Legislature(2013 - 2014)BARNES 124

03/27/2014 04:30 PM RESOURCES

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04:38:43 PM Start
04:39:19 PM SB138
07:03:02 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time & Date Change --
Heard & Held
-- Testimony <Invitation Only> --
+ LB&A Consultant: Roger Marks TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
4:39:19 PM                                                                                                                    
CO-CHAIR FEIGE  announced that the  only order of business  is CS                                                               
FOR  SENATE  BILL  NO.  138(FIN)  am, "An  Act  relating  to  the                                                               
purposes, powers,  and duties of  the Alaska  Gasline Development                                                               
Corporation;  relating to  an in-state  natural gas  pipeline, an                                                               
Alaska  liquefied  natural  gas project,  and  associated  funds;                                                               
requiring state  agencies and other entities  to expedite reviews                                                               
and  actions  related  to natural  gas  pipelines  and  projects;                                                               
relating to  the authorities  and duties  of the  commissioner of                                                               
natural resources relating to a  North Slope natural gas project,                                                               
oil and  gas and gas only  leases, and royalty gas  and other gas                                                               
received by the  state including gas received as  payment for the                                                               
production  tax on  gas;  relating  to the  tax  on  oil and  gas                                                               
production, on  oil production, and  on gas  production; relating                                                               
to the duties of the commissioner  of revenue relating to a North                                                               
Slope natural  gas project and  gas received as payment  for tax;                                                               
relating to confidential information  and public record status of                                                               
information provided  to or in  the custody of the  Department of                                                               
Natural  Resources and  the Department  of  Revenue; relating  to                                                               
apportionment factors of the Alaska  Net Income Tax Act; amending                                                               
the definition  of gross value  at the 'point of  production' for                                                               
gas for  purposes of the  oil and gas production  tax; clarifying                                                               
that the  exploration incentive credit,  the oil or  gas producer                                                               
education credit, and  the film production tax credit  may not be                                                               
taken against  the gas  production tax paid  in gas;  relating to                                                               
the  oil  or  gas  producer   education  credit;  requesting  the                                                               
governor to  establish an  interim advisory  board to  advise the                                                               
governor on  municipal involvement in  a North Slope  natural gas                                                               
project;  relating to  the development  of a  plan by  the Alaska                                                               
Energy  Authority   for  developing  infrastructure   to  deliver                                                               
affordable  energy to  areas  of  the state  that  will not  have                                                               
direct  access  to a  North  Slope  natural  gas pipeline  and  a                                                               
recommendation  of a  funding  source  for energy  infrastructure                                                               
development;  establishing  the  Alaska affordable  energy  fund;                                                               
requiring  the commissioner  of  revenue to  develop  a plan  and                                                               
suggest  legislation for  municipalities, regional  corporations,                                                               
and residents  of the state  to acquire ownership interests  in a                                                               
North  Slope  natural  gas pipeline  project;  making  conforming                                                               
amendments; and providing for an effective date."                                                                               
4:39:36 PM                                                                                                                    
ROGER   MARKS,  Petroleum   Economist,  Contract   Consultant  to                                                               
Legislative  Budget and  Audit Committee,  provided a  PowerPoint                                                               
presentation titled  "Evaluation of SB 138  & Associated Proposed                                                               
North  Slope  Natural  Gas   Commercialization  Proposals."    He                                                               
offered a brief  personal background, slide 2,  reporting that he                                                               
has  been   in  private   consulting  practice   specializing  in                                                               
petroleum economics and taxation in  Anchorage since 2008.  Prior                                                               
to that, he  was as a senior petroleum  economist with Department                                                               
of  Revenue,   Tax  Division,   monitoring  the   feasibility  of                                                               
commercializing North  Slope gas,  and was a  petroleum economist                                                               
with the U.  S. Geological Survey.  Currently,  he is continually                                                               
assessing the  feasibility of  the North Slope  gas project.   As                                                               
consultant to the Legislative Budget  and Audit Committee, he has                                                               
