Legislature(2013 - 2014)HOUSE FINANCE 519

04/16/2014 01:30 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
--Delayed to 1:40 p.m. Today--
Heard & Held
Moved Out of Committee
<Bill Hearing Canceled>
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
Heard & Held
Moved HCS CSSB 191(FIN) Out of Committee
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 Natural Resources and the                                                                    
     Department  of   Revenue;  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."                                                                                      
1:59:06 PM                                                                                                                    
MICHAEL PAWLOWSKI,  DEPUTY COMMISSIONER,  STRATEGIC FINANCE,                                                                    
DEPARTMENT  OF REVENUE,  continued to  address questions  on                                                                    
the legislation.  He recapped  that earlier  in the  day the                                                                    
administration had  discussed the affordable  energy aspects                                                                    
and the  ability to move  and look at infrastructure  and to                                                                    
move benefits of the project across the state.                                                                                  
Representative Gara  referred to  a request  for information                                                                    
about  where  Alaska  ranked  in   terms  of  its  potential                                                                    
government take on  the project. He stated  that Roger Marks                                                                    
[Legislative  Consultant,   Legislative  Budget   and  Audit                                                                    
Committee] estimated  the state's share at  approximately 60                                                                    
percent,   which  he   deemed   to  be   lower  than   other                                                                    
jurisdictions taking similar risks.                                                                                             
Mr. Pawlowski  replied that the royalty  study was available                                                                    
on the Department of Natural  Resources website and provided                                                                    
a broad range of government  takes across different types of                                                                    
projects. He  noted that he  would work to  provide excerpts                                                                    
from the  study. He relayed  that the consulting  firm Black                                                                    
and Veatch was updating the  study to put the information on                                                                    
one page.                                                                                                                       
Representative  Gara wondered  if the  information would  be                                                                    
available  prior to  the  amendment  process. Mr.  Pawlowski                                                                    
replied   that  the   consultants   were   working  on   the                                                                    
information as fast as possible.                                                                                                
Representative  Costello   communicated  that   her  primary                                                                    
concern   about  the   current  project   was  the   state's                                                                    
relationship with  TransCanada. She  asked about all  of the                                                                    
opportunities  the legislature  would  have  the ability  to                                                                    
alter its relationship with TransCanada.                                                                                        
Mr.  Pawlowski  pointed   to  page  8,  Exhibit   C  of  the                                                                    
Memorandum  of Understanding  (MOU)  related to  termination                                                                    
events  (copy on  file). The  section  described the  rights                                                                    
that  the  state  and  TransCanada  had  to  reevaluate  the                                                                    
relationship and  choose to terminate. The  initial and pre-                                                                    
FEED  [Front   End  Engineering  and  Design]   stages  were                                                                    
estimated to conclude around the  end of 2015; at that point                                                                    
contracts  with  a longer  duration  would  be ratified.  He                                                                    
detailed that the state had  the right at any time (provided                                                                    
that 90-day  notice was given to  TransCanada) to reevaluate                                                                    
and/or terminate the relationship  prior to the ratification                                                                    
of  the  contract   in  2015.  He  relayed   that  the  firm                                                                    
transportation   services   agreement  decision   would   be                                                                    
required  to  be brought  to  the  legislature and  be  made                                                                    
public  90  days  prior  to  the  effective  date;  the  MOU                                                                    
specified the date would be 90  days before the end of 2015.                                                                    
The legislature  would have an  opportunity to  determine if                                                                    
it  wanted  to  continue  moving forward  with  its  partner                                                                    
Mr. Pawlowski communicated that  after the contract had been                                                                    
approved, the FEED  stage would be entered;  during the FEED                                                                    
stage through  to the final  investment decision  (FID), the                                                                    
legislature  and  the  state  would  retain  an  ability  to                                                                    
terminate the relationship with  TransCanada for a couple of                                                                    
reasons. Including, if within 60  days from the date, one or                                                                    
more of the producers or  the transporter withdraws from the                                                                    
project  or at  any  time  the shipper  was  unable to  sign                                                                    
agreements to  sell all of its  royalty or tax gas  on terms                                                                    
acceptable to  the shipper. He relayed  that the legislature                                                                    
would  play  a   role  in  the  FID   (most  likely  through                                                                    
appropriation   powers).  The   state  would   have  another                                                                    
opportunity to reevaluate  its relationship with TransCanada                                                                    
at the  FID stage; however,  during the FEED and  FID stages                                                                    
