Legislature(2007 - 2008)BARNES 124

04/11/2007 01:00 PM RESOURCES

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01:05:34 PM Start
01:06:12 PM HB177
03:38:40 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HB 177-NATURAL GAS PIPELINE PROJECT                                                                                           
1:06:12 PM                                                                                                                    
CO-CHAIR GATTO  announced that the  only order of  business would                                                               
be HOUSE  BILL NO. 177,  "An Act  relating to the  Alaska Gasline                                                               
Inducement Act;  establishing the  Alaska Gasline  Inducement Act                                                               
matching  contribution  fund;  providing for  an  Alaska  Gasline                                                               
Inducement  Act coordinator;  making  conforming amendments;  and                                                               
providing for an effective date."   [Before the committee is CSHB                                                               
1:11:49 PM                                                                                                                    
PAT  GALVIN,  Commissioner,  Department of  Revenue  (DOR),  drew                                                               
attention  to the  PowerPoint presentation  dated 4/11/2007  from                                                               
the  Palin-Parnell  Administration.   As  specified  on slide  1,                                                               
Commissioner Galvin  said that the administration  would like the                                                               
committee  to recognize  that the  Alaska Gasline  Inducement Act                                                               
(AGIA)  is   designed  to  be   a  commercial  vehicle   for  the                                                               
opportunity  to create  a competitive  environment  in which  the                                                               
commercial  players  can  make their  own  independent  decisions                                                               
regarding how to participate and  develop solutions to the issues                                                               
that will arise with this  project.  Furthermore, AGIA is focused                                                               
on moving the project ahead  because it's in Alaska's interest to                                                               
[construct] the  pipeline sooner and have  certain terms imbedded                                                               
in  the  contract.   In  order  to  do  the aforementioned  as  a                                                               
government,  it  must be  done  in  as  transparent a  manner  as                                                               
possible.   Therefore, the decision-making process  is focused on                                                               
transparency.  There is also  the desire for the inducements that                                                               
Alaska   puts  forward   to  be   transparent  as   well.     The                                                               
aforementioned  results  in  knowledge   of  what  the  state  is                                                               
offering  as  well as  the  price  for  those inducements.    The                                                               
aforementioned further  provides knowledge  of the risks  and the                                                               
costs the state will face.                                                                                                      
1:13:37 PM                                                                                                                    
COMMISSIONER GALVIN,  referring to slide 2,  emphasized that it's                                                               
important  to note  that AGIA  is not  a negotiation.   The  AGIA                                                               
model is to create a  bidding opportunity through the request for                                                               
application process  that allows all competing  proposals to come                                                               
forward.  The aforementioned will  provide the state with an idea                                                               
of  the opportunities  it  has among  competing  interests.   The                                                               
legislation  includes   inducements  that  attempt   to  generate                                                               
interest in this  project such that it results  in the commercial                                                               
players moving  ahead with the  project per a  specified timeline                                                               
and committing  to certain terms  and requirements.  In  order to                                                               
achieve  the aforementioned  there is  a midstream  inducement of                                                               
potentially  $500 million  capital  contribution.   He  clarified                                                               
that although  the amount of  the contribution  isn't necessarily                                                               
known  at  this  point,  it  won't  exceed  $500  million.    The                                                               
aforementioned is  an important  aspect of  AGIA as  it specifies                                                               
that the state has a limit on  its exposure for this venture.  He                                                               
pointed  out   that  AGIA  includes  upstream   tax  and  royalty                                                               
inducements that are geared toward  obtaining a commitment to the                                                               
licensed project  at the initial  open season.  Again,  those are                                                               
being designed to be clear and transparent.                                                                                     
1:16:39 PM                                                                                                                    
COMMISSIONER GALVIN acknowledged that  sometimes AGIA is compared                                                               
to  the stranded  gas  contract.   However, there  was  a lot  of                                                               
concern  that the  stranded  gas contract  was  developed out  of                                                               
public view.   The legislation attempts to  address that concern.                                                               
There were also concerns with regard  to the hidden costs [of the                                                               
stranded gas] contract.   Therefore, AGIA is  trying to eliminate                                                               
the aforementioned level  of uncertainty with regard  to the cost                                                               
to the  state by ensuring  that the inducements  are quantifiable                                                               
and known at the onset.                                                                                                         
1:17:50 PM                                                                                                                    
REPRESENTATIVE   SEATON   expressed   concern   that   there   is                                                               
uncertainty  with  regard to  the  tax  rate.    One of  the  big                                                               
components of this  process is to get partners to  the table, get                                                               
gas in the open  season, and have bids made.  If  the tax rate is                                                               
unknown until the open season,  it will be difficult for entities                                                               
to come  forward and  work with  other partners.   Representative                                                               
Seaton opined, "We  basically have the most  expertise we're ever                                                               
going to have on what  [petroleum production profits tax] PPT was                                                               
and how  the tax program  was put together  and what it  means at                                                               
this time in the legislature."   He questioned why some certainty                                                               
isn't given by specifying what tax rate is going to apply.                                                                      
1:19:52 PM                                                                                                                    
COMMISSIONER  GALVIN  explained  that   the  concept  behind  the                                                               
current structure of HB 177 is that  the tax rate in place at the                                                               
time  an  interested party  makes  the  decision will  drive  the                                                               
decision whether to commit or not.   Under this concept, there is                                                               
no  need to  know  the  tax rate  years  in  advance because  the                                                               
decision   won't  be   made  until   the   commitment  is   made.                                                               
Commissioner  Galvin  said  he   understands  the  logic  of  the                                                               
argument  of setting  the tax  rate before  the applications  are                                                               
due.   However, one concern  is the constitutionality  of locking                                                               
in the  tax rate [before  the applications  are due].   He opined                                                               
that the strongest argument for locking  in the tax rate is based                                                               
upon the  exchange of  making the gas  commitment for  locking in                                                               
the tax rate at  that time.  The mechanism by  which the tax rate                                                               
would  be locked  at  the  time the  applications  are due  isn't                                                               
necessarily present because the gas  isn't being committed at the                                                               
time of application.   Therefore, there isn't  the same immediate                                                               
exchange that  would lock in  that contractual relationship.   If                                                               
the  application doesn't  lock in  the  tax rate,  then it  could                                                               
easily be  changed by the  legislature between [the  submittal of                                                               
the application] and the open season.                                                                                           
COMMISSIONER GALVIN related his disagreement  that there is a lot                                                               
of  expertise at  this  point.   He pointed  out  that the  first                                                               
returns on  PPT have  only recently been  received and  are being                                                               
assessed.   There was  a gap  in what was  expected and  what was                                                               
received.  Some time will have  to be taken to determine why that                                                               
occurred and whether the current  PPT structure will deliver what                                                               
it was  expected to  deliver.  He  noted that  the aforementioned                                                               
relates only to the oil side.   With regard to the gas side, much                                                               
more  information is  necessary.   The PPT  discussions primarily                                                               
focused on  oil, and therefore the  gas tax rate now  needs to be                                                               
more the  focus.   More information, he  opined, is  necessary to                                                               
have  that discussion  and be  able  to set  a rate  that can  be                                                               
locked  in for  many years.   Still,  it's worthwhile  to discuss                                                               
whether it's  necessary to have  a discussion on the  PPT between                                                               
now  and the  current  target date  for  applications being  due,                                                               
October  1st.   For  the purposes  of  AGIA, Commissioner  Galvin                                                               
stressed that [the administration]  feels very strongly that this                                                               
legislation  needs   to  be  passed   prior  to   addressing  the                                                               
complication associated with setting the gas tax rate in HB 177.                                                                
1:25:39 PM                                                                                                                    
CO-CHAIR  GATTO related  his understanding  that the  real return                                                               
was  less than  the anticipated  return  by $813  million over  8                                                               
months.   He calculated that  $813 million over 8  months amounts                                                               
to about $100  million a month.  Over 12  months, it would amount                                                               
to $1.2 billion, which is closer to what the PPT has produced.                                                                  
COMMISSIONER GALVIN  clarified that the expectation  for what PPT                                                               
was  going to  produce  for  that [8-month]  period  of time  was                                                               
approximately $950 million.   The aforementioned was  used as the                                                               
model for the evaluation of  what the appropriate rate should be.                                                               
Therefore, there  is a disconnect  between what was  expected and                                                               
what was  received.  Commissioner  Galvin further  clarified that                                                               
he is  merely suggesting that more  must be known about  why that                                                               
happened  prior  to  locking  in  some of  these  things  for  an                                                               
extended period of time.                                                                                                        
1:27:26 PM                                                                                                                    
REPRESENTATIVE WILSON  inquired as to  how much of  an adjustment                                                               
was made due to the oil spill that caused the shutdown.                                                                         
COMMISSIONER  GALVIN said  that  is  part of  the  analysis.   He                                                               
pointed out that  the $950 million was the  expectation after the                                                               
spill had occurred and the  shortfall had occurred, and therefore                                                               
it  was  factored  in  the   expectation.    Commissioner  Galvin                                                               
characterized  it as  an  additional  complication that  requires                                                               
1:28:16 PM                                                                                                                    
