Legislature(2013 - 2014)BARNES 124
04/06/2014 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 138 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
1:07:29 PM
CO-CHAIR FEIGE announced that the only order of business is 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."
CO-CHAIR FEIGE noted the committee would resume consideration of
amendments to CSSB 138(FIN) am.
1:07:49 PM
REPRESENTATIVE SEATON moved to adopt Amendment 21, labeled 28-
GS2896\I.A.56, Bullock, 4/3/14, which read:
Page 15, following line 30:
Insert a new bill section to read:
"* Sec. 16. AS 38.05 is amended by adding a new
section to read:
Sec. 38.05.023. Prohibited agreement or contract
term relating to the tax on oil production. An
agreement or contract negotiated under
AS 38.05.020(b)(11) or other agreement or contract in
which the state is a party and that is associated with
a North Slope natural gas project may not include a
provision that reduces or requires future compensation
to a producer for changes in the tax levied on oil
production under AS 43.55.011."
Renumber the following bill sections accordingly.
Page 17, line 24:
Delete "sec. 17"
Insert "sec. 18"
Page 21, line 16:
Delete "sec. 27"
Insert "sec. 28"
Page 25, line 9:
Delete "sec. 30"
Insert "sec. 31"
Page 31, line 18:
Delete "sec. 37"
Insert "sec. 38"
Page 53, lines 24 - 25:
Delete "sec. 23"
Insert "sec. 24"
Page 56, line 6:
Delete "16, 17, 23 - 27, 29, 30, 37, 39, and 55 -
61"
Insert "16 - 18, 24 - 28, 30, 31, 38, 40, and 56
- 62"
Page 56, line 8:
Delete "Section 38"
Insert "Section 39"
Page 56, line 9:
Delete "secs. 62 and 63"
Insert "secs. 63 and 64"
REPRESENTATIVE SADDLER objected.
REPRESENTATIVE SEATON stated the purpose of Amendment 21 is to
address the concerns brought forth by municipalities that if the
Alaska Stranded Gas Development Act had been passed and the
pipeline had not been built, the property tax structure would
have been changed. Amendment 21 says that the payment in lieu
of taxes (PILT) being negotiated will take effect on project
sanction.
The committee took an at-ease from 1:09 p.m. to 1:10 p.m.
1:10:00 PM
REPRESENTATIVE SEATON said Amendment 21 would separate oil tax
revisions from the things that can be negotiated under other
terms by the administration. It would take away any perceived
authorization for incorporating oil tax fiscal certainty from
the authorization that the legislature is giving the
administration to negotiate at this time that would be refined
to gas. It does that in two ways. The tax could not be reduced
and future compensation could not be required in case a future
legislature changes the tax on oil.
1:11:17 PM
CO-CHAIR FEIGE requested the administration's position on the
amendment.
JOE BALASH, Commissioner, Department of Natural Resources (DNR),
stated that although the department has sympathy for the intent
and pursuit of Amendment 21, it opposes it. He recollected that
at a prior meeting there had been discussion about how the cost
for the state's share of the gas production and infrastructure
is going to be carried against oil revenues, and he indicated
that that is something the department has committed to in the
HOA. He stated that while these future agreements will not take
on oil taxes directly, there will be a need for provisions that
address indirect effects of changes to oil in the future if
there is an impact on gas. He said one example of that is if 20
years from now the legislature decides that a net production tax
is no longer the way to go and instead chooses to go to a gross
tax, then upstream costs would no longer be recognized in the
production tax system. He questioned what the parties would do
in the future if something like that happened. For that reason,
he explained, the department is concerned that the language [of
Amendment 21] would tie its hands. Further, he said if the
production tax rate were changed up or down by the legislature,
the "knock on" effect relative to gas costs would have some
impact on each of the parties, including the state. He said the
department thinks having the ability to address those what-ifs
in the agreement is going to be necessary commercially.
1:13:54 PM
REPRESENTATIVE KAWASAKI asked whether the proposed amendment
deals solely with the contract terms related to the LNG proposal
and AS 38.05.020(b)(11) and not based on any future project.
REPRESENTATIVE SEATON answered yes. He stated that under
Amendment 21, the administration would be allowed to negotiate
gas terms, but would not be able to lower the tax rate on oil or
- if a future legislature changes the tax rates on oil - to bind
the state to "take the treasury and reimburse for any amount
that's changed on that." He added, "And this does say it
reduces the tax rates or reduces tax levies."
1:15:34 PM
CO-CHAIR FEIGE questioned why the proposed amendment is
necessary if the state already has the authority to change oil
taxes and would have to approve the contracts that come back.
REPRESENTATIVE SEATON responded that if the state negotiates a
whole contract around a reduction in oil tax or fixing the oil
taxes through a compensation rate for 25 years or the extent of
the contract, then the state will have to come back to a
difficult scenario of "looking at a system that may compromise
the ability of the legislature to approve those contracts." He
stated the purpose of Amendment 21 is to clarify ahead of time
that oil tax rates are not to be negotiated in a gas contract
and that future compensation for actions of future legislatures
are not effectively precluded, and thus negotiations could be
made around terms that the legislature would approve.
1:17:15 PM
REPRESENTATIVE TARR highlighted the words "reduces or requires"
within Amendment 21, and questioned why the word "requires" is
necessary if the primary concern is reduction.
REPRESENTATIVE SEATON explained there are two issues involved.
The first is that tax rates could be reduced; the other is that
the state treasury would be required to take money out of the
treasury and compensate companies for any increase in costs that
could occur.
1:18:31 PM
REPRESENTATIVE HAWKER offered his understanding that the stated
purpose of Amendment 21 is to prohibit contractual fiscal
certainty. He opined that it is not that simple and there is a
lot wrong with the language of the proposed amendment. He
restated the language without the future compensation clause as
follows: "agreement or contract in which the state is a party".
He said the state is not going to be a party in a lot of the
contracts; in some ways, an instrumentality or public
corporation of the state might be a party to the contracts, so
there is something there that is limiting and ill defined. He
continued with the language as follows: "agreement or contract
in which the state is a party and that is associated with a
North Slope natural gas project may not include a provision that
reduces" ... "the tax levied on oil production". He said he can
foresee that in the complexity of all the contracts that will be
negotiated, there may be a consequential effect of perhaps
moving an expense item into the realm of the oil production tax
net regime that would, in fact, reduce the tax levied on oil
production. He said going to the gross 13 percent and the way
the royalty agreements will be written, there could be a claim
that "by cost shifting from a net tax on gas to a net tax on
oil, ... the entire operations of this legislation reduces the
tax levied on oil production as a result of its execution." He
called this "bad circular logic."
REPRESENTATIVE HAWKER pointed to language in Amendment 21 that
would require "a contract that reduces or requires future
compensation to a producer" and said he does not think
"compensation" is well-defined or defined in tax code, and he is
unsure what "compensation" is, but questioned what would happen
if there is some sort of contingent clause that says "if
something happens then the consequence is this." He expressed
concern over amendments that indicate the legislature is
thinking it knows with certainty all the facts and circumstances
that will be encountered in the future of negotiating these
complex arrangements. Further, he expressed concern with
committing things to words without knowing the ramifications of
actually executing the contracts. He recollected that Co-Chair
Feige had said that contracts have to be brought back to the
legislature for detailed review, and with plenty of time to do
so. He opined that that is the time the legislature should be
stepping into this role, not now by putting amendments into
statute that "constrain the ability of the state to negotiate
the best possible deals in executing a natural gas pipeline
project."
1:22:45 PM
CO-CHAIR FEIGE inquired whether the Alaska Gasline Development
Corporation (AGDC) has an opinion on how Amendment 21 would
affect the corporation.
DAN FAUSKE, President, Executive Team, Alaska Gasline
Development Corporation (AGDC), Department of Commerce,
Community & Economic Development (DCCED), replied he is not sure
how [Amendment 21] would affect AGDC.