there  was a  provision  that would  provide TransCanada  an                                                                    
option  to participate  in  an  alternative similar  project                                                                    
advanced by the state. The  opportunity was based on the MOU                                                                    
terms (75 percent debt and  25 percent equity); however, the                                                                    
cost of debt  and return on equity were  open to negotiation                                                                    
based on  conditions at the  time. He summarized  that there                                                                    
would  be  multiple  occurrences  when  the  state  had  the                                                                    
opportunity  to  weigh  advancement  with  TransCanada;  the                                                                    
legislature  would  make  the next  decision  on  the  terms                                                                    
towards the end of 2015.                                                                                                        
2:06:57 PM                                                                                                                    
Representative  Costello asked  whether the  state's buyback                                                                    
option  was always  open or  limited. Mr.  Pawlowski replied                                                                    
that  the   buyback  option  was  only   applicable  in  the                                                                    
ratification of the  firm transportation services agreement.                                                                    
The  provision would  be  in  effect from  the  end of  2015                                                                    
Representative  Costello  referred  to  testimony  from  the                                                                    
Department of Transportation and  Public Facilities. She had                                                                    
been surprised by the testimony  related to the department's                                                                    
lack  of  awareness  about logistical  needs.  She  wondered                                                                    
whether the  logistics would be  provided to the state  at a                                                                    
certain  point or  if the  conversation  would improve  with                                                                    
Mr.  Pawlowski  answered  that  the  needs  of  the  project                                                                    
broadly  and  specifically  related to  transportation  were                                                                    
issues  developed  during  the pre-FEED  period.  The  phase                                                                    
moved  from a  conceptual idea  to a  conceptual design.  He                                                                    
elaborated that  the size of  the pipe was  developed during                                                                    
the time period; all of  the decisions impacted the boom and                                                                    
trench   sizes  in   addition   to   other  logistics.   The                                                                    
development of  due diligence conducted during  the pre-FEED                                                                    
time  period,  which  was also  important  for  the  Federal                                                                    
Energy  Regulatory  Commission (FERC)  environmental  impact                                                                    
statement (EIS)  requirements related to social  impacts. He                                                                    
noted  that  the  department  would   provide  the  list  of                                                                    
resource  reports  to  the  committee.  He  summarized  that                                                                    
during the next project stage  the detailed work would begin                                                                    
and the items  would be developed in order  for the involved                                                                    
parties to decide whether it was desirable to move forward.                                                                     
2:09:38 PM                                                                                                                    
Co-Chair Stoltze handed the gavel to Vice-Chair Neuman.                                                                         
Mr. Pawlowski followed up on  his response to Representative                                                                    
Costello.  He  added that  Black  and  Veatch was  currently                                                                    
updating  the  government  take  to  include  implied  state                                                                    
expenditures  for infrastructure;  the information  would be                                                                    
provided to the committee.                                                                                                      
Vice-Chair Neuman referred  to a 5 percent  return on equity                                                                    
(ROE) related to  SB 21 [oil tax legislation  that passed in                                                                    
2013]. He discussed a 5  percent per barrel of oil exclusion                                                                    
on ROE in the Black and Veatch proposal.                                                                                        
Mr. Pawlowski asked for  verification that Vice-Chair Neuman                                                                    
was speaking about the Black and Veatch fiscal analysis.                                                                        
Vice-Chair Neuman replied in the affirmative.                                                                                   
Mr. Pawlowski explained that under  SB 21 there was a credit                                                                    
for the production  of each barrel of oil. One  of the items                                                                    
Black  and Veatch  had looked  at was  a similar  credit for                                                                    
each  million British  thermal unit  (btu) or  million cubic                                                                    
feet (mcf) of  gas produced. The goal had  been to determine                                                                    
a modification that would create  the same system. The $5.00                                                                    
had been divided  by the energy equivalent,  which created a                                                                    
fixed credit per unit of gas.  He believed it had been $5.00                                                                    
divided by 6 per mcf.                                                                                                           
Vice-Chair  Neuman  asked  for  detail on  off  ramps  [i.e.                                                                    
termination options].                                                                                                           
Mr. Pawlowski pointed to page 8  of Exhibit C of the MOU. He                                                                    
explained that the section was  broken up into circumstances                                                                    
under which  the shipper  could terminate,  the transporters                                                                    
could  terminate,  and cases  where  either  the shipper  or                                                                    
transporter  could  terminate.  He addressed  the  right  to                                                                    