REPRESENTATIVE SEATON  said he  could appreciate  those comments.                                                               
However,  he  pointed   out  that  the  state   will  never  have                                                               
experience with gas  until it is flowing.  He  recalled that what                                                               
he  has heard  continuously  is that  to  achieve something  that                                                               
works, people  have to at  least know what the  tax rate is.   He                                                               
then  related his  understanding  from  other committee  hearings                                                               
that there has been testimony  that the players anticipated to be                                                               
at  the  table as  pipeline  companies  aren't going  to  proceed                                                               
unless they  have some confidence  that there's a source  of gas.                                                               
Therefore, the lack of knowledge of  the tax rate "may not get us                                                               
there," he said.  Representative  Seaton said he wasn't sure that                                                               
[a specific tax rate] isn't one  of the components that should be                                                               
reviewed.  He  then related his understanding  from analysis that                                                               
the PPT  will be high because  there are very few  expenses since                                                               
the  development  costs of  Prudhoe  Bay  have already  occurred.                                                               
Furthermore, he  opined that  the economics are  that the  gas is                                                               
going to be more profitable.   Still, knowing the tax rate may be                                                               
more  important to  obtain successful  applications through  AGIA                                                               
versus waiting  to work  on the upstream  if no  applications are                                                               
1:30:52 PM                                                                                                                    
COMMISSIONER   GALVIN  turned   to   the  characterization   that                                                               
participants have  expressed a  reluctance to  participate unless                                                               
they  receive   assurance  that   they  get   the  gas   if  they                                                               
participate.   He opined that  the testimony was a  reflection of                                                               
TransCanada's comments  that it wasn't  comfortable participating                                                               
given  that the  state was  requiring  a commitment  to submit  a                                                               
certificate.  That's  different than an entity  not submitting an                                                               
application  unless it  knows that  it's  going to  get the  gas.                                                               
Commissioner  Galvin opined  that ultimately  the state  needs to                                                               
have a  vehicle that  is shown  to be  economic and  provides the                                                               
lessees with a reason  to place their gas in the  line.  He said,                                                               
"You have moved from a question  of whether the producers need to                                                               
have this level of certainty that  they keep talking about at the                                                               
time  they submit  the application  or whether  it's at  the time                                                               
that they are being asked to  commit their gas."  The legislation                                                               
has  structured a  level  of  certainty that  is  believed to  be                                                               
appropriate at the time the applicant commits the gas.                                                                          
COMMISSIONER  GALVIN opined  that  when one  views the  economics                                                               
from a  Prudhoe Bay  lessees' perspective,  the economics  are so                                                               
positive when  $6 gas  is factored  in.  That  view results  in a                                                               
potential rate of  return of 50 percent due to  the limited level                                                               
of investment  required.   The question becomes:   what  level of                                                               
tax change  is needed to  affect that  decision.  Upon  review of                                                               
the  history of  Alaska's tax  take, Alaska  has never  even come                                                               
close  to  the  international  norms.    Therefore,  Commissioner                                                               
Galvin said that  he personally takes offense to  the notion that                                                               
the  state needs  to provide  certainty  [to potential  lessees].                                                               
The  state is  trying to  be  responsive by  providing a  10-year                                                               
window to  commit the  gas to  the line  and whether  that window                                                               
should be expanded is a different discussion.                                                                                   
1:35:16 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  opined that the producers'  major role                                                               
is to  obscure the issue.   He asked  if this is  the appropriate                                                               
time to  provide the  certainty or  can it  be compared  to other                                                               
projects on the  world market to determine when  the certainty is                                                               
necessary.   He  also  asked  if the  producers  are  in need  of                                                               
certainty in the form of specific numbers.                                                                                      
COMMISSIONER  GALVIN highlighted  that  no jurisdiction  provides                                                               
the certainty the producers are  requesting.  "So, you don't have                                                               
a comparable  to say when  is this necessary along  this timeline                                                               
because you don't  have an example of where it  was actually ever                                                               
provided," he  pointed out.   He reiterated that  the legislation                                                               
attempts  to  provide an  opportunity  for  participants to  make                                                               
decisions  regarding how  and when  they'll  participate in  this                                                               
process.  When  one talks about certainty it's  really a response                                                               
to uncertainty.  From a  resource development company standpoint,                                                               
there are uncertainties that are  dealt with daily.  The question                                                               
before  the state  is regarding  the  point at  which the  state,                                                               
prior to  other uncertainties,  does Alaska need  to lock  in the                                                               
perceived uncertainties of  the state fiscal system.   He related                                                               
the  belief that  once the  range of  potential economics  on the                                                               
pipeline  has  been  defined and  demonstrated  through  an  open                                                               
season, the  issues associated with  the need for  more certainty                                                               
on  the  state  fiscal  system  will  fall  to  the  side.    The                                                               
aforementioned is  the point of  AGIA.  Commissioner  Galvin then                                                               
commented that  the issue  raised by  Representative Seaton  is a                                                               
legitimate  matter  on which  to  hear  from  the industry.    He                                                               
emphasized that the  tax lock in is clearly trying  to induce the                                                               
commitment  of  gas  to  the  project.    The  [administration's]                                                               
feeling today is that it isn't  necessary to lock in the tax rate                                                               
in AGIA.                                                                                                                        
1:40:39 PM                                                                                                                    
CO-CHAIR JOHNSON  said that part of  [the purpose] of AGIA  is to                                                               
get people to  bid on the pipeline.  He  questioned what would be                                                               
wrong, from  the standpoint of AGIA,  if taxes are locked  in and                                                               
more people are brought to the table.                                                                                           
COMMISSIONER GALVIN answered, "Nothing."   He said he would agree                                                               
if the producers say that they need  to know the tax rate for the                                                               
10-year period  prior to  considering submitting  an application.                                                               
Clearly,  AGIA  has been  designed  so  that the  producers  will                                                               
decide to participate.  "And, if  that's one of the drivers, then                                                               
we need to address that," he said.                                                                                              
1:41:54 PM                                                                                                                    
CO-CHAIR JOHNSON asked then if a  provision is included in HB 177                                                               
that  locks  in  taxes  now  would  impact  other  parts  of  the                                                               
COMMISSIONER GALVIN  opined that the  question of locking  in the                                                               
tax rate in AGIA  is more a question of what is  the tax rate [an                                                               
applicant]  is willing  to  lock  in.   He  reiterated his  early                                                               
comment that his  level of confidence in the current  tax rate is                                                               
relatively   low.     Commissioner  Galvin   said  he   would  be                                                               
uncomfortable saying  that the state  should lock in  the current                                                               
tax  rate for  the [10-year]  period  of time.   Furthermore,  he                                                               
didn't believe the  producers would view the current  tax rate as                                                               
much of an  inducement.  Therefore, the  question becomes whether                                                               
the state will  somewhat arbitrarily pick a lower  number for the                                                               
tax rate.  The [administration]  wouldn't support such action, he                                                               
1:43:24 PM                                                                                                                    
REPRESENTATIVE WILSON,  recalling the  debate last  year, related                                                               
her observation that  it takes the producers a long  time to make                                                               
decisions.   Therefore,  she surmised  that  the producers  would                                                               
need some certainty  as soon as possible, before  they would even                                                               
[be interested].                                                                                                                
COMMISSIONER  GALVIN opined  that  he doesn't  believe anyone  is                                                               
suggesting that the rate be  set weeks before an interested party                                                               
is asked to make  the decision.  This is a matter  of when in the                                                               
sequence  of events  [the  tax rate  should be  set].   There  is                                                               
potentially up to three years  between when the license is issued                                                               
and when the open season would take place.                                                                                      
1:45:15 PM                                                                                                                    
COMMISSIONER  GALVIN, returning  to his  PowerPoint presentation,                                                               
directed  the  committee's attention  to  slide  3 regarding  the                                                               
state's terms.  He pointed out  that the state's "must haves" are                                                               
located  in the  section of  the legislation  that addresses  the                                                               
requirements  placed  on the  licensee.    The "must  haves"  are                                                               
geared toward  achieving a  competitive and  vibrant oil  and gas                                                               
industry on the  North Slope in the future.   In order to achieve                                                               
the  aforementioned, there  needs to  be a  pipeline that  begins                                                               
with a  low tariff and a  pipeline that can and  will be expanded                                                               
when new  gas is found.   That  expansion must be  something that                                                               
the explorers can  rely upon, he said.  He  opined that the "must                                                               
haves" were developed  after much thought and  research into what                                                               
is  commercially reasonable  as well  as where  the state's  true                                                               
interests lie  in this pipeline.   Additionally, the  state wants                                                               
to ensure that  there will be opportunities for  in-state use and                                                               
that  there   are  opportunities   for  Alaskans  to   enjoy  job                                                               
opportunities due  to the  construction of  the pipeline  and the                                                               
expanding  oil   and  gas  sector   in  the  North  Slope.     He                                                               
characterized the  "must haves" as  the state's bottom line.   He                                                               
then opined  that it's  for the state,  through this  process, to                                                               
tell the  industry and the  nation what the state's  "must haves"                                                               