1:23:18 PM
MICHAEL PAWLOWSKI, Deputy Commissioner, Office of the
Commissioner, Department of Revenue (DOR), stated that while he
appreciates the sponsor's intent in Amendment 21, he thinks
Representative Hawker has brought up an important point: the
words and how they get interpreted matter. He echoed that there
could be unintended consequences in amendments that try to put
"sideboards" in statute or uncodified law that narrow
development of agreements that will already be coming back to
the legislature for approval. In particular, he noted that
Amendment 21 is to a producer and is limited solely to
production tax. He said production tax is not the only way the
state achieves value from its resource development. Regarding
durability and fiscal stability, he said he hopes the
legislature continues to provide input throughout the process;
however, the agreements that come back must be understood by
both the public and the legislature. He opined that means
keeping all the options on the table and avoiding a specificity
that may produce unintended consequences rather than promoting
clarity. He stated that if the indirect effects Mr. Balash
described are necessary in a contract, then they should be
stated up front for the public, developed with the legislature
over the next few years, and put forward for public review. He
suggested that [Amendment 21] might push the project to start
looking for alternative creative ways, such as against corporate
income tax or royalties, and he stated his preference is to "put
it right out in front and center for the public and the
legislature."
REPRESENTATIVE SADDLER maintained his objection to the motion to
adopt Amendment 21.
REPRESENTATIVE SEATON said the intent of the proposed amendment
is not to micromanage. He said if the language of the proposed
amendment is too specific, he would be willing to replace
Amendment 21 with a letter of intent clarifying that the
legislature has heard the commissioners say that the intention
is not to negotiate oil and that the legislature agrees.
1:28:20 PM
REPRESENTATIVE HAWKER emphasized that a letter of intent from
the committee is not an endorsement of the full House;
therefore, he said he will not endorse a letter he has not read.
CO-CHAIR FEIGE told Representative Seaton he is welcome to craft
a letter of intent, on which the committee could then take a
vote.
REPRESENTATIVE SEATON said he would never ask anyone to vote on
something they had not seen.
1:29:23 PM
REPRESENTATIVE SEATON withdrew his motion to adopt Amendment 21.
He then stated his intent to draft a letter of intent and bring
it back for the committee's review.
1:29:40 PM
CO-CHAIR FEIGE, after discussion with members, determined that
amendments labeled 28-GS2806\I.A.3, Bullock, 3/31/14; 28-
GS2806\I.A.55, Bullock, 4/3/14; 28-GS2806\I.A.61, Bullock,
4/3/14; and 28-GS2806\I.A.66, Bullock, 4/3/14 would not be
offered at this time.
The committee took an at-ease from 1:33 pm. to 1:34 p.m.
1:34:44 PM
REPRESENTATIVE KAWASAKI moved to adopt Amendment 22, labeled 28-
GS2806\I.A.38, Nauman/Bullock, 4/2/14, which read:
Page 25, line 8, following "project":
Insert "; the commissioner of revenue may not
authorize payments in lieu of taxes to a municipality
in a contract negotiated under this paragraph unless
amounts collected as payments in lieu of taxes to a
municipality are not less than the amount the
municipality would have collected under AS 29.45 and
AS 43.56 over the period of the agreement between the
municipality and the taxpayer for the payment in lieu
of taxes"
Page 26, line 15, following "project":
Insert "; the commissioner of revenue may not
authorize payments in lieu of taxes to a municipality
in a contract negotiated under this paragraph unless
amounts collected as payments in lieu of taxes to a
municipality are not less than the amount the
municipality would have collected under AS 29.45 and
AS 43.56 over the period of the agreement between the
municipality and the taxpayer for the payment in lieu
of taxes"
REPRESENTATIVE SADDLER objected.
REPRESENTATIVE KAWASAKI prefaced his explanation of Amendment 22
by remarking that the committee has heard quite a bit of
testimony from municipalities across the state and has
introduced intent language pertaining to a municipal advisory
commission and a payment in lieu of tax (PILT) issue. However,
he said he is offering Amendment 22 on behalf of those in
Fairbanks and the rest of Interior Alaska. He said under the
proposed amendment, revenues received by the state and
municipalities over initial project terms could not be
negotiated away and could not be less than what would be
collected under current statute.
1:36:39 PM
MR. PAWLOWSKI said the entire advisory commission process - its
operations, documents reviewed, and recommendations - will be
public. He said he sees [Amendment 22] as potentially limiting
on that negotiation. He said as the governor's advisory board,
the designated mayors are a part of that group. He stated that
any recommendations to come forward to change statute, which is
what would need to happen for PILT or property tax to move
forward, would be deliberated by the legislature. That change
will come out of a recommendation of that group, which will
conduct a public process. He said at this time he is not
supportive of limiting the discussion around an open public
forum. He said an interesting aspect of PILTs and impact
payments related to "the shapes of the curves." He explained
that in a traditional property tax environment it starts off
high when the property is installed and then depreciation over
time reduces that. With time value of money, he said,
consideration may be given to increasing and escalating payments
for predictability -- an option that was described in the Heads
of Agreement so that as a community looks out to the future
those increasing payments over time provide more predictability
for their budgets. The question of whether it would have been
less is a question that is very difficult to determine when
things like the time value of money are introduced; using a
different discount rate would change that assumption. A deeper
problem he has with Amendment 22, he said, is the implication
that the commissioner of DOR could, through contract, authorize
a PILT or a payment in lieu of taxes. He said to date he has
consistently testified the department's belief that Article 9,
Sections 3 and 4, of the Constitution of the State of Alaska
clearly reserve that power to the legislature. Therefore, he is
uncomfortable with the aforementioned implication.
1:39:51 PM
REPRESENTATIVE HAWKER concurred with Mr. Pawlowski, stating that
the right to tax is the sovereign right of legislators and that
right cannot be signed off to the administration in a contract.
He said he thinks [Amendment 22] is a null and void proposal.
He said this sort of amendment voids the concept of a payment in
lieu of taxes (PILT), even if the legislature chose to "pursue
one." He added, "We're putting some kind of a measurement under
there that would have to be determined, and that's this future
knowledge of what taxes would have been collected under the
statutes over the period of the agreement." He said the whole
point of a PILT is to make it easy on people so those
calculations, which are difficult to do with a huge project, do
not have to be done. He said he opposes Amendment 22.
1:41:35 PM
REPRESENTATIVE TARR said she does not interpret Amendment 22 as
taking away the authority of the legislature to authorize a
contract. She offered her understanding that Legislative Legal
and Research Services did not bring up any constitutional issues
when Amendment 22 was drafted, and she suggested someone from
Legislative Legal and Research Services could weigh in on that.
Regarding a PILT, she said at some point there will be an
agreement made as to the value, and instead of having the
traditional payment schedule of larger payments over time, as
Mr. Pawlowski mentioned, [the payments] "would just be
equalized." She proffered that under Amendment 22, whatever
stop point of value and payment schedule is chosen, the overall
payments could not be less than the described value. She
suggested there may be two interpretation of the language, and
she questioned whether anyone could address that.
CO-CHAIR FEIGE, emphasizing the word "unless" in the language of
Amendment 22, said his interpretation is that if the payments
are going to be graded on what they would receive by tax, then
the commissioner would be allowed to "authorize that PILT,"
which is, as Representative Hawker mentioned, not an authority
that the legislature necessarily wants to delegate to any
department.
REPRESENTATIVE TARR asked whether anyone from Legislative Legal
and Research Services or Department of Law (DOL) is available on
line.
1:43:43 PM
CO-CHAIR FEIGE said there are quite a bit of unknowns related to
what municipalities will require, how they would want taxes
structured, which is why the governor issued the administrative
order to put that working group together to help collect that
information, define the problem, and recommend a potential
solution. He opined that the legislature should give the group
time to report back to the legislature before its next regular
session. He said he thinks doing anything with PILTs at this
point is premature.