terminate prior to the FEED  stage; notice could be given by                                                                    
the shipper (State  of Alaska) any time provided  that a 90-                                                                    
day notice was given  to the transporter (TransCanada). From                                                                    
the  beginning  of  FEED  through   FID  the  shipper  could                                                                    
terminate within  60 days  from the date  one or  more North                                                                    
Slope producers or transporter withdrew  from the Alaska LNG                                                                    
Project. Secondly,  the shipper could terminate  at any time                                                                    
if  it was  unable to  sign agreements  to sell  all of  its                                                                    
royalty  or tax  gas  on terms  acceptable  to the  shipper.                                                                    
Additionally, the shipper could  choose to terminate for any                                                                    
reason at FID.                                                                                                                  
Mr. Pawlowski  addressed that  the transporter  could choose                                                                    
to terminate if the  legislature failed to provide statutory                                                                    
authority to  the Department of  Natural Resources  (DNR) or                                                                    
the Department of Revenue (DOR)  to enter into the precedent                                                                    
agreement  by  June  30, 2014.  He  referred  to  additional                                                                    
reasons listed in the MOU (Exhibit C):                                                                                          
     · Shipper fails to execute the PA within the specified                                                                     
     · Shipper fails to execute the FTSA by December 31,                                                                        
     · Shipper fails to maintain the standard of                                                                                
        Creditworthiness  Requirements.   Transporter  shall                                                                    
        provide notice to Shipper of a  failure to meet such                                                                    
        standards,  and  Shipper  shall  have  a  reasonable                                                                    
        period to cure.                                                                                                         
     · At FID, if all Transporter corporate/Board approvals                                                                     
        have not been obtained.                                                                                                 
     · Within 3 months from FID, if debt financing has not                                                                      
        been secured on terms and conditions satisfactory to                                                                    
        Transporter in its sole discretion.                                                                                     
Mr. Pawlowski  noted that  the term  sheet was  a conceptual                                                                    
document.  The  precedent  agreement would  begin  with  the                                                                    
concepts  and  would  add detail.  The  firm  transportation                                                                    
services  agreement  would  add  a more  thorough  level  of                                                                    
2:14:36 PM                                                                                                                    
Representative   Guttenberg   referred  to   DOR's   earlier                                                                    
testimony that Black and Veatch  was working on a new report                                                                    
on government take.  He believed it had been  in the context                                                                    
of   the   state's   obligation    to   expand   and   build                                                                    
infrastructure. He was concerned  about the issue because of                                                                    
a report  from the  Department of Transportation  and Public                                                                    
Facilities.   He  wondered   if  there   were  things   like                                                                    
deductions   for   existing  North   Slope   infrastructure,                                                                    
expansion,  and how  it would  affect the  existing oil  tax                                                                    
Mr.  Pawlowski responded  that  the  deductibility of  lease                                                                    
expenditures had  been included in every  model developed on                                                                    
the  project   since  the  beginning.  He   noted  that  the                                                                    
deductions were often  listed in Black and  Veatch models as                                                                    
a separate  part of the  negative calculation for  the early                                                                    
years. He  clarified that the  prior evening  the department                                                                    
had received a  request by the committee  chair's office for                                                                    
an update  on the government  take. Also requested  was that                                                                    
the state choose  some numbers that it would  be spending on                                                                    
infrastructure. He  believed it had been  a specific request                                                                    
to  assume $1  billion or  another amount  was spent  by the                                                                    
state  on infrastructure.  He explained  that providing  the                                                                    
information  required the  models  to be  rerun; the  models                                                                    
were not  based on anything  other than a guess.  He relayed                                                                    
that   the   royalty   report   included   government   take                                                                    
Representative Guttenberg  asked if  there was  one scenario                                                                    
being  run that  included $1  billion as  the infrastructure                                                                    
needs.  Mr.  Pawlowski  replied  that  the  scenarios  would                                                                    
include  $1  billion,  $2  billion,  and  $500  million.  He                                                                    
provided a disclaimer that the numbers were arbitrary.                                                                          
Representative  Gara  noted  that a  contract  under  former                                                                    
Governor  Murkowski had  fallen apart  when the  legislature                                                                    
had  realized  the  governor   could  move  forward  without                                                                    
legislative approval. He asked for the meaning of FID.                                                                          