are.  Furthermore,  the state should receive  something in return                                                               
for its $500 million, a pipeline that meets the state's needs.                                                                  
1:50:20 PM                                                                                                                    
CO-CHAIR GATTO asked  if the producers have  voiced any objection                                                               
to the "must haves."                                                                                                            
COMMISSIONER GALVIN  noted that  there is  a slight  variation in                                                               
the  message  from  the  producers.     For  example,  ExxonMobil                                                               
Corporation  (ExxonMobil) has  opined  that  the state  shouldn't                                                               
establish "must  haves" but rather  should have  broad objectives                                                               
and allow the  applicants to suggest the "must  haves."  However,                                                               
other participants have  suggested moving some of  the items from                                                               
the "must have" list into a  valuation criteria.  When the latter                                                               
suggestion  is made,  one  must consider  why  it was  suggested.                                                               
Commissioner  Galvin  opined that  the  must  have list  includes                                                               
those things  the state truly  must have and  shouldn't negotiate                                                               
away.   He mentioned that  another aspect to consider  is whether                                                               
the  change  desired  by  the   applicant  is  a  change  to  the                                                               
competitive  field  that  would  provide that  applicant  with  a                                                               
competitive advantage.                                                                                                          
1:52:39 PM                                                                                                                    
REPRESENTATIVE ROSES  related his  understanding that  during the                                                               
application process, the applicant  must specify its project, the                                                               
route,  size,  design,  timelines,   budget,  and  its  capacity.                                                               
However, he questioned how an  entity can develop a comprehensive                                                               
plan  for the  capacity if  there haven't  been discussions  with                                                               
those  who have  the gas  regarding how  much they're  willing to                                                               
provide.   An integral part  of how  much gas they're  willing to                                                               
provide, he  surmised, is probably  directly proportional  to the                                                               
tax they  have to pay  and whether it's profitable  to distribute                                                               
the gas.   Therefore, he questioned how the plan  is put together                                                               
without   having   such   a  commitment   from   the   producers.                                                               
Furthermore, if the state has a  list of "must haves" it's likely                                                               
that all  other companies that  have to  generate a profit  do as                                                               
well.  Representative Roses inquired  as to how an entity reaches                                                               
a  point  in  the  application  process  to  provide  a  somewhat                                                               
realistic expectation of capacity  without having some commitment                                                               
from the  producers as to  what they're  willing to provide.   He                                                               
further  inquired  as   to  how  the  producers   will  know  the                                                               
aforementioned if they don't know what their costs will be.                                                                     
COMMISSIONER  GALVIN explained  that  the sequence  of events  is                                                               
that [an applicant] is going to  provide the state with the plans                                                               
for a pipeline  that has a certain capacity.   That capacity will                                                               
be based upon  the expectation of what will be  committed once an                                                               
open  season  occurs.   The  open  season  will confirm  or  deny                                                               
whether it's a reasonable expectation.                                                                                          
1:56:02 PM                                                                                                                    
REPRESENTATIVE ROSES posed  a scenario in which  an applicant has                                                               
preliminary conversations  with the  producers who say  they will                                                               
provide a certain  amount of gas or a certain  amount of time and                                                               
the  applicant  says a  pipe  of  a  certain size  is  necessary.                                                               
During  the  open season  the  tax  rate  is determined  and  the                                                               
producers change  the amount, although  it was designed  based on                                                               
what  the applicant  thought he/she  would have.   Representative                                                               
Roses then related  his understanding that part of  the design is                                                               
how  to expand  the  capacity.   In  that  regard, he  questioned                                                               
whether the  design would include  expansion of the  capacity due                                                               
to new exploration or the  underestimation of the [amount of gas]                                                               
because of the lack of knowledge with regard to fixed costs.                                                                    
COMMISSIONER GALVIN deferred  to Mr. Shepler.   He suggested that                                                               
there is some confusion with  regard to how the uncertainties fit                                                               
into the level of  gas that would be committed.   If the tax rate                                                               
changes, there isn't suddenly more gas to flow.                                                                                 
1:57:37 PM                                                                                                                    
DONALD  SHEPLER,   Attorney  at  Law,  Greenberg   Traurig,  LLP,                                                               
informed  the committee  that in  the  Lower 48  the open  season                                                               
process  evolved   as  a  way   for  Federal   Energy  Regulatory                                                               
Commission  (FERC)   to  assure   that  pipeline   capacity,  new                                                               
projects, and  new expansions are  offered to anyone  who desired                                                               
such access.  He characterized  the open season as an interactive                                                               
process that  involves communication with the  potential shippers                                                               
and  even perhaps  nonbinding open  seasons to  test the  waters.                                                               
Mr. Shepler said  that it isn't unheard of for  a pipeline to put                                                               
out an open  season and determine that the  demand was inadequate                                                               
for what it had in mind.   He recalled an instance in which there                                                               
were at  least four  open seasons for  a project  that ultimately                                                               
resulted  in a  major pipeline  interconnecting system.   Another                                                               
aspect is that FERC is going  to review this open season proposal                                                               
before it  becomes official in  order to  ensure that it's  not a                                                               
discriminatory open season.                                                                                                     
2:00:01 PM                                                                                                                    
REPRESENTATIVE ROSES surmised  then that an entity  comes in with                                                               
a  design in  which a  certain size  [pipe] with  a certain  size                                                               
capacity is proposed,  then an open season occurs.   Based on the                                                               
results of that  open season and the commitment  of the producers                                                               
with regard to providing gas to  the line, the [project] would be                                                               
resized based on the need.                                                                                                      
MR.  SHEPLER replied,  "Generally, yes."   In  that context  it's                                                               
important  to note  that the  pipeline is  talking to  its future                                                               
customers, shippers, which can be  producers or nonproducers.  In                                                               
Alaska, for the most part, there  is a known size of the resource                                                               
base on the North Slope.                                                                                                        
2:01:22 PM                                                                                                                    
REPRESENTATIVE  ROSES   asked  if  the  application   process  is                                                               
required to  occur prior to the  open season, or should  the open                                                               
season occur  first and then  design a  pipe to fit  the capacity                                                               
that's guaranteed.   He questioned  why there should  be multiple                                                               
open seasons to achieve the right size of the pipe.                                                                             
MR. SHEPLER reminded  the committee that the  unique situation in                                                               
Alaska is  that it's  known that  there is  8 billion  cubic feet                                                               
(bcf),   more  or   less,  that's   going   around  in   circles.                                                               
Furthermore, the  state also has  the experience  of negotiations                                                               
under  the  Stranded Gas  Act  a  couple  of  years ago.    Those                                                               
negotiations centered around a reasonably  narrow range of sizes.                                                               
He  opined that  the real  issue  is whether  the producers  will                                                               
commit their  gas to a project  in the open season.   The process                                                               
of the open season starts  the FERC proceedings, which eventually                                                               
lead to  a FERC  certificate application.   He  characterized the                                                               
aforementioned as a funnel narrowing  the level of uncertainties.                                                               
By the  time FERC  has approved  a certificate,  the size  of the                                                               
pipe, the  route, and the  projected costs  are known.   The open                                                               
season  starts the  aforementioned process  going and  culminates                                                               
under AGIA  with the commitment  by the licensee or  applicant to                                                               
process a FERC certificate.                                                                                                     
2:04:30 PM                                                                                                                    
REPRESENTATIVE  ROSES   related  his   view  that  there   is  an                                                               
application process  that uses theoretical  concepts in  terms of                                                               
the design.   If the open season exceeds the  expectation, then a                                                               
larger  pipe may  be needed.   Representative  Roses opined  that                                                               
[under  AGIA] it  seems that  the decision  of who  to grant  the                                                               
license will  be based on  the size of  the pipe, the  route, and                                                               
the capacity.   The open season occurs and after  an applicant is                                                               
determined,  that applicant's  design work  is modified  based on                                                               
the open season.   He asked if there is a  law preventing an open                                                               
season from  occurring prior  to designing the  size of  the pipe                                                               
and awarding a license to move forward with the pipe.                                                                           
COMMISSIONER  GALVIN   noted  his  agreement  that   the  natural                                                               
progression  of   the  project   is  what   Representative  Roses                                                               
described.   However, it's  not happening.   He opined  that it's                                                               
not happening because the market  isn't working in that direction                                                               
since there are  three companies that hold all the  rights to all                                                               
the gas.   Those three  companies, the producers,  aren't willing                                                               
to  move  ahead  with  any decision  making  until  they  receive                                                               
something more than they received last year.                                                                                    
2:07:08 PM                                                                                                                    
REPRESENTATIVE  ROSES  related  his understanding  then  that  by                                                               
doing  AGIA  and  now  having someone  apply  for  a  theoretical                                                               
construct for a pipe, the producers now have more than before.                                                                  
COMMISSIONER GALVIN  clarified that the producers  have a project                                                               
that defines  the economics  of the line.   The  [producers] will                                                               