REPRESENTATIVE KAWASAKI clarified that Amendment 22 pertains
solely to the project and the contracts that would be negotiated
on those projects. He said it is not intended to give the
commissioner the authorization, but rather that "they don't have
the authorization to create a contract negotiated under the
paragraph." He said it is technical amendment in that it is
unknown what the taxing authority of the municipalities would
end up costing, but he opined that language is needed in SB 138
to protect municipalities and their ability to tax. He said he
wants the legislature to make clear that it supports municipal
authority to tax property. He said he does not know if
Amendment 22 will achieve that goal, but it is an attempt to at
least begin the discussion.
1:46:14 PM
REPRESENTATIVE P. WILSON ventured that "they might come up with
something very unique that's never been done before, but that
will do much better than this" and she does not want the
legislature to prevent any creativity that could take place in
the process.
The committee took an at-ease from 1:47 p.m. to 1:48 p.m.
1:48:12 PM
DONALD BULLOCK JR., Attorney, Legislative Legal Counsel,
Legislative Legal and Research Services, Legislative Affairs
Agency, Alaska State Legislature, in response to Co-Chair Feige,
explained that Article 9, Section 1, of the constitution
prohibits surrendering, suspending, or contracting away the
power to tax, except as provided in that article. He said this
is an issue that Legislative Legal and Research Services has
dealt with often in the past in terms of the Alaska Gasline
Inducement Act (AGIA), under which an exemption was provided to
producers who committed during the first open season. He said
the constitution appears to prohibit taxing away the power of
taxation. He concluded as follows:
So, in other words, if a payment in lieu of taxes
provided that a tax payer would pay a certain amount
over time rather than allow the municipality and the
assembly each year to determine what the necessary
mill rate was for the municipality, if that was the
... contract, it would be unconstitutional under
Article 9, Section 1.
1:50:19 PM
MR. BULLOCK, in response to Representative Tarr, said the
commissioner of DOR administers the oil and gas property tax
under AS 43.56 and there is a link between the department's
taxation of oil and gas property with municipalities that impose
a property tax on the same property. He continued as follows:
So, if it was a tax issue and the commissioner of
revenue is negotiating something that effects the
municipalities tax under his power under this
particular part of the bill that's being amended, then
this sets a limit that if a payment in lieu of taxes
survived a constitutional challenge, that the
municipality would not suffer by receiving less under
a payment in lieu of taxes agreement compared to what
they would anticipate receiving as mil rates evolved
and as property values changed over the life of the
contract.
MR. BULLOCK indicated that over a period of time, a payment in
lieu of taxes could not be less than what a municipality would
have otherwise received from its property tax.
1:52:20 PM
REPRESENTATIVE SEATON asked for clarification regarding "may not
authorize unless".
MR. BULLUCK said there are two issues at play. The first is
whether the commissioner of DOR can even enter into or be a
party to a negotiation over payment in lieu of taxes. If that
survived a constitutional challenge, then the second part is
what the terms would be that relate to the payment in lieu of
tax. He said the terms are that over all, that payment in lieu
of tax could not result in less revenue to the municipality
compared to if the municipality "just taxed it" as it normally
would.
REPRESENTATIVE SEATON summarized that the "unless" would not
authorize the commissioner to negotiate the taxes; it just means
if the commissioner's negotiations are deemed constitutional,
then they would have to meet certain requirements.
MR. BULLOCK confirmed that if the commissioner was allowed to
negotiate a PILT, he/she could not negotiate one that would
result in less money. In response to a follow-up comment, he
stated that the problem with Amendment 22 is that it makes it
sound as if a PILT is all right, and the legislature must decide
whether it wants to take the chance that a court is not going to
strike down this type of agreement.
1:54:58 PM
REPRESENTATIVE TARR stated that that problem exists without the
amendment, so it is not the amendment that is presenting that
constitutional issue. "It's the very issue of suggesting
negotiating PILT," she surmised.
MR. BULLOCK concurred; there nothing in the bill that addresses
PILT. The bill authorizes the negotiation of certain contracts
and gives the power very generally. Amendment 22, as well as
some of the others the committee has been considering, are
putting some sort of boundaries as to what the issues are that
may be addressed in contract or, if an issue is part of a
contract, what the legislature's desire is as to how the issue
should be considered.
1:56:07 PM
REPRESENTATIVE SADDLER [maintained his objection].
REPRESENTATIVE KAWASAKI reiterated that he thinks there needs to
be some protections for property tax payers. He noted that
property tax payers in Fairbanks pay some of the highest taxes
in the state, and he said he feels uncomfortable allowing CSSB
138(FIN) am to move forward without some sort of treatment that
would ensure taxes are spread equitably across all properties.
1:57:25 PM
A roll call vote was taken. Representatives Seaton, Tarr, and
Kawasaki voted in favor of the motion to adopt Amendment 22.
Representatives Hawker, Olson, P. Wilson, Saddler, and Feige
voted against it. Therefore, Amendment 22 failed by a vote of
3-5.
1:58:54 PM
REPRESENTATIVE TARR moved to adopt Amendment 23, labeled 28-
GS2806\I.A.28, Bullock, 4/2/14, which read:
Page 15, following line 30:
Insert a new bill section to read:
"* Sec. 16. AS 38.05 is amended by adding a new
section to read:
Sec. 38.05.023. Limitation relating to the toll
structure for transporting natural gas. An agreement
or contract associated with a North Slope natural gas
project that provides for the state to pay a person
for transporting natural gas under a firm
transportation services agreement may not include a
toll structure that bases a charge for transportation
on a return on equity of more than 15 percent,
including any adjustment to a base rate determined at
the time of the final investment decision."
Renumber the following bill sections accordingly.
Page 17, line 24:
Delete "sec. 17"
Insert "sec. 18"
Page 21, line 16:
Delete "sec. 27"
Insert "sec. 28"
Page 25, line 9:
Delete "sec. 30"
Insert "sec. 31"
Page 31, line 18:
Delete "sec. 37"
Insert "sec. 38"
Page 53, lines 24 - 25:
Delete "sec. 23"
Insert "sec. 24"
Page 56, line 6:
Delete "16, 17, 23 - 27, 29, 30, 37, 39, and 55 -
61"
Insert "16 - 18, 24 - 28, 30, 31, 38, 40, and 56
- 62"
Page 56, line 8:
Delete "Section 38"
Insert "Section 39"
Page 56, line 9:
Delete "secs. 62 and 63"
Insert "secs. 63 and 64"
REPRESENTATIVE SADDLER objected.
REPRESENTATIVE TARR noted Amendment 23 references the Memorandum
of Understanding (MOU), Exhibit C, page 2, Key Processing and
Transportation Commercial Terms 6, [Terms & Conditions 6], which
relates to return on equity (ROE) as modified by [Terms &
Conditions 8], which is the rate tracker differential. She said
this subject came up during discussions with Roger Marks,
[contract consultant to Legislative Budget and Audit Committee],
who talked about conditions in the market that could change and
ensuring "a good deal" in a relationship with TransCanada. She
said, "Right now they can have a return on equity of 12 percent,
which would be adjusted by the rate tracker differential." She
said the rate tracker differential is the difference between the
interest rate of a 30-year U.S. Treasury note when the MOU was
signed, which was January 14, 2014, and at the time of final
investment decision (FID), which she estimated may be five years
from now. She said Amendment 23 would ensure that in the event
of a spike in interest rates, TransCanada's actual return on
investment could not increase by more than 3 percent above the
negotiated contract term. Representative Tarr said she was
interested in the proposed amendment following Mr. Marks'
suggestion that [Alaska's] relationship with TransCanada is more
like that of a bank and [the state] may be able to find better
financing terms in the market. She said, "So, this ...
maintains that relationship, but just puts some ... of the
sidebars in there." She related that in the analysis seen for
TransCanada, the modeling has been done at 12 percent and no
work has looked at what would happen if interest rates spiked
and the ROE increased. She added, "So, this amendment limits
that again to the 15 percent."