Mr. Pawlowski  replied that FID  stood for  Final Investment                                                                    
Representative  Gara referred  to department  testimony that                                                                    
the state's authority would be  determined [at FID] when the                                                                    
governor came  forward with a  contract and  the legislature                                                                    
could decide whether appropriate the  money. He asked if his                                                                    
understanding was accurate.                                                                                                     
Mr. Pawlowski  replied that he  was hesitant  to contemplate                                                                    
what  would  be necessary  for  the  FID. His  reference  to                                                                    
appropriations had  been used based  on his  assumption that                                                                    
appropriations  would be  necessary given  the scale  of the                                                                    
FID  and   construction  step.  He  communicated   that  any                                                                    
contract with a duration  exceeding five years would require                                                                    
a  legislative vote.  He  did not  currently  know how  many                                                                    
contracts would be necessary for the FID to take place.                                                                         
Representative Gara wanted to ensure  that it was in writing                                                                    
that at  FID the legislature  had the right  to say no  to a                                                                    
contract.  He  did not  want  the  legislature  to be  in  a                                                                    
situation where it  was held liable for damages  if it chose                                                                    
not to appropriate money.                                                                                                       
2:19:33 PM                                                                                                                    
Mr. Pawlowski  answered that  the actual  body of  work that                                                                    
would  go into  the  FID  was not  currently  known. To  his                                                                    
knowledge  there was  nothing  specific  in the  legislation                                                                    
that drove  one single  decision. The department  had worked                                                                    
to break the  concept apart from previous  efforts, that one                                                                    
contractor  or  one  execution  would  actually  lead  to  a                                                                    
project. There  were multiple  contracts and  agreements. He                                                                    
detailed  that part  of the  path was  designing what  would                                                                    
occur in  the pre-FEED stage.  As the different  work needed                                                                    
was identified, it  would become clearer what  would need to                                                                    
be  done  in  the  FEED  and FID  stages.  There  were  many                                                                    
potential decision points  leading up to FID,  but they were                                                                    
unknown at present.                                                                                                             
Co-Chair Austerman  noted that  enalytica was  available for                                                                    
Representative Wilson wondered how  to determine the project                                                                    
was the  best deal for  the state's residents.  She wondered                                                                    
why  the consultants  believed the  current project  was the                                                                    
best way  to go  or if  there were  other options  it should                                                                    
2:22:28 PM                                                                                                                    
JANAK MAYER, PARTNER, ENALYTICA,  asked for clarification on                                                                    
the  question. He  wondered if  the  question was  primarily                                                                    
focused  on potential  future  gas  prices for  constituents                                                                    
along the pipeline route.                                                                                                       
Representative Wilson  agreed. She believed the  state would                                                                    
ensure  the constituents  were taken  care  of. She  relayed                                                                    
that the  Fairbanks area was  primarily on heating  oil. She                                                                    
wondered how  gas would  be different  from heating  oil for                                                                    
Fairbanks and other areas.                                                                                                      
NIKOS TSAFOS,  PARTNER, ENALYTICA, responded with  advice on                                                                    
thinking  about  the  issue at  the  40,000-foot  level.  He                                                                    
highlighted that the state would  sell gas in Asia. Once the                                                                    
process began  the state would  realize that  consumers were                                                                    
using gas  or fuel oil.  He spoke to the  competitiveness of                                                                    
Alaska's gas in  the Asian market; it would need  to be less                                                                    
expensive than  fuel oil. When  oil prices had  collapsed in                                                                    
2008 and  2009 there had been  a short period of  time where                                                                    
oil was  cheaper than  gas. He stated  that during  the time                                                                    
the Korea  Electric Power Corporation had  switched from LNG                                                                    
to oil. He  reasoned that if gas was taken  earlier it would                                                                    
be able  to compete with fuel  oil if the delivery  price of                                                                    
gas had to be lower than the  fuel oil in Asia. He could not                                                                    
think  of  many  cases  worldwide  where  gas  traded  at  a                                                                    
continuous premium  to fuel  oil. He  detailed that  in most                                                                    
locations gas gained market share  by being more competitive                                                                    
than fuel oil,  which was one reason gas prices  in Asia and                                                                    
Europe were linked  to fuel oil. Distribution  price was not                                                                    
yet  known. He  characterized  his response  as the  highest                                                                    
level observation  that could provide  any comfort  that the                                                                    