make their decision based on a known  pipe and a known cost.  The                                                               
producers  will  then  explain  to  the  state  why  they  aren't                                                               
committing  their  gas to  the  line  based  on a  real  project.                                                               
Therefore, AGIA is intended to  force the issue through the state                                                               
putting up  the money to  induce someone  to move the  project to                                                               
the open season.  The project would  then be on the table and the                                                               
costs, tariffs, and  risks to the producers would be  known.  The                                                               
producers would then have to decide  whether they are going to do                                                               
the project.                                                                                                                    
2:08:49 PM                                                                                                                    
REPRESENTATIVE  ROSES   inquired  as  to  what   happens  if  the                                                               
producers still aren't willing to cooperate.                                                                                    
COMMISSIONER  GALVIN  answered,  "Because  then we  will  have  a                                                               
project that has  an economic base."  The state  can then ask the                                                               
producers why they aren't putting their  gas in the line.  If the                                                               
producers,  as  suggested  by   Representative  Roses,  say  it's                                                               
because  they don't  want  to put  their gas  in  the line,  then                                                               
they'll have to  explain that to Congress,  consumers, the state,                                                               
and the  Federal Trade Commission  (FTC).  If the  project proves                                                               
to be economic and the  producers choose not to participate, they                                                               
will have a lot of answers to provide.                                                                                          
2:10:46 PM                                                                                                                    
REPRESENTATIVE  ROSES,   returning  to   Representative  Seaton's                                                               
earlier comment,  opined that unless the  producers see something                                                               
different that will entice them  to sell what they aren't willing                                                               
to now, it  sounds like the project  is back at the  point of the                                                               
Stranded Gas  Act.   However, much more  time, 15-20  years, will                                                               
have passed at the time litigation is decided.                                                                                  
COMMISSIONER GALVIN  stated that he and  Representative Roses are                                                               
concerned  about the  same  thing;  the risk  that  as more  time                                                               
passes,  Alaska  teeters  closer  to the  financial  edge.    The                                                               
question  is  whether  to  have  the  discussion  about  what  is                                                               
necessary  to  make  this  project  happen  today  with  all  the                                                               
uncertainties or to  have the project move ahead to  the point at                                                               
which the cost of the project is  known.  He opined that when the                                                               
discussion occurs  in that context,  it's a  completely different                                                               
discussion  than  what  is  occurring  now.    Furthermore,  AGIA                                                               
provides an opportunity  for the producers to  decide now whether                                                               
they want to  participate and take the state's terms  in order to                                                               
ensure the opportunity isn't lost.   The aforementioned is a much                                                               
better position for the state than the current situation.                                                                       
2:14:40 PM                                                                                                                    
CO-CHAIR  GATTO highlighted  that the  producers are  not without                                                               
risk.   In fact,  at this  moment it isn't  their gas,  they only                                                               
have a lease to  produce it.  However, if, in  a few years, there                                                               
is a plan  and a builder, the producers would  be at risk because                                                               
there  is a  requirement.    If the  requirement  isn't met,  the                                                               
producers have  to give up the  gas.  He characterized  [AGIA] as                                                               
an opportunity for the producers to be the builder.                                                                             
2:15:44 PM                                                                                                                    
REPRESENTATIVE WILSON,  referring to page  4, lines 7-14  of CSHB                                                               
177(O&G), recalled  that last year that  [the producers] couldn't                                                               
make a  decision on  the size  of the pipe  until after  the open                                                               
season.   At that point, FERC  would get involved.    She further                                                               
recalled that  [the producers]  were contemplating  48-inch pipe,                                                               
which is  the largest built  thus far.   However, a  52-inch pipe                                                               
would be  cheaper in the long  run due to  the price of gas.   As                                                               
more gas is  found, it's cheaper to have the  larger pipe than to                                                               
have  feeder lines.   Still,  the  52-inch pipe  hasn't yet  been                                                               
invented nor has  the machinery required to put it  in place, and                                                               
therefore  she   questioned  how  such   could  be  said   to  be                                                               
economically viable.                                                                                                            
COMMISSIONER  GALVIN said  that  any project  based on  materials                                                               
still in the  laboratory will have to be  seriously questioned in                                                               
regard to  whether it will  be delivered.  The  aforementioned is                                                               
why the  analysis is  both economic and  technical.   He reminded                                                               
the committee that  when a proposal is made, it  will be based on                                                               
the  known  resource  and  an   expectation  about  what  may  be                                                               
committed at an open season.   The pipe will be designed based on                                                               
the   range  of   possible  commitment   that  they'll   receive.                                                               
Therefore, the  state, in  its analysis, will  have to  factor in                                                               
the  likelihood of  actually obtaining  that level  of commitment                                                               
and the  plan's flexibility  in regard to  the various  levels of                                                               
commitment.   Commissioner Galvin  stressed that  everyone should                                                               
realize that  what the  producers propose now  is before  an open                                                               
season and  before the actual  commitments are received  or there                                                               
is a sense  of the initial shipping capacity.   The producers, he                                                               
pointed out, will have to  be responsive to the state's interests                                                               
and  their interests  in having  a  line that  is expandable  and                                                               
would  be cost  effective for  some time.   This  means that  the                                                               
producers'  proposal   will  have  to  address   those  different                                                               
scenarios, which  will also be  reflective of both the  design of                                                               
the pipe  or the other steps  to commit more gas  or a particular                                                               
2:20:40 PM                                                                                                                    
REPRESENTATIVE WILSON surmised then that  the state is asking the                                                               
producers to put  down on paper "imaginary"  numbers they believe                                                               
will work.  The state will  then have to review those numbers and                                                               
decide whether they're possible.                                                                                                
COMMISSIONER  GALVIN   noted  that  all  the   numbers  from  the                                                               
producers will  be based on  the level  of analysis done  to that                                                               
point.  The  level of confidence that the state  will have in the                                                               
producers'  numbers  will  be  based upon  the  level  of  detail                                                               
provided in the analysis.   There will have to be [analysis/data]                                                               
to support the numbers proposed by the producers.                                                                               
2:22:28 PM                                                                                                                    
COMMISSIONER  GALVIN,  in   further  response  to  Representative                                                               
Wilson, said  that there  is a certain  amount of  flexibility in                                                               
regard to what  the producers choose to do at  a certain point in                                                               
the process.                                                                                                                    
2:23:46 PM                                                                                                                    
CO-CHAIR  JOHNSON  inquired  as  to  the  location  of  the  five                                                               
delivery points that are required in the legislation.                                                                           
COMMISSIONER GALVIN  clarified that  the applicant has  to commit                                                               
to five  delivery points  once the demand  is present  to require                                                               
them.   In  further  response to  Co-Chair Johnson,  Commissioner                                                               
Galvin said that five isn't a magic number.                                                                                     
CO-CHAIR  JOHNSON surmised  then  that [if  there is  flexibility                                                               
with  regard to  the number  of delivery  points required],  then                                                               
five delivery  points must not be  a "must have."   Therefore, he                                                               
questioned why it's a "must have."                                                                                              
COMMISSIONER GALVIN  explained that the  "must have" is  that the                                                               
producers have to  agree to meet in-state demand.   One aspect of                                                               
that is having  a commitment that the producers  will provide for                                                               
five offtake points.                                                                                                            
2:25:04 PM                                                                                                                    
CO-CHAIR  JOHNSON  inquired  again  as  to  why  there  are  five                                                               
delivery points  and the location of  them.  He pointed  out that                                                               
the legislation calls for  [applicants/producers] to come forward                                                               
with certainty that  will be evaluated by the  state.  Therefore,                                                               
he questioned why the same can't be expected from the state.                                                                    
COMMISSIONER  GALVIN  related   that  from  the  administration's                                                               
perspective  if   the  delivery  points  were   eliminated,  [the                                                               
contract]  isn't   as  valuable.    From   Commissioner  Galvin's                                                               
perspective  the  question  would  be whether  the  state  should                                                               
consider a  proposal that  doesn't include  delivery points.   By                                                               
placing  the delivery  points  in the  "must  haves" section,  it                                                               
means  that the  state doesn't  want to  consider an  application                                                               
that doesn't  have five delivery  points.  He clarified  that the                                                               
application  doesn't have  to specify  the five  delivery points,                                                               
the  applicant merely  has to  commit that  when the  opportunity                                                               
arises and  there is a demand  for in-state use, they  will allow                                                               
the  delivery point  to take  place.   Whether  there are  three,                                                               
five, or seven  delivery points is open to discussion.   The five                                                               
delivery points was what [the  department] anticipated within the                                                               
CO-CHAIR  JOHNSON said  that he  wants  to know  what are  really                                                               
"must  haves."   He  inquired  as to  what  would  happen if  the                                                               
committee reduces  the number of  "must haves."   He specifically                                                               
inquired as to what are the deal breakers.                                                                                      
COMMISSIONER  GALVIN clarified  that the  items labeled  as "must                                                               
haves" in  the legislation are  telling the world that  these are                                                               