2:00:53 PM
REPRESENTATIVE HAWKER observed that the word "person" in
Amendment 23 means a corporate citizen, and he questioned what
would happen if that person was a "go-it-alone" entity, such as
AGDC, and the state would therefore be paying itself to be the
transporter of the gas. He indicated that the structure of the
return on the state's own equity in the transportation of its
own gas is an unknown quantity: it could be 2 percent; it could
be 18 percent .... He opined that those are the kind of
elements in the deliberations that the legislature should not be
constraining at this point, and if the legislature trusts the
administration to negotiate contracts and bring them back to the
legislature, then it should not attempt to predict the future by
telling the administration now that it cannot make a certain
decision. He said, "This is where we have killed every pipeline
project that has come along to date." He stated opposition to
Amendment 23.
CO-CHAIR FEIGE remarked that the legislature has ultimate veto
power on the contract when it comes back for legislative review.
2:02:53 PM
REPRESENTATIVE SADDLER offered his recollection that there had
been some analysis of the interest rates and return on
investment in the Black & Veatch analysis. He added, "So,
that's entirely accurate." He said he also has concerns about
predicting future economic and financial arrangements, and he
said [Amendment 23] gets into "the weeds of the finances." He
stated he would not support Amendment 23.
2:03:27 PM
MR. BALASH said DNR opposes Amendment 23. He explained one
reason for the opposition is that it would be in direct conflict
with the terms of agreement with TransCanada and create an
uncertainty for all parties. He observed that "this would be a
feature of the general law for such time as it remains in
place." He said that markets and conditions change, which is
one of the reasons that the department agreed "to rely on the
30-year treasury as a marker for this rate tracker mechanism."
He continued as follows:
If those numbers are escalating ..., then our returns
on our various funds and other wealth will also rise
in the returns that they're achieving, we would
expect. So, we think that 15 is just, frankly, an
arbitrary number that may mean something today, but
over time may not.
2:04:41 PM
REPRESENTATIVE TARR requested Mr. Balash to address, within the
context of the proposed amendment, Mr. Marks' concerns about
whether the state could be getting a better financing option.
She directed attention to the phrase "with a North Slope natural
gas project", within Amendment 23, and said she thinks it would
be confined "to this particular project," although "because it's
specific to a term of the MOU with TransCanada - that part is
not referenced here." She stated that the intent is "not for it
to fly outside of this particular instance."
MR. BALASH responded that Representative Tarr is correct that it
is related to a North Slope project that would be subject to the
agreements negotiated in AS 38.05.020(b)(10-11); although, he
said DNR does not know with certainty that the Alaska LNG
Project, as contemplated in the HOA, is going to be successful
and go forward. He said DNR is optimistic, but its view of
TransCanada's role in Alaska differs starkly from that of Mr.
Marks. He explained that DNR does not see TransCanada as a
bank. "If we thought they were simply providing a financial
service for us, we could do better and we would do better. We
can do better with our friends at the Department of Revenue, for
crying out loud."
2:06:48 PM
MR. PAWLOWSKI added that page 20 of CSSB 138(FIN) am contains a
broad definition for a North Slope natural gas project, which
could be applied to any project. He said it is unknown whether
the permutations of the context of this amendment within that
statute would be broader. He said the equity option agreement
with TransCanada allows the state to "stand on both sides." He
stated that the legislature needs to work further on those
agreements as they evolve. He said the state may find it wants
to wholly finance and get a return or that the return in the
equity option is equally as important, and that may depend on
"where that resides within the state and the revenues the state
returns from that equity option."
2:07:53 PM
REPRESENTATIVE SEATON stated one concern related to the charts
and graphs presented by Black & Veatch showed that a lot of
value in the project was in the transportation aspect. He
expressed his concern that depending on what prices are for the
actual product, the state may need to extract revenue from the
transportation portion, instead of just the sales agreement. He
said he does not think the state should limit itself, especially
if it turns out that the state is paying itself. He said
transportation related revenue is a more even source of revenue
than just looking at the sales price on the spot market or based
on how long a term contracts are. For those reasons, he said,
he does not support Amendment 23.
2:09:53 PM
REPRESENTATIVE TARR said she thinks if this particular project
does not go forward, the legislature is going to be "redefining
everything"; however, because of Representative Seaton's
expressed concerns, she asked if "this could be written to be
more specific to that particular TransCanada MOU relationship."
While waiting for a response from Mr. Bullard, she asked whether
there is a percentage at which the administration feels would
not restrict negotiations but would meet the concerns of
Alaskans that the state would get a fair return on its
investment on its resource.
MR. PAWLOWSKI responded the current MOU provides flexibility
related to "lots of other terms," such as the blend between debt
and equity. He said, "It makes a huge difference when you
start to move one term on what the operations are of the other
terms." He said he does not believe there would be a term that
the administration would be comfortable with outside the MOU.
2:13:05 PM
MR. BALASH added that this is speaking to an agreement that
provides for the state to pay a person, and a person could
include AGDC; therefore, he opined, the point made by
Representative Seaton is a good one to keep in mind. Speaking
to Representative Tarr's question about an agreeable percentage
amount, he said because this is a general law that will be on
the books unless changed, he thinks "it is just something that's
inappropriate to put into a statute like this." He said if the
general economy and market at large is changing so much that 30-
year treasuries have gone up a full 300 basis points, he thinks
the state will be facing "cross-pressures across the board" that
will challenge the economics of this project.
REPRESENTATIVE TARR agreed.
2:14:36 PM
REPRESENTATIVE TARR asked Mr. Bullock whether there is a way for
[Amendment 23] to be written to be more specific to the issue
she is addressing, because "a few percentage points on ... the
dollars we're talking about make a big difference." Further,
she asked him to address the use and definition of the word
"person".
2:15:12 PM
MR. BULLOCK replied some of the amendments that have been seen
are in uncodified law related to the types of contracts that
might be signed; however, Amendment 23, as well as some of the
others, is put in codified law. The amendments in uncodified
law are intended to be more responsive to the MOU and, in some
cases, the HOA. They are in uncodified law because they are
meant to take affect for a limited period of time. When putting
them in uncodified law, the law will apply to the negotiations
on this particular project. He said Amendment 23 is in codified
law, thus is intended to apply into any future contract that DNR
negotiates with a person that would carry the state's gas. He
said Amendment 23 could be put into uncodified law, in which
case the 15 percent may be more reasonable in the current
environment. Notwithstanding that, he said all the oil and gas
contracts and projects discuss rate of return on equity and the
amount of debt, and the legislature can always determine how
much it wants the state to be liable for. He said circumstances
may change in the future, in which case the 15 percent could be
amended in the future, and it would be the prerogative of the
legislature to make that decision.
2:17:17 PM
CO-CHAIR FEIGE expressed his hope that all the rules would not
have to be renegotiated every time. He said the legislature's
job should be to establish the framework so that entities beyond
the state can know with certainty what Alaska's rules are. He
said this particular project does require some statute changes
because of its nature; however, he does not envision the
constant need for revision of rules on all future projects.
2:18:34 PM
CO-CHAIR SADDLER maintained his objection to the motion to adopt
Amendment 23.
2:18:39 PM
A roll call vote was taken. Representatives Tarr and Kawasaki
voted in favor of the motion to adopt Amendment 23.
Representatives Olson, Seaton, P. Wilson, Hawker, Saddler, and
Feige voted against it. Therefore, Amendment 23 failed by a
vote of 2-6.
The committee took an at-ease from 2:19 p.m. to 2:40 p.m.