energy delivered to Alaskans would  be more competitive than                                                                    
what they  currently paid (especially locations  that relied                                                                    
heavily on oil-based energy).                                                                                                   
2:27:05 PM                                                                                                                    
Representative   Wilson  wondered   if  it   came  down   to                                                                    
contracts. She asked how the  state would make sure it would                                                                    
have  sufficient  gas  for  instate  use.  She  remarked  on                                                                    
meeting  demand   and  making  sure  Alaska   was  not  only                                                                    
receiving a leftover amount of gas.                                                                                             
Mr. Tsafos  replied that  the issue could  be thought  of in                                                                    
two different  ways. He  remarked that  the concern  was not                                                                    
unique to  Alaska; any  sovereign developing  LNG considered                                                                    
to  obtain competitive  energy. He  believed there  were two                                                                    
parts that  would require management. First,  when using gas                                                                    
for heating it was difficult to  know how much would be used                                                                    
because  it depended  on  the weather.  He  stated that  the                                                                    
limitation  was well  understood and  would require  working                                                                    
through  contracts.   He  explained  that   sales  contracts                                                                    
typically had  upward or  downward quantity  provisions. For                                                                    
example,  if 4  million  tons were  sold  there was  usually                                                                    
flexibility to go 10 percent  higher or lower. Additionally,                                                                    
there  was  a  planned  out monthly  delivery  schedule.  He                                                                    
suspected that in Alaska it  would be assumed that the state                                                                    
needed more gas  in the winter; therefore,  it would deliver                                                                    
less during that period. He  noted that it would also depend                                                                    
on  the state's  ability  to produce  more. He  communicated                                                                    
that the state could produce at  a flat amount and alter the                                                                    
distribution between domestic sales  and exports or it could                                                                    
produce more  when more was  needed and vice  versa. Second,                                                                    
the  broader concern  was  what would  happen  if the  state                                                                    
underestimated  its  need.  He  relayed that  there  were  a                                                                    
number of ways  to manage the issue  including studying what                                                                    
the number  would be.  He referred  to prior  testimony that                                                                    
AGDC  would  work  to determine  the  most  reliable  number                                                                    
possible. He discussed the  importance of understanding what                                                                    
the  contingencies and  spare  capacities of  infrastructure                                                                    
would be.  He referred  to committee discussions  on surplus                                                                    
infrastructure and  spare capacity in order  to enable other                                                                    
producers  to   meet  the   demand.  Additionally,   it  was                                                                    
important  to have  a contractual  access regime  that would                                                                    
allow  third-parties to  supply the  gas; the  absence of  a                                                                    
well  laid plan  could be  problematic. He  stated that  the                                                                    
optimal solution  was not yet known.  Sovereigns that failed                                                                    
to  do the  proper due  diligence had  seen exports  decline                                                                    
because they had  diverted gas to the  domestic market; some                                                                    
had paid penalties as a  result. He detailed that there were                                                                    
ways to mitigate  the problem such as choosing  to commit 80                                                                    
to 90  percent of sales  to long-term contracts in  order to                                                                    
provide more flexibility and avoid  penalties. He noted that                                                                    
the  state  may  want  to  consider  marketing  its  gas  in                                                                    
different ways than producers. Perhaps  the state would want                                                                    
to keep  more of  its gas  for the open  market in  order to                                                                    
retain  gas   for  the  "what  if's."   The  commercial  and                                                                    
technical aspects  would be worked  through during  the pre-                                                                    
FEED and FEED  stages. He reiterated that  the concerns were                                                                    
fairly common facing all LNG  producers. He thought the best                                                                    
thing  to  do was  to  look  at  how various  concerns  were                                                                    
addressed in each stage of the agreements.                                                                                      
2:32:52 PM                                                                                                                    
Representative  Wilson believed  the state  was looking  for                                                                    
answers that were not yet  known. She noted that the answers                                                                    
were  desired  before the  start  of  the project,  but  the                                                                    
legislature  was  being told  the  project  needed to  start                                                                    
before  the answers  could be  obtained.  She remarked  that                                                                    
AGDC and the administration would  direct the project on the                                                                    
state's  behalf.  Currently   TransCanada  was  the  state's                                                                    
partner and the three producers  would each have 25 percent.                                                                    