the  state's "must  haves."   He related  that "we"  are open  to                                                               
discuss what should or shouldn't be  on the list of "must haves."                                                               
He further clarified that whether  these are the administration's                                                               
"must haves" is a different question.                                                                                           
2:29:07 PM                                                                                                                    
CO-CHAIR  JOHNSON  inquired then  as  to  why what  is  currently                                                               
referred to  as "must haves"  aren't set  as guidelines/criteria,                                                               
such that  the applicant that  reaches or exceeds  the guidelines                                                               
is awarded  the contract.   He questioned  why an  applicant that                                                               
meets all  the requirements, but  only has three  delivery points                                                               
would be considered noncompliant.                                                                                               
COMMISSIONER GALVIN  opined that  since the  state is  willing to                                                               
put up $500  million and match [the applicant] in  its costs, the                                                               
state has  the right  to ask  for things in  return.   He further                                                               
opined that  [the department] believes  it's appropriate  for the                                                               
state to  establish at  least a  floor for  what is  expected and                                                               
allow  the interested  parties to  compete on  that basis.   [The                                                               
administration], he  related, believes that it's  appropriate for                                                               
the  state to  tell applicants  that five  delivery points  are a                                                               
"must  have."   [The administration],  he further  related, would                                                               
prefer that the five delivery  points remain a requirement for an                                                               
application to be considered.                                                                                                   
2:32:17 PM                                                                                                                    
CO-CHAIR JOHNSON  said that he  is looking at what  is imperative                                                               
to  the legislation.   He  again inquired  as to  what is  a true                                                               
"must have"  that's absolutely nonnegotiable.   He  then inquired                                                               
as to what can be included in HB  177 to broaden it [such that it                                                               
obtains many applicants].                                                                                                       
COMMISSIONER GALVIN  commented that  it's a bit  disconcerting to                                                               
have a discussion about the legislation  in regard to what can be                                                               
stripped out  and remain something the  administration is willing                                                               
to endorse.  Commissioner Galvin  related that the administration                                                               
believes HB 177 is  in great shape as it is  now and doesn't need                                                               
to be  changed much at all.   He said that  the administration is                                                               
interested  in  hearing what  areas  the  committee finds  to  be                                                               
2:34:48 PM                                                                                                                    
CO-CHAIR  GATTO mentioned  that  in 2000  the producers  invested                                                               
$125 million on a feasibility study,  so there has been work done                                                               
[on this project].                                                                                                              
COMMISSIONER  GALVIN interjected  that TransCanada  will probably                                                               
comment on how much it has invested in the project also.                                                                        
2:35:22 PM                                                                                                                    
COMMISSIONER  GALVIN, returning  to his  PowerPoint presentation,                                                               
directed attention  to slide  4.  He  related that  the decision-                                                               
making  process is  intended to  be transparent  and competitive,                                                               
not a  negotiated process.   The process affords  the opportunity                                                               
of the bids  being reviewed in a public setting  during which the                                                               
public  can comment.   The  decision [as  to who  is awarded  the                                                               
contract] is made  and returned to the  legislature for approval.                                                               
The entire process  is intended to be as  transparent as possible                                                               
so that the public can have confidence in the outcome.                                                                          
2:36:26 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  related  his understanding  that  the                                                               
public is  going to have  60 days for review.   He then  asked if                                                               
the  administration  is going  to  place  the contract  proposals                                                               
without analysis before  the public or is there going  to be some                                                               
process  in which  there  are  comparisons and  data  that a  lay                                                               
person can understand.                                                                                                          
COMMISSIONER   GALVIN   answered   that   at   this   point   the                                                               
administration  doesn't   have  a   preconceived  idea   how  the                                                               
information will  be presented and  thus the  legislation doesn't                                                               
include  such.   However, in  keeping with  the intent  of having                                                               
public  involvement, it's  incumbent upon  the administration  to                                                               
make  information  available  to  the  public  in  a  way  that's                                                               
understandable.   He  then turned  the presentation  over to  Mr.                                                               
2:38:12 PM                                                                                                                    
MR. SHEPLER, referring  to slide 5, opined that  expansion of the                                                               
pipeline  is  vital  to  the  ultimate  goal  of  establishing  a                                                               
vibrant,  competitive oil  and gas  driven economy  on the  North                                                               
Slope.   The  FERC, in  its  orders, have  recognized the  unique                                                               
situation of Alaska and that  there will almost certainly be only                                                               
one pipeline  built out  of Alaska.   The aforementioned  has led                                                               
FERC  to adopt  a rebuttable  presumption in  favor of  rolled-in                                                               
pricing, which means  that as the costs are  accumulated they are                                                               
divided amongst all the volumes  under contract.  The FERC orders                                                               
recognized that  there are some  governmental subsidies  that are                                                               
included  in the  initial project  in  the form  of federal  loan                                                               
guarantees that  will reduce the  borrowing costs of  the sponsor                                                               
of  the pipeline  project.   Another  subsidy  is the  seven-year                                                               
depreciation  for income  tax purposes,  which reduces  rates for                                                               
initial  shippers.   Mr. Shepler  clarified  that ultimately  the                                                               
rates  for   all  initial  shippers   will  be  reduced   by  the                                                               
aforementioned  factors,  and  therefore  reduce  the  real-world                                                               
impact  of  rolling  in  pricing   when  expansion  becomes  more                                                               
expensive.   He  informed the  committee that  initial expansions                                                               
will typically  be based  on adding  new compressor  units, which                                                               
are relatively  low cost and  produce a substantial bang  for the                                                               
buck.   However, in order to  maximize the value of  the pipeline                                                               
itself  the expensive  looping and  expansions will  increase the                                                               
rates for all shippers.                                                                                                         
2:41:22 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG requested  clarification with regard to                                                               
the looping.                                                                                                                    
MR. SHEPLER  explained that looping  is a pipeline  industry term                                                               
for putting in  a parallel pipe, a welded in  integrated piece of                                                               
the original pipe.  Once the  gas has been compressed and no more                                                               
expansion from  compression exists, the  size of the pipe  can be                                                               
doubled by  putting in another  run of pipe.   The aforementioned                                                               
is  expensive because  miles of  pipe are  being purchased.   Mr.                                                               
Shepler  related  his  understanding   that  the  pipe  would  be                                                               
installed a few  miles downstream of a compressor  initially.  As                                                               
more  volumes  come  on,  a  few  more  miles  would  be  put  in                                                               
downstream  of the  compressor,  ultimately resulting  in a  dual                                                               
line.  He pointed out that  looping is more expensive than simply                                                               
purchasing another  compressor unit  or station.   At  some point                                                               
during the  looping, the rolled-in  rates increase.   Mr. Shepler                                                               
highlighted  that  AGIA specifies  that  the  obligation for  the                                                               
pipeline  company to  file  for and  support  rolled-in rates  is                                                               
capped.   The pipeline company  has to  commit that it  will file                                                               
for and propose rolled-in rates  so long as that doesn't increase                                                               
the  rate for  shippers  by  more than  15  percent over  initial                                                               
tariff rates.                                                                                                                   
2:43:40 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked if  that  15  percent over  initial                                                               
tariff rates is in nominal dollars.                                                                                             
MR. SHEPLER reminded the committee that  he is an attorney not an                                                               
economist.   However,  he offered  that  the target  here is  the                                                               
initial regulated rate  that the FERC approved  when the pipeline                                                               
went  into  service.   The  legislation,  AGIA, contemplates  the                                                               
initial rate  increase of up  to 15 percent through  roll-ins and                                                               
the pipeline company would have  the obligation to file for that,                                                               
subject to FERC approval.                                                                                                       
2:44:44 PM                                                                                                                    
REPRESENTATIVE SEATON  asked if this  is a meaningless  number 10                                                               
years later after inflation.  He  asked if it's the actual dollar                                                               
value at the time FERC decided the rate.                                                                                        
2:45:27 PM                                                                                                                    
KEVIN BANKS, Acting  Director, Division of Oil  & Gas, Department                                                               
of Natural Resources, posed a  scenario in which the initial rate                                                               
is $2.00 and  10 years from now expansion is  occurring that will                                                               
increase  the cost  of shipping  to  about $2.30  on a  rolled-in                                                               
basis.   Inflation  isn't taken  into account.   He  informed the                                                               
committee that  the fact that it's  based off of the  rate in the                                                               
initial open  season works  in the favor  of the  initial shipper                                                               
because the 15  percent uptake is still measured  against a $2.30                                                               
cap.   If  the expansion  is more  that $2.30,  the amount  above                                                               
$2.30 will be determined using  an incremental basis and thus the                                                               
cost will shift  to the new shippers.  Mr.  Banks, in response to                                                               
Co-Chair  Gatto, said  [the cost]  is  nominal and  works to  the                                                               
favor of  the initial  shipper if  inflation has  occurred during                                                               
the intervening period.   The cap means that 15  percent over the                                                               