2:40:24 PM
REPRESENTATIVE TARR moved to adopt Amendment 24, labeled 28-
GS2806\I.A.44, Nauman/Bullock, 4/3/14, which read:
Page 1, line 4, following "projects;":
Insert "relating to the investments of the Alaska
Housing Finance Corporation, the Alaska Retirement
Management Board, the constitutional budget reserve
fund, and the Alaska permanent fund;"
Page 2, following line 15:
Insert a new bill section to read:
"* Section 1. AS 18.56.090 is amended by adding a
new subsection to read:
(g) Funds of the corporation may not be invested
in an Alaska liquefied natural gas project, as defined
in AS 31.25.390, unless specifically authorized by the
legislature."
Page 2, line 16:
Delete "Section 1"
Insert "Sec. 2"
Renumber the following bill sections accordingly.
Page 12, following line 8:
Insert new bill sections to read:
"* Sec. 15. AS 37.10 is amended by adding a new
section to read:
Sec. 37.10.225. Limitation on investment.
Notwithstanding AS 37.10.220, the board may not invest
in an Alaska liquefied natural gas project, as defined
in AS 31.25.390, unless specifically authorized by the
legislature.
* Sec. 16. AS 37.10.430(c) is amended to read:
(c) A special subaccount is established in the
budget reserve fund (art. IX, sec. 17, Constitution of
the State of Alaska). Money in the subaccount shall be
invested to yield higher returns than might be
feasible to obtain with other money in the budget
reserve fund. In establishing or modifying the
investment policy for the subaccount in the
constitutional budget reserve fund, the commissioner
of revenue shall assume that those funds will not be
needed for at least five years. Income earned on money
in the subaccount shall be retained in the subaccount
by the department. Funds of the subaccount may not be
invested in an Alaska liquefied natural gas project,
as defined in AS 31.25.390, unless specifically
authorized by the legislature.
* Sec. 17. AS 37.13.120 is amended by adding a new
subsection to read:
(f) The board may not invest money from the fund
in an Alaska liquefied natural gas project, as defined
in AS 31.25.390, unless specifically authorized by the
legislature."
Page 14, line 3:
Delete "sec. 14"
Insert "sec. 18"
Page 17, line 24:
Delete "sec. 17"
Insert "sec. 21"
Page 21, line 16:
Delete "sec. 27"
Insert "sec. 31"
Page 25, line 9:
Delete "sec. 30"
Insert "sec. 34"
Page 31, line 18:
Delete "sec. 37"
Insert "sec. 41"
Page 53, lines 24 - 25:
Delete "sec. 23"
Insert "sec. 27"
Page 54, line 25:
Delete "sec. 14"
Insert "sec. 18"
Page 56, line 6:
Delete "Sections 1 - 14, 16, 17, 23 - 27, 29, 30,
37, 39, and 55 - 61"
Insert "Sections 1 - 18, 20, 21, 27 - 31, 33, 34,
41, 43, and 59 - 65"
Page 56, line 8:
Delete "Section 38"
Insert "Section 42"
Page 56, line 9:
Delete "secs. 62 and 63"
Insert "secs. 66 and 67"
REPRESENTATIVE HAWKER objected.
REPRESENTATIVE TARR said early in the process she submitted a
list of questions [to the commissioners of DNR and DOR]
regarding the project's investment scenarios and funding
sources. [The 3/21/14] response from [Commissioner Balash] and
Commissioner Rodell indicated that investment could be made from
the funds listed [in Amendment 24] without appropriation. She
related there was a concerned response that brought forward more
explanation, which elicited "additional concern." She said
there are some sidebars, such as the prudent investment rule for
the Alaska Permanent Fund. She said there are a couple other
issues, which may, "because of timeframes, constrict the other
funds from being used." She stated, "I just want to make it
clear on the record, because those two instances where it was
... publicly stated that that could happen without an
appropriation, that that's not in fact what we will likely see
happen; that's not the intention. Of course everybody gets
concerned when people talk about spending from the permanent
fund."
2:42:59 PM
REPRESENTATIVE OLSON said he had a problem with Amendment 24.
He stated that one of the reasons the aforementioned funds have
been successful over the years is that [the legislature] has not
been able to micromanage them. Left to the management of the
funds, they have prospered. He said there have been several
attempts over the last 10 years to either prohibit certain
investments or direct funds to be spent in a particular way and
that, he opined, is not the responsibility of the legislature.
REPRESENTATIVE HAWKER concurred with Representative Olson. He
posited that "in the dialog on this" there should not be "a
takeaway that says it is certainly my intent to prohibit an
investment by any one of these entities in an Alaska North Slope
natural gas pipeline if it does, in fact, fit into their
investments profiles, all of their prudent investor rule
compliance, all their investment guidelines, all the issues they
have regarding concentration of risk, but something that meets
the muster that all investments must meet prior to being made by
these agencies or funds. We're not restricting them either, by
dropping this amendment and not taking it further."
2:44:29 PM
REPRESENTATIVE KAWASAKI asked for confirmation that the intent
of Amendment 24 is not that the funds could be used, but that
they would have to be authorized by the legislature.
REPRESENTATIVE TARR answered yes. She reiterated that there was
concern that funds could be appropriated without legislative
approval.
2:45:05 PM
CO-CHAIR FEIGE said those serving on the boards and corporations
listed in the proposed amendment are nonpolitical and have
expertise the legislature does not have to make the decisions
they make. He asked if the administration had feedback on
Amendment 24.
MR. PAWLOWSKI said the investments of these funds are done by
professional investment managers, under investment policies,
rules, and guidelines. He mentioned the Constitutional Budget
Reserve (CBR) and said there are limits on the duration of the
investments. The subaccount in the CBR was created by the
legislature to allow for slightly longer duration; however, he
surmised that "even this type of investment does not fit within
that." He said a hands-off approach is used regarding those who
manage the permanent fund. He deferred to Chris Poag from the
Department of Law to offer further information.
2:48:29 PM
CO-CHAIR FEIGE reviewed Amendment 24 and asked Mr. Christopher
Poag to speak to it.
CHRISTOPHER POAG, Assistant Attorney General, Labor and State
Affairs Section, Civil Division (Juneau), Department of Law
(DOL), replied his understanding of the MOU is that if the time
comes to exercise an equity option, then the legislature would
be involved in that decision; therefore, he does not think any
of the fund [managers] would have the ability to exercise the
option without the legislature speaking to the investment. He
indicated that if the time came where the legislature and the
administration encouraged the exercise of the option and thought
it would be a good idea to use the assets of one of the two
funds - the Alaska Retirement Management (ARM) Board retirement
assets or the Permanent Fund Corporation assets - "this would be
... in probably a smaller portion of" the portfolio, as "special
opportunity investments."
MR. POAG added he is not familiar with the size of the ARM
Board's "special opportunities," but surmised that even
considering the size of the board's aggregate assets, this
probably would be outside the scope of the board's current
investment policies for this type of investment. Nevertheless,
he said he thinks it is plausible that if the legislature and
the administration encouraged that investment, the board would
then - unless [the legislature] modified the prudent investor
rule - have to consider whether that investment met the risk
profiles and the size of the allocation consistent with the
board's investment portfolio, before the board would make that
decision.
MR. POAG talked about the constitutional mandate that the
Permanent Fund Corporation shall engage in income-producing
investments. He said the corporation used to provide a list for
the legislature's review, but somewhere along the line, the
corporation proved itself with a good track record and was given
carte blanche by the legislature, as long as its investments
were consistent with the prudent investor rule. He stated, "If
this were, for example, an investment that had a higher risk
profile than they would have otherwise invested in, unless you
mandated or direct them to make that investment, they would not
use that prudent investor rule that's provided to them to make
the investment." He said it is speculative at this point to say
whether or not the investment would fit within the profile
because the risk profile is unknown. Also, the legislature
needs to give the green light to the investment. For those
reasons, he said he thinks Amendment 24 is unnecessary.
