                                                
Vice-Chair Neuman  clarified that, as an  example, the state                                                                    
legislature  could  add  an additional  2  percent  in-value                                                                    
production tax after the passage of the bill.                                                                                   
                                                                                                                                
Mr. Pawlowski  stated that the  power to set  taxes belonged                                                                    
to the legislature. The administration  was confident in the                                                                    
tax rates established in the  bill. He was not implying that                                                                    
the administration supported any changes to the rates.                                                                          
                                                                                                                                
Vice-Chair  Neuman  clarified  that his  question  aimed  at                                                                    
dispelling  the fears  of other  members about  being locked                                                                    
into a  percentage with the  bill. He  was glad to  know the                                                                    
agreements  would be  brought before  the legislature  again                                                                    
for final approval.                                                                                                             
                                                                                                                                
4:07:34 PM                                                                                                                    
                                                                                                                                
Representative  Edgmon referred  to  the difference  between                                                                    
express  and implied  agreements. He  mentioned that  as the                                                                    
project   continued  to   move  forward   legislators  would                                                                    
potentially  feel additional  pressure  to maintain  project                                                                    
momentum.   He  stressed   that  he   was  not   making  any                                                                    
accusations.   He  emphasized   that   with  the   different                                                                    
permutations he  wanted to better understand  to what extent                                                                    
the  state   was  making  implied  agreements   because  the                                                                    
decisions were being  made at present that  would likely add                                                                    
to the pressure of keeping the project going.                                                                                   
                                                                                                                                
Mr. Pawlowski appreciated  Representative Edgmon's comments.                                                                    
He remarked  that it was  essential to the project  that the                                                                    
administration and  the legislature  work together  and were                                                                    
engaged as the  agreements were crafted. He  opined that the                                                                    
bigger decisions should not be rushed.                                                                                          
                                                                                                                                
Representative Edgmon asked  the administration's team about                                                                    
Co-Chair Austerman's  point regarding the offtake  lines. He                                                                    
wanted to see an informal  analysis of what the debt service                                                                    
would  potentially be  for an  offtake point.  He wanted  to                                                                    
know, of  the 20 percent  royalty amount of up  $180 million                                                                    
per  year, how  many offtake  points could  be serviced.  He                                                                    
requested greater detail than high-level concepts.                                                                              
                                                                                                                                
Vice-Chair  Neuman discussed  the schedule  for the  evening                                                                    
meeting.                                                                                                                        
                                                                                                                                
CSSB  138(FIN)  am  was  HEARD and  HELD  in  committee  for                                                                    
further consideration.                                                                                                          
                                                                                                                                

Document Name Date/Time Subjects
SB 138 H FIN Black & Veatch 04.15.14.pdf HFIN 4/15/2014 1:30:00 PM
SB 138