initial rate will be borne by the expansion shippers.                                                                           
2:48:09 PM                                                                                                                    
REPRESENTATIVE ROSES  questioned what occurs if  there is another                                                               
roll-in later.   He asked  if since the  15 percent cap  has been                                                               
reached, there would  be no new increase and  everything would be                                                               
passed on  to the new  guy.  Or,  would $2.30 become  the initial                                                               
rate for the next roll-in, he asked.                                                                                            
MR. BANKS answered  that the $2.30 will remain and  thus the next                                                               
expansion will be incremental.                                                                                                  
COMMISSIONER  GALVIN  clarified  that  it  won't  necessarily  be                                                               
incremental.   He explained that AGIA  is set up to  obligate the                                                               
licensee   to  support   rolled-in  rates   up  to   this  limit.                                                               
Therefore, the licensee  may propose rolled-in rates  for its own                                                               
purposes.   This  provision is  included  with the  understanding                                                               
that the  licensee may  prefer not to  roll-in rates  beyond this                                                               
2:50:17 PM                                                                                                                    
REPRESENTATIVE ROSES surmised  then that this rate  is the tariff                                                               
being paid to ship gas down the line.                                                                                           
COMMISSIONER GALVIN replied yes.                                                                                                
REPRESENTATIVE   ROSES  further   surmised,   "So,  the   initial                                                               
commitment by  the producers to  put 'X'  volume of gas  into the                                                               
line -  they're going to  start off with  this initial rate.   We                                                               
now expand the line because somebody  else has come on with a new                                                               
field.  They can be brought up  to 15 percent more than what they                                                               
originally paid, still  based on the volume that  they had agreed                                                               
to pay."                                                                                                                        
COMMISSIONER GALVIN interjected that  at each expansion, when the                                                               
rate changes,  [the licensee] will  have the opportunity  to opt-                                                               
out of the commitment.                                                                                                          
REPRESENTATIVE ROSES  asked if the  opportunity to opt-out  is in                                                               
the legislation.                                                                                                                
2:51:17 PM                                                                                                                    
MR.  SHEPLER said  that the  opportunity  to opt-out  is part  of                                                               
FERC's  policy.   He  explained  that FERC  requires  that for  a                                                               
pipeline company  that expands, there has  to be an offer  to let                                                               
parties "turn  back" capacity.   There  might not  need to  be an                                                               
expansion at  all if  those holding the  capacity are  willing to                                                               
return it  to the pipeline  to sell it  to those wanting  the new                                                               
2:51:49 PM                                                                                                                    
REPRESENTATIVE ROSES posed  a scenario in which one  of the three                                                               
producers agrees to sell the gas.   However, five years after gas                                                               
flows  down the  line a  new  well is  brought on  and the  three                                                               
original entities are offered the ability  to opt-out.  In such a                                                               
scenario, he questioned what would  stop them from all opting out                                                               
unless  there are  new negotiations  that result  in a  different                                                               
tariff rate.                                                                                                                    
2:52:33 PM                                                                                                                    
CO-CHAIR GATTO pointed  out that just because  there is expansion                                                               
doesn't  mean  that  the  price   increases.    He  reminded  the                                                               
committee that  the price of  a compressor is little  compared to                                                               
the price of the pipeline.   He opined that the initial expansion                                                               
probably lowers the price for everyone.                                                                                         
MR. SHEPLER confirmed the aforementioned.                                                                                       
CO-CHAIR GATTO said that part of expansion is beneficial.                                                                       
2:53:19 PM                                                                                                                    
REPRESENTATIVE  ROSES said  he understood  that, but  pointed out                                                               
the potential in  the legislation for a 15 percent  increase.  He                                                               
related his agreement  that no one would opt-out if  the price is                                                               
lowered.   However,  any increase  in price  could result  in one                                                               
opting out since it would become  a leverage point.  He suggested                                                               
that the concern would be that  once costs are increased there is                                                               
no mechanism  or guarantee that  all three major  producers can't                                                               
pull out unless the state renegotiates.                                                                                         
2:53:51 PM                                                                                                                    
MR. SHEPLER  stated that the turn  back is limited to  the amount                                                               
of the new demand.   He then pointed out that  the FERC policy in                                                               
the Lower 48  from 1960-1999 was for rolled-in  treatment for all                                                               
expansions, even when it increased  existing shippers' rates.  In                                                               
1995, the  aforementioned was somewhat  limited such that  if the                                                               
expansion  had any  system benefits  to all  users and  increased                                                               
shippers'  rates by  5 percent,  rolled-in pricing  was required.                                                               
In  1999  FERC changed  its  policy  saying  that it  created  an                                                               
unlevel playing  field for competing  pipelines.   Therefore, the                                                               
policy in the  Lower 48 switched over to  incremental pricing and                                                               
thus it isn't  a foreign concept in the Lower  48 for an existing                                                               
shipper to face increasing rates as  a result of expansions.  Mr.                                                               
Shepler then  pointed out that  rolled-in rates are  the standard                                                               
operating practice for expansions in Canada.                                                                                    
2:55:54 PM                                                                                                                    
MR. BANKS highlighted  that Canada, at the outset of  its oil and                                                               
gas  industry in  Alberta, was  much  the same  as Alaska  today.                                                               
Initially,  rolled-in  rates  made  it possible  for  the  market                                                               
within Alberta  to expand dramatically.   At the same  time, very                                                               
long  pipelines  were  built across  Canada.    Furthermore,  the                                                               
development of  the gas line  system within Alberta  has resulted                                                               
in  thousands  of producing  fields  and  thousands of  miles  of                                                               
pipeline  serving  those  fields.    As  a  consequence  of  that                                                               
development, one sees the same  access to the marketplace that is                                                               
present in  the Lower  48 where a  fairly competitive  market for                                                               
transportation exists  as a consequence of  Canada's rate-setting                                                               
2:57:39 PM                                                                                                                    
MR.  BANKS,  referring  to  slide   7  regarding  resource  risk,                                                               
explained  that resource  risk pertains  to what  exploration and                                                               
production  companies as  well as  the  state have  to review  in                                                               
terms  of  their  expectations.    Mr.  Banks  then  related  the                                                               
following quote  from Rex  Talston (ph),  ExxonMobil Corporation,                                                               
which  read:   "We're  willing  to  take geological  risk,  we're                                                               
willing  to take  cost risk,  we're willing  to take  price risk.                                                               
But we can't  take fiscal terms changing on us  risk because then                                                               
I can't  calculate the basis  on which  to decide whether  it's a                                                               
good investment or  not."  Mr. Banks indicated that  the state is                                                               
similarly involved in  each of those types of risk.   With regard                                                               
to  geological risk,  the state  has its  own geological  risk to                                                               
address.   The state is  more involved than  ever in the  cost of                                                               
developing  those  risks because  the  state  has assumed  a  net                                                               
profit  tax  system through  the  PPT.   Furthermore,  the  state                                                               
shares in the transportation cost  risk.  He noted that companies                                                               
will  be allowed  to deduct  transportation costs,  including the                                                               
potential  "that  they  may  have to  pay  for  a  'take-for-pay'                                                               
situation."  In  the leases the state is proposing  to make under                                                               
AGIA,  the state  would  assume that  the  actual and  reasonable                                                               
costs,  including   empty  capacity,   should  be   an  allowable                                                               
deduction on the royalties and taxes.   The state will assume the                                                               
same sort of  market risk as the companies and  will evaluate the                                                               
royalties and taxes  based on the prices the  market will deliver                                                               
at any given time.                                                                                                              
MR. BANKS highlighted  that the state faces other  risks as well,                                                               
such as the risk of nonperformance  by the lessee.  He emphasized                                                               
that the state doesn't control  the timing of production from the                                                               
leases.  The  aforementioned is a decision made by  the lessee as                                                               
it  works through  its economics.   Point  Thomson is  an extreme                                                               
example  of how  the  state doesn't  have  control over  inducing                                                               
production on the  state's leases.  Furthermore, the  oil and gas                                                               
business  is generally  risky and  is a  business in  which large                                                               
corporations  participate   daily.     The  reason   these  large                                                               
corporations  can  manage  the  risk   is  because  they  have  a                                                               
portfolio of  activities around the  world.  Mr. Banks  said that                                                               
the  primary reason  the oil  and gas  industry is  an integrated                                                               
industry  is  because it's  a  way  of  managing price  risk  and                                                               
geology due to  the opportunity to develop  high risk:high reward                                                               
prospects balanced  against low  risk:low reward prospects.   The                                                               
state doesn't have  that kind of broad portfolio.   Therefore, in                                                               
a sense the state is faced with a different risk profile.                                                                       
MR. BANKS then  turned to price risk.  He  informed the committee                                                               
that the  price risk has  recently increased  from $4 to  $14 for                                                               
gas in the Lower 48.   The aforementioned is a much greater swing                                                               
than  the state  thought it  could possibly  impose, in  terms of                                                               
changing  the state's  fiscal terms.   He  acknowledged that  the                                                               
lessees have raised this issue  as they are accustomed to dealing                                                               