Theoretically, if the time comes and the legislature, assuming
this did not fit within its prudent investor rule, wishes to
direct that investment, the constitution certainly would allow
for that.
2:52:58 PM
REPRESENTATIVE HAWKER said Amendment 24 does not specify whether
it pertains to an equity investment, which is buying ownership
in a project, or something different, such as buying the debt
behind the project. He said the debt could be that of
TransCanada, ConocoPhillips, or BP, specifically to promote this
project. He said even if it was the State of Alaska's debt, it
likely would be rated high quality, with a low-profile and
predictable return in the fixed return component of the state's
portfolios. Representative Hawker said there is a presumption
[in Amendment 24] that the Permanent Fund [Corporation] cannot
step up to the plate and take an equity position in the project
without authorization from the legislature; however, he said it
does not address "whether that's a direct or an indirect." He
indicated that the last he heard, one of the largest single
holdings of the Alaska Permanent Fund was the ExxonMobil
Corporation, and by the state holding that, it has an indirect,
but very real investment in the project going forward. He said
if the amendment is to be considered further, the language must
be clarified as to direct and indirect investment, equity, debt,
and other concerns. He echoed Representative Olson's previous
statement that the legislature has been successful in the
management of the state's investments, the liquid capital,
because the legislature has hired the best qualified people and
not put constraints on them beyond proper investment guidelines.
2:55:56 PM
REPRESENTATIVE KAWASAKI recalled that at the outset of his
testimony, Mr. Poag mentioned that equity options would come
back the legislature at some point in time. He said he thinks
"the concern addressed in this amendment is that the permanent
fund - prudent invest rule out of the way - that AHFC [Alaska
Housing Finance Corporation], ARM Board, or one of these
organizations can make an investment without." He inquired
whether it is the case that they can.
MR. POAG stated he assumes the purpose of Amendment 24 is
specifically to prevent these funds from exercising the option
in the MOU. He requested correction if his assumption is not
right.
2:56:52 PM
REPRESENTATIVE TARR said a question she asked [Commissioner
Balash and Commissioner Rodell] and their [3/21/14] response to
that question are as follows:
The MOU Equity Option term sheet mentions that the
state's equity share could be owned by a state
investment fund such as the CBR. Would it be possible
for an equity investment to be made by fund managers,
as part of their portfolio, without an act of
appropriation by the legislature?
Yes, it would be possible for an equity investment to
be made without a legislative appropriation, assuming
the entity charged with managing the assets of the
fund determined the investment satisfied the
investment criteria that they are bound by [AS
37.10.071, AS 37.13.120]. ... It is the intent of the
MOU to only allow the state or one of its funds to own
the equity interest. An external manager would not
actually own the equity option, but they could manage
the option, as it has been exercised by the state
using state funds they manage.
REPRESENTATIVE TARR stated [Amendment 24] addresses the point
that [an equity investment] could be done without a legislative
appropriation. She indicated her constituents have expressed
concern that the legislature be involved with how the state
spends its money. Amendment 24 is an attempt to ensure that the
legislature is engaged [in how the state's money is spent].
REPRESENTATIVE SADDLER posited that the legislature is engaged,
because it established the prudent investor operating guidelines
under which these funds are managed.
2:59:13 PM
REPRESENTATIVE OLSON asked Representative Tarr if she has any
documentation from her constituents, such as e-mails, that can
be added to the committee packet so their concerns will be on
the record.
REPRESENTATIVE TARR answered yes. She related that people asked
her about this at a constituent meeting. The [3/21/14] answers
[from the commissioners] were made public a few days ago and in
response to that a news article was written about one piece of
it and this issue came up. She noted that she has been in
frequent communication with the administration about this and
her intent here was to have the conversation, because this is
public information, to clear this up and then she was planning
to remove the amendment.
3:00:00 PM
MR. PAWLOWSKI expressed appreciation for Representative Tarr
reading that question into the record because within the
department's answer was a good illustration of the dialogue that
has been had. He offered his belief that many of the committee
members were instrumental in constructing the prudent investor
rule.
CO-CHAIR FEIGE surmised that many constituents may not be aware
of the rule.
MR. PAWLOWSKI, regarding the department's response read by
Representative Tarr, emphasized that there is a difference
between exercising the option and owning the option. He noted
that this came up from the term sheet in the MOU with
TransCanada, [Exhibit C], page 2. In that term sheet is a
provision that would allow the transfer of the equity option to
a fund, if the legislature were to exercise the option. He
reminded members that the option is part of the firm
transportation services agreement which will come back to the
legislature for consideration. He said right now the
administration has agreed to work with AGDC on that option;
however, the legislature could decide that that is a valuable
asset that could be transferred to a fund. He said, "We didn't
want that to be taken off of the table." He recollected that in
the department's aforementioned response, it used the term
"ownership of the option" and not "exercise" [the option], and
he explained that is because of the linkage to the firm
transportation services agreement. He opined that "getting the
order of events is important in considering this question."
3:01:39 PM
REPRESENTATIVE KAWASAKI asked whether AHFC and the ARM Board
have the same strict prudent investor rules as the Permanent
Fund Corporation.
MR. POAG answered he cannot speak to AHFC; however, he said the
ARM Board has one of the more vigorous prudent investor rules,
which occurs in AS 37.10.071 and references sole financial best
interest. He said it is a prudent investor rule different from
that which was codified by the legislature in AS 37.13.120 and
followed by the Permanent Fund Corporation.
CO-CHAIR FEIGE recollected that Mr. Fauske was the former head
of AHFC; he therefore fielded Representative Kawasaki's question
to him.
MR. FAUSKE responded that AHFC dealt in short-term money market
funds, not equity investments, because of the cash draw
requirements on the corporation as it purchased mortgages.
3:04:07 PM
REPRESENTATIVE HAWKER, in response to the Co-Chair, withdrew his
objection for the purpose of allowing Amendment 24 to be
withdrawn.
REPRESENTATIVE TARR responded further to Representative Olson's
prior request for documentation for the record.
3:05:24 PM
REPRESENTATIVE TARR [withdrew Amendment 24].
3:06:32 PM
REPRESENTATIVE TARR moved to adopt Amendment 25, labeled 28-
GS2806\I.A.25, Nauman/Bullock, 4/1/14, which read:
Page 1, line 7, following "on gas;":
Insert "relating to an option for the state to
acquire an ownership interest in a North Slope natural
gas project;"
Page 15, following line 30:
Insert a new bill section to read:
"* Sec. 16. AS 38.05 is amended by adding a new
section to read:
Sec. 38.05.023. State option to acquire an
ownership interest in a North Slope natural gas
project. (a) An agreement or contract associated with
a North Slope natural gas project that includes an
option for the state to acquire an ownership interest
in a gas pipeline or gas treatment plant may not
require the state to exercise the option before
December 31, 2016.
(b) In this section, "gas pipeline" and "gas
treatment plant" have the meanings given in
AS 31.25.390."
Renumber the following bill sections accordingly.
Page 17, line 24:
Delete "sec. 17"
Insert "sec. 18"
Page 21, line 16:
Delete "sec. 27"
Insert "sec. 28"
Page 25, line 9:
Delete "sec. 30"
Insert "sec. 31"
Page 31, line 18:
Delete "sec. 37"
Insert "sec. 38"
Page 53, lines 24 - 25:
Delete "sec. 23"
Insert "sec. 24"
Page 56, line 6:
Delete "16, 17, 23 - 27, 29, 30, 37, 39, and 55 -
61"
Insert "16 - 18, 24 - 28, 30, 31, 38, 40, and 56
- 62"
Page 56, line 8:
Delete "Section 38"
Insert "Section 39"
Page 56, line 9:
Delete "secs. 62 and 63"
Insert "secs. 63 and 64"
REPRESENTATIVE HAWKER objected.