She believed most  of the gas would be  takin in-kind versus                                                                    
in-value.  She  believed the  tax  structure  was being  set                                                                    
somewhat. She remarked on the  pre-FEED and FEED stages. She                                                                    
wondered if she was missing  any pieces. She understood that                                                                    
a contract would not be set at present.                                                                                         
Mr. Mayer  answered that  there were a  number of  key items                                                                    
occurring  at  present.  He discussed  that  the  state  was                                                                    
acknowledging   a   vision   that  addressed   whether   all                                                                    
requirements could be  met for taking in-kind  and having an                                                                    
equity share. The legislature  was giving the administration                                                                    
the authority to negotiate the  key points. He remarked that                                                                    
the  basic  structure  of  a  state  gas  share  and  direct                                                                    
participation   in   the    project   provided   significant                                                                    
flexibility for the state to  solve the problem of obtaining                                                                    
affordable gas  prices in  the state.  The options  would be                                                                    
better understood  as the process  evolved. He  relayed that                                                                    
the state  could decide  to solve the  problem by  using its                                                                    
own share  of the  gas to provide  for the  domestic demand;                                                                    
the price would have an  impact on the economics received by                                                                    
the  state. The  state could  decide that  it was  a uniform                                                                    
obligation  across all  project participants;  if the  other                                                                    
partners believed the terms were  not in their best interest                                                                    
there may be negotiations. There  were a wide range of items                                                                    
that could  be considered including meeting  in-state demand                                                                    
not  primarily with  gas  from the  project  but from  other                                                                    
sources such  as Cook Inlet  or from other producers  on the                                                                    
North Slope (gas that was  essentially stranded at present).                                                                    
There  were many  different mechanisms  the state  could use                                                                    
that would determine the ultimate delivery price.                                                                               
Representative  Wilson   asked  what  the  state   would  be                                                                    
required to approve  next and when. Mr.  Tsafos deferred the                                                                    
question to the administration.                                                                                                 
2:38:16 PM                                                                                                                    
Representative Wilson  wondered if the  consultants believed                                                                    
the state  would need to  be able  to meet the  deadline for                                                                    
the  Asian  market  needs.   There  were  other  competitors                                                                    
working to get the market as  well. She wondered if 2022 was                                                                    
the "drop dead" deadline.                                                                                                       
Mr. Tsafos  cautioned that it  was dangerous to  speak about                                                                    
closing windows  of opportunity.  He stated that  because of                                                                    
the  time  the  project  would take,  the  farther  out  the                                                                    
project went the  better it looked because  there were fewer                                                                    
projects planned in the future.  He discussed that currently                                                                    
entities selling gas were aiming  for delivery dates in 2018                                                                    
through 2021. Alaska was looking  at a later market that was                                                                    
not  as saturated  by competition.  He acknowledged  that as                                                                    
time went by,  later future dates would  become saturated as                                                                    
well. He  stated that  trying to  capture a  specific window                                                                    
was the wrong  way to move forward. He  believed the primary                                                                    
reason to keep moving forward was  due to the length of time                                                                    
the process took. He noted  that everything was interrelated                                                                    
and one piece  could not be moved without the  other. It was                                                                    
not possible  to talk about  marketing until  conducting the                                                                    
financing study;  likewise it was  not possible to  know how                                                                    
much gas  there would  be before conducting  the engineering                                                                    
study. Although  the state  would get  to FID  that included                                                                    
financial,  marketing, technical  studies,  the items  would                                                                    
become more final throughout the  process. He concluded that                                                                    
it  was not  possible  to  wait for  everything  to be  done                                                                    
before  moving to  the  subsequent  step because  everything                                                                    
would become obsolete if too much time passed.                                                                                  
2:42:16 PM                                                                                                                    
Co-Chair  Austerman  believed   that  what  the  legislature                                                                    
approved  in  the  current session  would  mean  a  two-year                                                                    
timeframe on  most contracts. He surmised  that if contracts                                                                    
were not signed within the  two years they would become null                                                                    
and void;  the contracts  would be  required to  come before                                                                    