with much  greater risk in  their business.   He opined  that the                                                               
state  is a  fairly  stable  and patient  regime  with which  the                                                               
lessees can work.                                                                                                               
3:02:47 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG   returned  to  the  PPT   credits  in                                                               
relation to oil versus gas, and requested further explanation.                                                                  
COMMISSIONER  GALVIN   clarified  that  the  PPT   system  is  an                                                               
integrated oil and  gas system.  Therefore,  deductible costs due                                                               
to gas production are deducted  against the PPT payment, which is                                                               
either for oil  and gas tax.   To the extent that  the lessee has                                                               
an allowable deduction,  gas costs could be  deducted against the                                                               
oil production tax  or be a credit if there's  no production tax.                                                               
With  regard  to  what  constitutes  a  deductible  gas  expense,                                                               
Commissioner Galvin  pointed out that  per the  PPT it must  be a                                                               
lease-hold expense.   A  lease-hold expense is  based on  what is                                                               
upstream  of the  point of  production,  which is  where the  gas                                                               
moves out of  the control of the lessee to  a more common system.                                                               
With oil, the aforementioned takes  place either when the product                                                               
moves into a common carrier line or  at TAPS.  With gas, it would                                                               
take  place at  the entrance  of the  gas treatment  plant (GTP).                                                               
The  gas treatment  plant would  be  downstream of  the point  of                                                               
production and  thus wouldn't be  a deductible expense  under the                                                               
PPT.    However,  everything  from   [the  gas  treatment  plant]                                                               
upstream would  be deductible  under the PPT,  both as  a capitol                                                               
expense, the  20 percent,  and as part  of the  ongoing expenses,                                                               
the 22 percent deduction from the [lessees'] revenue.                                                                           
[Co-Chair Gatto passed the gavel to Co-Chair Johnson.]                                                                          
3:06:11 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG   surmised  then   that  all   of  the                                                               
distribution lines would be able to be written off.                                                                             
COMMISSIONER GALVIN answered  that is a potential so  long as the                                                               
distribution lines  are part of a  system short of that  point of                                                               
production.   In further  response to  Representative Guttenberg,                                                               
Commissioner Galvin  said he  wasn't sure  if there  is a  way to                                                               
build in some pre-treatment on  lease.  Potentially, [the lessee]                                                               
could add  additional costs  in that  sector of  development that                                                               
could be deducted under the PPT.                                                                                                
3:07:11 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG asked  if the  regulations on  the PPT                                                               
have been completed.                                                                                                            
COMMISSIONER GALVIN replied no.                                                                                                 
3:07:18 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  inquired  as to  how  the  deductions                                                               
would be written into the tariff.                                                                                               
MR.  SHEPLER,  noting  his  limited  knowledge  of  how  the  PPT                                                               
actually works, said that he can't provide an answer.                                                                           
COMMISSIONER GALVIN  offered to  review the question  and provide                                                               
the committee with an answer.                                                                                                   
3:08:39 PM                                                                                                                    
MR. BANKS,  continuing with slide  9, explained that a  system is                                                               
being created that is a prescription  or a definition of a set of                                                               
terms  for  the  state  and  the applicants  in  the  form  of  a                                                               
contract.    [The  legislation]  lays out  a  set  of  relatively                                                               
general  requirements such  that  the marketplace  is allowed  to                                                               
generate  the  most creative  solutions  to  these issues.    For                                                               
example, overrun  risk will  be balanced  and shared  between the                                                               
pipeline and the  upstream shippers.  The "must  haves" provide a                                                               
framework in AGIA  between the state and the  pipeline owner, the                                                               
lessees  and resource  owners, as  well as  between the  pipeline                                                               
itself  and  the resource  owners  and  those competing  for  the                                                               
application.     Mr.   Banks   highlighted   the  importance   of                                                               
recognizing that  [AGIA] is establishing a  mechanism that levels                                                               
the  playing field  while creating  a  setting in  which all  the                                                               
players  come on  the field.    The "must  haves" accomplish  the                                                               
aforementioned  and  allow the  state  to  achieve some  critical                                                               
values out  of the pipeline  in terms of expansion,  in-state use                                                               
of  gas, jobs,  low tariffs,  et cetera  by bringing  all parties                                                               
together in a  competitive setting.  The  evaluative criteria, he                                                               
said, is intended to establish  the aforementioned by setting out                                                               
a mechanism in  which the state specifies what it  means in terms                                                               
of  potential revenue  for  the state  and  balance that  against                                                               
whether the pipeline applicant can really deliver.                                                                              
[Co-Chair Johnson returned the gavel to Co-Chair Gatto.]                                                                        
3:11:32 PM                                                                                                                    
COMMISSIONER GALVIN turned the committee's  attention to slide 10                                                               
regarding the FERC  process and requested that  Mr. Shepler focus                                                               
on some  aspects of the  FERC process  particular to Alaska.   He                                                               
further  requested discussion  of  the risk  associated with  the                                                               
initial  open  season  and  how  it can  be  shared  between  the                                                               
pipeline company and the initial shippers.                                                                                      
3:12:06 PM                                                                                                                    
MR.  SHEPLER said  that the  FERC process  basically narrows  the                                                               
range of  uncertainty.  The  process begins with the  open season                                                               
that has to be pre-approved by  FERC and which results in binding                                                               
solicitation of  capacity interest and precedent  agreements that                                                               
define termination  conditions.  From there  [an applicant] would                                                               
move  through the  FERC certification  process, which  involves a                                                               
detailed   project  description   with  environmental   research.                                                               
Furthermore,  FERC  must  make  a  finding  on  the  project,  as                                                               
required  by  the  present   public  convenience  and  necessity.                                                               
Unique to Alaska  is that Congress has already  codified that the                                                               
pipeline  is required  by the  public convenience  and necessity.                                                               
In  fact, two  weeks ago  FERC representatives  before the  House                                                               
Special  Committee  on  Oil  and Gas  confirmed  that  from  that                                                               
standpoint, it's a unique pipe.                                                                                                 
3:13:43 PM                                                                                                                    
MR. SHEPLER, referring to slide  11, explained that the rates for                                                               
pipelines  in the  Lower 48  are divided  into the  following two                                                               
categories:  recourse  rates and negotiated rates.   The recourse                                                               
rate is  the default rate,  the cost-based conventional  rate the                                                               
[Regulatory Commission of Alaska] RCA  would establish.  The FERC                                                               
also  allows for  negotiated rates  in which  a willing  buyer of                                                               
capacity  and a  willing seller  of  capacity meet  and agree  on                                                               
price terms  that are agreeable  to both  parties so long  as the                                                               
shipper  has access  to the  default rate.   The  FERC encourages                                                               
parties  in  new projects  and  expansions  to negotiate  between                                                               
themselves  the risks  of cost  overruns.   For  example, on  the                                                               
Rockies Express Pipeline Project  the company offered fixed rates                                                               
for the  full 10-year term of  the contract as a  negotiated rate                                                               
option that  was subject to change  in future rate cases.   Under                                                               
the negotiated  rate if  the pipeline  company overruns  its cost                                                               
estimate, the pipeline company and  its shareholders will have to                                                               
bear the  risks of that cost  overrun.  He noted  that ultimately                                                               
FERC has to approve the negotiated rates.                                                                                       
3:15:54 PM                                                                                                                    
MR.  SHEPLER, in  response to  Representative  Seaton, said  that                                                               
AGIA   contemplates   commercial   activity   structured   around                                                               
commercially reasonable terms.  There  is no state veto, although                                                               
he suggested  that the  state, as  a participant,  could exercise                                                               
its right  to comment on  the setting  of the recourse  rates and                                                               
the negotiated  rates.   In the  context of  a project  like this                                                               
most of the  initial shippers will move  forward under negotiated                                                               
rates as opposed to recourse rates, he opined.                                                                                  
3:17:06 PM                                                                                                                    
REPRESENTATIVE SEATON posed a scenario  in which there is an open                                                               
season and  the producers wait  it out.   In the  meantime, Shell                                                               
comes forward  and bids for the  gas.  In such  a situation, what                                                               
is the state's position, he asked.                                                                                              
COMMISSIONER  GALVIN,  referring  to  slide 12,  said  that  AGIA                                                               
provides applicants  multiple opportunities  to participate.   He                                                               
opined that  a scenario  in which  a pipeline  is proposed  and a                                                               
company is  willing to  commit its  gas to the  line even  in the                                                               
face of incurring  significant development costs in  order to get                                                               
the gas  into the line  begs the question  as to why  the state's                                                               
lessee  wouldn't be  willing to  put gas  in the  line when  they                                                               
wouldn't  have  to  incur  the   same  development  costs.    The                                                               
aforementioned  doesn't  seem  to  be a  realistic  scenario,  he                                                               
opined.   He  highlighted that  the explorers  would have  a much                                                               
higher hurdle to commercialize the  producers' gas than would the                                                               
producers.  Therefore,  it doesn't seem likely that  a line would                                                               
be filled with  OCS [outer continental shelf] gas  as the initial                                                               
product.      He   reiterated   that   AGIA   provides   multiple                                                               