3:06:40 PM
REPRESENTATIVE TARR explained Amendment 25 is another issue she
has been discussing with the administration. She said a concern
that has come up, given the number of issues that are being
addressed here, is the speed at which things are happening and
some pressure on people to make decisions quickly that they may
not be comfortable with. She noted that the MOU says the
state's equity option is available through the end of 2015.
Given all of the different agreements and the timeline within
which they are supposed to happen, delaying this by one year
will not impact anything else. She understood from her
conversations with the administration, however, that also in the
MOU is some flexibility should both parties not be ready at
12/31/15. She said the attempt in Amendment 25 is because of
the importance in deciding whether to exercise that equity
option without feeling pressure. Her last conversation with
Commissioner Balash, she related, was about delaying that
decision until the end of the 2016 legislative session, rather
than 12/31/16, because that would give a little more time for
the appropriation to be made than would be necessary potentially
to exercise that option. She requested the administration to
address the date.
3:08:25 PM
COMMISSIONER BALASH confirmed there has been ongoing dialogue
with the sponsor of Amendment 25 regarding this and other
amendments. In this particular case, he said, what is being
talked about is the intent of parties to have this option
available at the movement from Pre-Front-End Engineering and
Development (Pre-FEED) to Front-End Engineering and Development
(FEED), and the date of 12/31/15 was inserted as a backstop to
that. Everyone is optimistic that the project will be at that
particular juncture and have some action before the end of
calendar 2015. However, he continued, if it becomes necessary
to extend the date to sync up with the transition from Pre-FEED
to FEED and that particular date, there will be opportunity to
work with the counter-parties to go ahead and extend that date.
He said he is concerned that stating upfront that an extension
of time is needed now will put the state in an awkward position
relative to the counter-parties and that it will have the effect
of potentially giving the counter-parties leverage to extract
some other concession from the state, which is not the intent of
the amendment sponsor. The administration would appreciate the
flexibility, he noted, and would appreciate the legislature
keeping it informed about this particular concern as time goes
on through 2015.
3:10:31 PM
REPRESENTATIVE P. WILSON understood Amendment 25 is not saying
hold off until then, but rather to extend the date so there is
that flexibility. She asked whether the administration would
have the flexibility to do that anyway.
COMMISSIONER BALASH responded the administration will have the
flexibility to pursue that with TransCanada. It is an agreed
upon term in the MOU, so the administration will need to work it
out with TransCanada. He said he does not want to have to do
that until he needs to do that. If it is going to cost him
something as a negotiator to get that extension of time, he is
not going to ask for that extension unless he thinks he needs
it, in which case he is sure there will be something that
TransCanada will be interested in at the time.
3:11:42 PM
REPRESENTATIVE HAWKER noted this is a statutory one-year delay
in moving the project forward with certainty and assuredness
about how it is going to take form. This is not a cost-free
amendment, he argued. There has been testimony that each year
of delay is a cost of $800 million to the project. Currently
the MOU has a deadline that is making sure all of the parties to
the MOU and HOA keep moving forward at an appropriate pace. He
said he does not want to give the other parties another year to
find excuses for doing this or that, he wants to see a project
keep moving forward and moving forward on the reasonable track
that has been agreed to by all the parties.
REPRESENTATIVE TARR maintained that is not what Amendment 25
does. It says "before" December 31, so it does not prohibit the
parties from doing things any earlier; it could even be before
12/31/15 as anticipated. However, she said, she has talked to
the administration and everybody is expecting there will be some
slippage in the timeline as set forth now. Amendment 25 offers
flexibility with that decision making, she argued, it is not
requiring things to take longer; it is only if it is necessary.
REPRESENTATIVE HAWKER responded that is the whole point -- these
are negotiations. Right now there is a hard fast closure date,
he said, and the legislature is gratuitously giving a whole year
without asking for anything in return from all the other
counter-parties in the agreement, and that is wrong.
3:13:56 PM
REPRESENTATIVE HAWKER maintained his objection.
REPRESENTATIVE TARR related she has been working closely with
the administration on all of her amendments. Every effort, she
said, is to do what she can to help move this project forward
and to ensure it has direct benefits for Alaskans and that the
state gets a fair return. She said she does not want to do
anything that hinders the administration. In the spirit of
working together she withdrew her motion to adopt Amendment 25.
3:15:05 PM
REPRESENTATIVE KAWASAKI moved to adopt Amendment 26, labeled 28-
GS2806\I.A.64, Bullock, 4/3/14, which read:
Page 13, line 18, following "paragraph":
Insert "(A)"
Page 13, line 20, following "contract;":
Insert "and
(B) must include a provision that requires
that each party to the agreement or contract pay, in
proportion to the party's ownership interest in the
North Slope natural gas project, the costs of that
portion of infrastructure downstream from the point of
production that are directly related to the North
Slope natural gas project; the state may not pay for
any costs of infrastructure upstream of the point of
production; infrastructure costs include the costs of
construction, improvement, and maintenance of roads,
bridges, port facilities, and utilities;"
Page 15, line 12, following "paragraph":
Insert "(A)"
Page 15, line 14, following "contract;":
Insert "and
(B) must include a provision that requires
that each party to the agreement or contract pay, in
proportion to the party's ownership interest in the
North Slope natural gas project, the costs of that
portion of infrastructure downstream from the point of
production that are directly related to the North
Slope natural gas project; the state may not pay for
any costs of infrastructure upstream of the point of
production; infrastructure costs include the costs of
construction, improvement, and maintenance of roads,
bridges, port facilities, and utilities;"
3:15:13 PM
CO-CHAIR SADDLER objected.
REPRESENTATIVE KAWASAKI explained Amendment 26 deals with the
[4/2/14] discussion the committee had with the Department of
Transportation & Public Facilities (DOT&PF) regarding impacts to
the state's roads, rails, and ports, and the disposition of who
ends up paying for those. Testimony was heard from the deputy
commissioner regarding the airport in Deadhorse, for instance,
where federal highway funds cannot be used and the state is
paying for those facilities. He said Amendment 26 clarifies who
is responsible for those roads, rails, and ports and who is
responsible for their construction. The committee heard that
under the Alaska Stranded Gas Development Act there was a great
undertaking with DOT&PF and the producers about how much that
was going to cost. Under the AGIA license, he added, DOT&PF
also did a complex study on how much the increase to roads,
rails, and ports would cost, which was approximately $2 billion.
He said he does not think the state should be exclusively on the
hook. Testimony was heard that the state will not be
exclusively on the hook and that somehow industry will benefit
from the roads as well as legislators' constituents, and
Amendment 26 requires it in advance. He maintained it is
necessary that this be clarified before getting too far down the
road on this bill.
3:17:43 PM
CO-CHAIR FEIGE posed a scenario in which a new bridge is built
over the Yukon River to carry the LNG pipeline across. He
understood Representative Kawasaki to be saying that if this new
bridge is a supplementary or a replacement bridge for the
current bridge, that the bridge would then be owned by each of
project partners in the same proportion that they are part of
the project. He asked who would pay for the maintenance on that
bridge as it is utilized over its lifespan.
REPRESENTATIVE KAWASAKI responded the sizes of facilities are
being ramped up and his question during the discussion with
DOT&PF was whether there is any actual figuring of how much the
maintenance and operation are going to be once those roads are
done. He said there is no real matrix in which to do that and
the state ought to be concerned every time it builds a road.
Under Amendment 26, a negotiation will happen between DOT&PF and
the partners in this project. He recognized the state has a
responsibility to those roads, too, but said the state is
spending millions of dollars on roads north of Fairbanks and on
airports in remote locations. Those costs should be borne by
the folks utilizing them the most, he argued, and this should be
clarified in the language of the bill before moving forward.