submitted  a   report  to  the   committee  similar   to  today's                                                               
presentation, which includes the latest "lay of the land."                                                                      
MR. MARKS said  the administration has put  together a thoughtful                                                               
plan that  could lead  to a  successful project,  and he  will be                                                               
offering  some   observations,  questions,  and  options   to  be                                                               
considered.  He introduced slide  3, "Outline," and discussed the                                                               
pieces of his presentation:   introduction, high-level decisions,                                                               
role  of  Alaska  Gasline Inducement  Act  (AGIA),  and  taxation                                                               
provisions of CSSB 138(FIN) am.                                                                                                 
MR. MARKS offered slide 4,  "1. Introduction: Market Challenges,"                                                               
saying he believes the proposed  project is far from certain, and                                                               
three  big challenges  will be  the competition,  the pricing  of                                                               
natural gas in  Asia, and the burden of the  size of the project.                                                               
He pointed  out that about 24  countries in the world  are either                                                               
exporting, or  preparing to export,  liquefied natural  gas (LNG)                                                               
with an  eye on the  Asian market.   Also, Iranian gas,  which is                                                               
currently  embargoed, is  a potential  competitor in  the market.                                                               
He reported that 30 percent  of the nuclear electricity supply in                                                               
Japan has  been moved  to gas after  the nuclear  plant disaster,                                                               
although  the  Japanese  government  has  expressed  interest  in                                                               
moving back  to nuclear  power given the  concern in  Japan about                                                               
increasing greenhouse gas  emissions.  China, he  continued, is a                                                               
"big wild card."                                                                                                                
4:45:08 PM                                                                                                                    
MR. MARKS explained that most  of the consensus forecast for Asia                                                               
between now  and 2030 is  for twice as  much supply as  demand in                                                               
Asia, so there is  a lot of competition.  He  said the pricing of                                                               
LNG  linked  to oil  is  falling  as  Asian buyers  realize  that                                                               
producers are making a windfall  profit, and there is now greater                                                               
competition.   Although the average  prices are still  high, they                                                               
reflect old  contracts which have been  in place for a  long time                                                               
under old  provisions.  Newer  prices are much lower  and because                                                               
new prices  are going to  be based on cost,  Alaska will be  at a                                                               
disadvantage.    He  reported that  recent  projections  by  Rice                                                               
University  are for  LNG  in Asia  to be  about  $10 per  million                                                               
British  Thermal Units  (BTUs), which  is  "not that  good."   He                                                               
suggested that  the cost estimates  for the Alaska  pipeline have                                                               
probably increased, and  that other projects around  the world do                                                               
not face the same challenges as  an 800 mile pipeline through the                                                               
Arctic.  A  lot of gas must  go through the pipeline  to keep the                                                               
costs down, and  this creates a marketing burden  for capturing a                                                               
large incremental share of the Asian  market in a short amount of                                                               
time.  A partially empty pipeline  has bad effects on the rate of                                                               
return.   A full pipeline  will capture  about 30 percent  of the                                                               
annual  incremental Asian  market, which  is "a  pretty ambitious                                                               
task."   Alaska has a much  higher break-even price than  much of                                                               
the competition.                                                                                                                
MR. MARKS  discussed slide 5,  "New LNG Projects  are Expensive,"                                                               
by  PFC  Energy,  which  shows  the  break-even  prices  for  gas                                                               
projects around  the world  as ranging  from $8-$13  [per million                                                               
BTUs], whereas his estimate for Alaska is $11-$17.                                                                              
4:49:19 PM                                                                                                                    
REPRESENTATIVE KAWASAKI,  referencing slide 5, asked  whether the                                                               
break-even rate is calculated on the size of the project.                                                                       
MR. MARKS replied  it is based on the current  project cost range                                                               
of $45-$65  billion, and a  range of hurdle rates  between $8-$12                                                               
all based  on the current tax  proposal for the state  taking its                                                               