the  legislature in  order to  move  to the  next step.  Mr.                                                                    
Mayer  answered  in  the   affirmative.  The  contracts  the                                                                    
legislature was  empowering the administration  to negotiate                                                                    
without coming back before the  legislature would govern the                                                                    
pre-FEED phase. Contracts governing  the project beyond pre-                                                                    
FEED  would  come  back  to  the  legislature  for  approval                                                                    
(especially  large  contracts   such  as  the  joint-venture                                                                    
agreements and firm transportation services agreements).                                                                        
Mr. Tsafos  communicated that the fiscal  notes only covered                                                                    
the  pre-feasibility  study.  The   FEED  stage  would  cost                                                                    
hundreds of millions of dollars.                                                                                                
Co-Chair Austerman surmised  that by the time  the state got                                                                    
to the FEED  stage there would be a special  session in late                                                                    
2015  to  discuss the  issue.  Mr.  Tsafos replied  that  it                                                                    
sounded  reasonable, but  he deferred  the  question to  the                                                                    
Representative  Gara was  interested in  the ability  to get                                                                    
extra  gas  in  the  pipeline.  He  discussed  expanding  by                                                                    
compression  up to  1 billion  cubic feet;  expansion beyond                                                                    
the amount  would become difficult  without help  from other                                                                    
parties.  He  referred  to  a  provision  in  the  HOA  that                                                                    
represented risk  for the  state, but  reward for  the other                                                                    
companies. He elaborated that if  the state wanted to expand                                                                    
the pipeline,  as long as it  and a new shipper  came in and                                                                    
expanded, the  state had to  share the benefits  with Exxon,                                                                    
Conoco, and  BP. Once  the expansion got  the state  back to                                                                    
the cost  of the  initial shipping rate  the state  would be                                                                    
required to  bare all of the  cost. He remarked that  if the                                                                    
cost of  expansion increased the  tariff up to  the original                                                                    
rate, the  state and  shipper would be  required to  pay the                                                                    
cost. He wondered why the provision was fair.                                                                                   
2:46:37 PM                                                                                                                    
Mr. Mayer  replied that  there were  two important  items to                                                                    
distinguish  pertaining to  Representative Gara's  question.                                                                    
The  first item  pertained  to the  parties  involved in  an                                                                    
expansion and who  bore the direct capital  cost. The second                                                                    
item related  to the  total per unit  capital costs  for the                                                                    
entire  pipeline, whether  the  costs were  higher or  lower                                                                    
than previously, and whether there  was a benefit or cost to                                                                    
the  expansion in  terms of  the implied  tariff. He  stated                                                                    
that  among  the  parties  to  the  HOA  there  were  active                                                                    
explorers who  may have  additional gas  in the  future that                                                                    
they would like to see an  expansion for (that the state may                                                                    
or  may not  want  to  participate in).  He  noted that  the                                                                    
agreement allowed  a party  that wanted to  expand to  do so                                                                    
unilaterally without  being held back by  the other parties.                                                                    
He  mentioned  that  under  the   HOA  any  benefits  of  an                                                                    
expansion would go to all  parties; however, when costs rose                                                                    
they were borne  by the parties executing  the expansion. He                                                                    
agreed that  greater symmetry  from the  state's perspective                                                                    
was  preferable. However,  he noted  that reasonable  people                                                                    
could disagree on  the subject. He had  heard testimony that                                                                    
the  tradeoff was  that the  initial investment  enabled the                                                                    
expansion; therefore,  the initial investors  should benefit                                                                    
in some  way. However,  when looking  solely at  the state's                                                                    
interest, it would be reasonable  to say that only expanding                                                                    
parties bore  costs and  benefits or  that if  benefits were                                                                    
shared that  costs would also  be shared. He stated  that in                                                                    
negotiations  if  one  party was  adamant  about  unilateral                                                                    
expansion, sharing the costs may be given up.                                                                                   
2:50:29 PM                                                                                                                    
Mr. Tsafos  referred to discussions about  the importance of                                                                    
initial  design and  how to  build  a pipeline  that was  as                                                                    
expandable as  possible as cheaply as  possible. He reasoned                                                                    
that  if  the state  wanted  its  partners, which  would  be                                                                    
baring 75 percent  of the cost, to put down  75 percent on a                                                                    
slightly  larger or  more expandable  pipeline,  one way  to                                                                    
encourage  the  partners  towards  the option  would  be  to                                                                    
provide  them with  a benefit.  He noted  that the  tradeoff                                                                    