3:20:09 PM
REPRESENTATIVE HAWKER addressed Amendment 26 in the context of
where its provisions would be placed in the statute. He noted
the proposed amendment language states "must include a provision
that requires that each party to the agreement or contract" to
do the aforementioned. He pointed out that the section of CSSB
138(FIN) am [in which this language would be inserted] is page
15, [lines 8-14], which is about the authorities of the
commissioner of the department of natural resources and which
state, "in consultation with the commissioner of revenue,
participate in the negotiation of agreements that include
balancing, marketing, disposition of natural gas, and offtake
and contracts and development of terms for inclusion in those
proposed agreements and contracts associated with a North Slope
natural gas project". Amendment 26 is a tax assessment, he
maintained, and it seems that if the committee wants to create
specific assessments on roads, highways, and infrastructure on
the producers, it ought to be structured in statute entirely
differently. He argued he does not see the gas balancing,
marketing, gas sales contracts, and project development
contracts contemplated under this provision of statute as having
much relevance to that infrastructure development.
REPRESENTATIVE KAWASAKI responded Amendment 26 has to be placed
in this section of the bill because when the commissioner of
natural resources is negotiating all of the other terms this is
a term that [legislators] would like included. He said he does
not think it is specifically DNR's responsibility to find out
how much those roads are going to cost; rather that is a
negotiation between DOT&PF and the producers. He recalled
explanations during the Alaska Stranded Gas Development Act that
the producers spent a lot of time interacting with DOT&PF to
figure out what kinds of things the producers would need to
advance a project. He said Amendment 26 speaks to that. He
deferred to Mr. Bullock for further explanation.
3:23:26 PM
CO-CHAIR FEIGE offered his view that ongoing maintenance is a
reason for property tax statutes. He inquired whether the cost
of infrastructure that would be addressed in Amendment 26 would
not already be accounted as per the committee's discussion
regarding the impact aid and the PILTs that must be fleshed out
by the advisory board.
REPRESENTATIVE KAWASAKI replied he thinks there definitely are
municipalities that want to weigh in on their direct and
indirect impacts, which was addressed by [Amendment 15].
However, he continued, there is a lot of unorganized borough
where there will not be these impacts. He reiterated that
during the AGIA discussions, DOT&PF said the price tag for
getting to the point of being ready to build a pipeline would be
$2 billion. He said that while this is a different project and
the testimony was that it would cost much less than $2 billion,
it is still unknown what the cost will be.
CO-CHAIR FEIGE noted that even unorganized borough property is
still subject to the 20 mil tax, which goes to the state. He
maintained that the committee has already accounted for what
Amendment 26 is looking for.
3:25:24 PM
MR. BULLOCK believed one of the precedents for this type of
agreement has to do with the road to Skagway where the mining
company that was shipping ore down the highway paid for things
like beefing up Captain Moore Bridge to be able to handle the
trucks. It would not necessarily be part of the ownership, he
said, it is more like a user fee. Responding to Representative
Kawasaki, Mr. Bullock explained that Amendment 26 was put into
the section of the bill related to the responsibilities of the
commissioner of natural resources because when the request was
made it was an important enough provision that it was tied
directly into the powers of the commissioner within AS
38.05.020(b)(11). He said he does not know the reason why it
had such a high level of importance as opposed to other terms.
3:26:50 PM
CO-CHAIR FEIGE requested the administration's position on
Amendment 26.
MR. PAWLOWSKI said the concern underlying Amendment 26, as he
understands it, comes from a reading of the Heads of Agreement,
particularly on page 16, Article 10. He explained there was a
broad recognition within the Heads of Agreement group that there
are additional needs for state support of the project going
forward. He said [Article 10.1.c] references "appropriations
and permitting for the construction of necessary in-state
infrastructure" and he noted that that has been interpreted by
people to imply that it is solely the state's responsibility to
pay for that infrastructure. He expressed his wish that that
specific question would have been asked of the Heads of
Agreement sponsors when they were before the committee because
he believes he has heard them say in other committees or, if
not, in the walk-arounds he has done with them, it is not a
presumption that it is solely the state's responsibility. This
is part of the impact aid discussion, he added. Just as DOT&PF
told the committee, he continued, there are natural dividing
lines behind what is general use infrastructure and the
improvements to that infrastructure that go specifically to the
project. He said he understands the concern and agrees it is an
important one to talk about and to recognize that it is not the
state's interpretation of that section of the Heads of Agreement
that it is solely the state's responsibility for infrastructure.
In that context, he noted that Amendment 26, page 1, line 6,
states, "requires that each party to the agreement or contract
pay, in proportion to the party's ownership interest in the
North Slope natural gas project, the costs of that portion of
infrastructure downstream from the point of production". This
worries him, he said, because it ties the administration's hands
to agree to a payment of a portion. In this project, the state
will be a party either through an agent like AGDC or TransCanada
and the state will have up to a 25 percent share in this
project. Amendment 26, he argued, would imply it is a given
that the state will pay 25 percent of the cost of that
infrastructure. Given that has not been negotiated or discussed
yet, he said he is concerned about setting that precedent in
statute going into that discussion because the administration
would like the freedom, both in the impact discussion and to
push for the lowest possible state share, of any appropriation
support. Recognizing there will be some, he continued, he does
not want to start off at 25 percent and be bound to a 25 percent
number when the state could potentially push for lower.
3:30:15 PM
REPRESENTATIVE TARR said she appreciates having this discussion
and getting it on the record because Article 10 is in regard to
additional state support for the Alaska LNG Project. Therefore,
it is easy to interpret the language about appropriations and
permitting for the necessary infrastructure as meaning that it
will be borne by the state solely. She related that when
drafting Amendment 26, it was awkward trying to say what the
proportional amount would be because, depending upon the
location, one project sponsor could have a disproportionate
benefit to that infrastructure development. The point brought
up by DOT&PF the other day, and like the user fee example
suggested by Mr. Bullock, was that DOT&PF will typically
apportion a new road; for example, a new shopping center needing
turning lanes will pay some portion and the rest would be paid
by the state. She said she wants to put on the record that she
hopes what is negotiated is not just proportional to the
ownership interest, but thinking about improvements that benefit
one project sponsor more than the others, and whether the public
is getting the benefit. The committee was shown by DOT&PF that
its use of the state's flexible highway funding for improvements
on the Parks Highway is of great benefit to the state's
residents and visitors. As infrastructure development for the
project is moved into, she continued, it may be become clearer
that one project sponsor benefits more than the general public
of Alaska.
3:32:08 PM
MR. PAWLOWSKI offered his appreciation for Representative Tarr's
statements. He said he would like to put on the record that
AIDA is currently involved in building an ore shed [at the
Captain Moore Bridge] to expand the state's facilities there,
and this is being done based on a five-year contract with the
mining company who will ship its product through. He explained
AIDA is relying on that long-term contract to finance the
development of that ore shed. He said he can see similar
opportunities with railways and ports where [the Alaska LNG
Project] will have a long-term contract to, say, move pipe on
the rail out of Port MacKenzie. The state would potentially be
paying for that upgrade through a financing based on the
commitment of the contract to use the infrastructure, which
reminds him that Amendment 26 might actually limit [the state's]
ability to do that in a way that serves the state's interest.
He assured members that these are all things that [the
administration] is going to be working on and considering.
3:33:26 PM
REPRESENTATIVE KAWASAKI appreciated the administration's
clarification of Article 10.1.c of the Heads of Agreement. He
said he now understands that the proportion to the ownership
provision [within the amendment] does not actually make sense.
He offered his hope that during negotiations for infrastructure
that will help everyone, and when the state is building things
to ramp up to a project, that the state does not expose itself
to huge maintenance and operating costs in the future. He
withdrew his motion to adopt Amendment 26.
3:34:12 PM
[CSSB 138(FIN) am was held over.]
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