opportunities for  the producers,  in particular,  to participate                                                               
as  well as  to  the  third party  pipeline  companies and  other                                                               
entities  during the  initial inducement.   At  the point  of the                                                               
open season, there  is again an opportunity for  the producers to                                                               
participate by committing  their gas to the line.   Explorers and                                                               
gas purchasers  may decide to  participate at this time  as well.                                                               
He said that AGIA is  structured so that the various participants                                                               
see opportunities at  various stages and make a  decision to move                                                               
the project ahead.                                                                                                              
3:21:24 PM                                                                                                                    
COMMISSIONER GALVIN opined  that as the state  moves through this                                                               
process and  the unknowns are  eliminated and the  actual project                                                               
is  identified, the  project will  be clearer  than it  is today.                                                               
However, he  acknowledged that there  may still be some  level of                                                               
uncertainty  with  some aspects  of  the  project.   Through  the                                                               
negotiated ratemaking  some of that uncertainty  can be mitigated                                                               
between the pipeline and the shippers,  although it may not be at                                                               
the point of obtaining the  necessary commitment.  Therefore, the                                                               
administration feels  strongly that the state  should obtain from                                                               
the licensee a commitment from the  outset that it won't use that                                                               
as a sign  of failure and that the licensee  will move forward if                                                               
it's an economic  project.  Otherwise under the terms  of AGIA it                                                               
would have  been dropped along  the process.  With  a significant                                                               
amount  of  confidence,  Commissioner   Galvin  opined  that  the                                                               
producers in this process will  recognize the opportunity at each                                                               
step  of the  process and  determine  it's in  their interest  to                                                               
3:24:26 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG recalled  that  the  2005 FERC  ruling                                                               
includes a  section for  an in-state demand  study and  a section                                                               
regarding   methodology  of   determining  value   of  bids   for                                                               
deliveries in  the state.   He asked  if those sections  would be                                                               
appropriate in AGIA.                                                                                                            
MR. SHEPLER clarified  that the 2005 FERC ruling  requires that a                                                               
"FERC-compliant open season"  must have been preceded  by the in-                                                               
state study and requires  distance-sensitive rates for deliveries                                                               
in Alaska, as  does AGIA.  The aforementioned is  already part of                                                               
the federal  requirements.   He said he  didn't know  whether the                                                               
aforementioned  should   be  part  of  the   AGIA  "must  haves."                                                               
However, the  AGIA requirement for  distance sensitive  rates for                                                               
in-state deliveries is  the real concern for Alaskans  as well as                                                               
the instant delivery points.                                                                                                    
3:26:18 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  opined that  it would  be advantageous                                                               
to Alaska  to do so  sooner through  AGIA rather than  during the                                                               
FERC process.                                                                                                                   
COMMISSIONER GALVIN related his  belief that the in-state demands                                                               
study has  to be  done prior  to the open  season under  the FERC                                                               
rules.    Therefore, it  wouldn't  be  at  the  very end  of  the                                                               
process.   Commissioner Galvin  opined that  [the administration]                                                               
clearly recognizes  that meeting in-state demand  is an important                                                               
part  of the  natural  gas  pipeline policy  as  a  state.   [The                                                               
administration]  further recognizes  that the  pipeline needs  to                                                               
move forward as quickly as  possible and have the opportunity for                                                               
in-state demand  to catch up  to the  initial open season.   More                                                               
significantly, in-state  demand is likely  to be met  through the                                                               
expansion  and  opportunities  for   future  expansion  and  open                                                               
seasons for  in-state use,  he said.   He  opined that  when [the                                                               
administration] reviewed how to meet  in-state demand in AGIA the                                                               
focus  was on  long-term issues.   He  mentioned that  the Alaska                                                               
Natural  Gas  Development  Authority (ANGDA)  has  done  in-state                                                               
studies and  have expressed concern  with regard to the  level to                                                               
which the state  will be ready to participate in  an initial open                                                               
season.  He  mentioned that the House version of  AGIA includes a                                                               
gasification revolving  loan program.   At  some point,  one must                                                               
decide  where the  initial priorities  lay  in order  to get  the                                                               
project moving  and an initial  open season.   "We don't  want to                                                               
necessarily  have  that  slow  down  because of  a  need  for  an                                                               
additional study ...  that's not going to  actually meet in-state                                                               
demand in a  timely manner," he opined.  However,  he opined that                                                               
it's  worth  reviewing  in  terms   of  where  the  state  stands                                                               
regarding how to meet both goals.                                                                                               
3:29:46 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG reminded  members that  he lives  in a                                                               
town that  has an  oil pipeline,  a refinery,  and where  he pays                                                               
high  national   averages  for  petroleum  products.     He  then                                                               
commented that it's in the state's  best interest to plan to have                                                               
optimal use of a gas pipeline throughout the state.                                                                             
CO-CHAIR GATTO interjected  that once a gas pipeline  is in place                                                               
several things will follow, such  as serving villages and propane                                                               
3:30:33 PM                                                                                                                    
REPRESENTATIVE   SEATON  recalled   that   yesterday  there   was                                                               
discussion  about  carbon  dioxide  as  an  evaluation  criteria,                                                               
although there has been no mention of it today.                                                                                 
COMMISSIONER  GALVIN confirmed  that the  state is  interested in                                                               
working with the  committee to address that issue.   Therefore, a                                                               
number  of different  ways to  address it  are being  reviewed in                                                               
terms of what language may or  may not be necessary to include in                                                               
the  legislation.   The  desire,  he  opined,  is to  achieve  an                                                               
environmentally friendly project.                                                                                               
3:31:43 PM                                                                                                                    
REPRESENTATIVE  SEATON,  referring  to  Chevron's  annual  report                                                               
regarding its  management of energy,  directed attention  to page                                                               
10, which  relates that Chevron has  installed California's first                                                               
mega-watt class hydrogen fuel cell co-generation plant.                                                                         
MR.  BANKS  related  his understanding  that  the  aforementioned                                                               
plant uses methane.                                                                                                             
REPRESENTATIVE SEATON confirmed that it  does.  He said, "As long                                                               
as  you're not  releasing methane  or  fugitive CO,  that's  what                                                               
we're trying to get at is so that  we're not looking at a cap and                                                               
trade  or something  that could  impact negatively  the pipeline.                                                               
So, it's  an interesting  thing if we  have fuel  cell technology                                                               
that doesn't release methane, that  actually uses methane for the                                                               
hydrogen source.   But as long as  we're not releasing CO  that's                                                               
... the whole  purpose of getting around  addressing this somehow                                                               
in a criteria."                                                                                                                 
CO-CHAIR  GATTO pointed  out  that there  is  CO  that  is a  raw                                                               
material and there's COthat is created.                                                                                         
3:33:51 PM                                                                                                                    
COMMISSIONER GALVIN,  drawing the committee's attention  to slide                                                               
13,  reiterated that  AGIA sets  up a  commercial vehicle  geared                                                               
toward leveling  the playing field  and having  competition along                                                               
with a transparent process.   Furthermore, AGIA meets the state's                                                               
needs,  which are  geared toward  expansion and  low costs.   The                                                               
commercial interests  in the project  are used to try  to resolve                                                               
some  of   the  issues  the   state  faces  with   this  project.                                                               
Commissioner  Galvin  restated  his earlier  comments  that  AGIA                                                               
provides  an opportunity  for participants  to enter  the process                                                               
and  receive  state inducements  for  something  in return.    He                                                               
highlighted that any  project can move forward  without any state                                                               
participation  and  AGIA  doesn't  preclude  the  aforementioned.                                                               
Still, the  administration believes  that AGIA provides  the best                                                               
mechanism for  the state  to participate in  the project  so that                                                               
ultimately  there  is  the greatest  likelihood  of  the  project                                                               
moving forward in  a timely manner with terms  that are favorable                                                               
to the state's long-term future.                                                                                                
3:35:33 PM                                                                                                                    
CO-CHAIR  JOHNSON  asked if  there  can  be  a rolled-in  and  an                                                               
incremental rate request.   He clarified that he  was thinking of                                                               
Shell  from which  no  tariffs or  oil taxes  are  received.   He                                                               
questioned  whether the  state  can  treat companies  differently                                                               
during an expansion based on  whether there's a rolled-in rate or                                                               
an incremental rate.                                                                                                            
MR. SHEPLER  said that technically  a partial rolled-in  rate and                                                               
an incremental  rate can be used.   However, he pointed  out that                                                               
it's a  policy call.  He  noted that ultimately FERC  will review                                                               
the project in  terms of consumers in the Lower  48 and the other                                                               
shippers on  the system.   Therefore, he surmised that  FERC will                                                               
follow  its   policy  of  favoring  rolled-in   pricing  for  any                                                               
expansion, regardless  of whether it benefits  the state directly                                                               
or not.                                                                                                                         
[HB 177 was held over.]                                                                                                         

Document Name Date/Time Subjects