could be important.                                                                                                             
Representative  Gara   believed  the  state  had   the  most                                                                    
interest  in bringing  in new  parties. He  opined that  the                                                                    
producers did  not care  about the ability  to bring  in new                                                                    
parties. He stressed  that the state cared how  much more of                                                                    
the North Slope  was developed. He hoped the  state would be                                                                    
actively  seeking new  partners;  however,  he reasoned  the                                                                    
partners would not  develop unless they could  get their gas                                                                    
in the pipeline. He commented  on the state giving producers                                                                    
the  benefit  of reduced  shipping  rates  if there  was  an                                                                    
Co-Chair  Austerman  asked   Representative  Gara  to  avoid                                                                    
making statements about how producers  would act in response                                                                    
to certain things.                                                                                                              
Representative Gara agreed. He wondered  why it would not be                                                                    
fair for  producers to  share in costs.  He asked  about the                                                                    
fairness of allowing the state to  bring the cost back up to                                                                    
the original rate in order to expand.                                                                                           
Mr. Mayer answered in terms  of the implied pipeline tariff,                                                                    
the arrangement seemed to be  a fair and equitable. He could                                                                    
not say whether the arrangement  would ensure the state with                                                                    
the right of  unilateral expansion that was  provided in the                                                                    
current contract.                                                                                                               
2:54:10 PM                                                                                                                    
Representative Guttenberg wondered  if the consultants could                                                                    
answer a  question related to the  midterm service agreement                                                                    
in the MOU,  Exhibit C. Mr. Mayer replied that  he would try                                                                    
to answer the question.                                                                                                         
Representative  Guttenberg   looked  at  the   document  and                                                                    
observed that  TransCanada would  have the ability  to write                                                                    
off  its property  taxes against  the capital  expenditures,                                                                    
which was  100 percent recovered through  tolls. He surmised                                                                    
that  Anchorage and  Fairbanks would  charge property  taxes                                                                    
and they  would charge the  taxes to the state.  He observed                                                                    
that the money moved in a circle.                                                                                               
Mr.  Mayer  answered  that  there were  a  series  of  costs                                                                    
incurred in  the development  of a  project. The  costs with                                                                    
allowances  for  the return  on  debt  and equity  would  be                                                                    
recovered by  the project builder  over the lifespan  of the                                                                    
project.   The   costs   included   the   upfront   capital,                                                                    
maintenance,  operating,  and  those associated  with  taxes                                                                    
such as federal,  state, and property taxes  etc.; the costs                                                                    
were all built into the model determining the tariff.                                                                           
Representative Guttenberg observed that  it was money moving                                                                    
in a circle.                                                                                                                    
2:56:41 PM                                                                                                                    
Co-Chair   Austerman  asked   for   verification  that   the                                                                    
consultants  were   under  contract  with   the  Legislative                                                                    
Affairs  Agency.  Mr.  Mayer   replied  in  the  affirmative                                                                    
(specifically  under   the  Legislative  Budget   and  Audit                                                                    
Co-Chair  Austerman asked  when  the  contract expired.  Mr.                                                                    
Mayer  replied  that  it  expired   on  January  31  of  the                                                                    
following year.                                                                                                                 
Co-Chair   Austerman  asked   for   verification  that   the                                                                    
consultants would  be available  over the  upcoming interim.                                                                    
Mr. Mayer agreed.                                                                                                               
Co-Chair Austerman relayed that  amendments on the bill were                                                                    
due at 4:00 p.m. that day.                                                                                                      
CSSB 138(FIN)am was HEARD and  HELD in committee for further                                                                    
2:58:07 PM                                                                                                                    
AT EASE                                                                                                                         
3:04:49 PM                                                                                                                    

Document Name Date/Time Subjects
SB 191 CS WORKDRAFT FIN C VERSION.pdf HFIN 4/16/2014 1:30:00 PM
SB 191
CSSB 140 (FIN) Letters of Support.pdf HFIN 4/16/2014 1:30:00 PM
SB 140
CSSB 140 (FIN) Sectional Analysis.pdf HFIN 4/16/2014 1:30:00 PM
SB 140
CSSB 140 (FIN) Summary of Changes ver U to ver E.pdf HFIN 4/16/2014 1:30:00 PM
SB 140
CSSB 140 (FIN) Supporting Document-Planning and Infrastructure Section of AAPC Preliminary Report.pdf HFIN 4/16/2014 1:30:00 PM
SB 140
CSSB 140 (FIN) Sponsor Statement.pdf HFIN 4/16/2014 1:30:00 PM
SB 140
CSSB 140 (FIN) Supporting Document-ARPAPolar map.pdf HFIN 4/16/2014 1:30:00 PM
SB 140
SB 138 4.16.14 HFIN Response to Rep Gara Questions.pdf HFIN 4/16/2014 1:30:00 PM
SB 138
SB 138 4.15.14 House Finance 830 AM DOR Notes.pdf HFIN 4/16/2014 1:30:00 PM
SB 138