gas in-kind.                                                                                                                    
REPRESENTATIVE  KAWASAKI, referencing  slide 4,  asked about  the                                                               
prices falling to about $6.                                                                                                     
MR. MARKS replied Russia has sold LNG for as low as $6 to Korea.                                                                
CO-CHAIR  SADDLER  requested  clarification  regarding  the  high                                                               
range of break-even in Alaska.                                                                                                  
MR. MARKS explained it depends on  whether it is "$45 or $65" and                                                               
whether the hurdle  rate is 8 percent or 12  percent; however, he                                                               
said,  he does  not know  what hurdle  rates were  used by  other                                                               
4:51:09 PM                                                                                                                    
MR. MARKS  turned attention to  slide 6, "Timing Landscape."   He                                                               
said the State  of Alaska needs the project as  soon as possible,                                                               
and  it has  been received  with a  certain amount  of "momentum"                                                               
according to  the administration.  He  related the administration                                                               
is emphasizing the momentum with  a present value of $800 million                                                               
for every year  the project is delayed.  He  reflected on present                                                               
value and whether  there is relevant context  for the discussion.                                                               
Present  value means  the time  value  of money  and its  current                                                               
worth compared to  that worth in the future.   Moving to slide 7,                                                               
"How  Present Value  is  Calculated," he  referred  to the  chart                                                               
which  depicts the  nominal flow  of $1  million annually  with a                                                               
discount factor  of 7  percent, and  the loss  of value  for each                                                               
subsequent year, for  a preset value in 2048 of  $13,854,009.  He                                                               
said  the  discount  factors  get   lower  and  lower  with  each                                                               
subsequent  year  and  nothing  that happens  after  10-15  years                                                               
matters very much, so  he is unsure that this is  the best way to                                                               
look at this project in terms of looking at its timing.                                                                         
MR. MARKS returned attention to  slide 6, noting the proposed gas                                                               
project is for  the benefit of the next  generations of Alaskans.                                                               
The concern  Alaskans will  have in  20 years  will be  about how                                                               
much gas revenue the state is  receiving and its use in the homes                                                               
and businesses of  Alaskans.  He pointed to  current gas billings                                                               
which include  the price of the  gas, the price of  the pipeline,                                                               
and its  capital terms.   He suggested that better  capital terms                                                               
could annually  save Alaskans money:   in 20 years  Alaskans will                                                               
be  less  concerned  whether  the   present  value  in  2014  was                                                               
maximized and  more concerned with  the gas revenue and  its cost                                                               
to Alaskans.   He suggested  that an  option for a  modified deal                                                               
starting a little  later could create more  long-term benefits to                                                               
the state for  higher revenues and lower priced  gas to Alaskans.                                                               
He allowed that it is important  to find cheaper heating fuel for                                                               
Fairbanks and  rural Alaska,  but that present  value may  not be                                                               
the way  to look at  this.  He said  there is not  any short-term                                                               
window of  opportunity, as  the demand in  Asia will  continue to                                                               
grow.   Some aspects could  proceed while  different arrangements                                                               
are  made, some  legislation could  be passed  to give  producers                                                               
direction,  and producers  could  begin the  process without  the                                                               
state; the  process could continue  even while the  state reviews                                                               
some options that take time.                                                                                                    
4:57:50 PM                                                                                                                    
MR. MARKS  drew attention  to slide 8,  "2. High  Level Decisions                                                               
under Proposal."   He  said that the  three high  level decisions                                                               
for the state are to take  its production taxes and royalties in-                                                               
kind;   not  to   regulate  tariffs   and  expansions;   and  for                                                               
TransCanada,   and  perhaps   the  State   of  Alaska,   to  have                                                               
partnership for  the pipeline and  gas treatment plant  (GTP) and                                                               
for  Alaska to  own  the  LNG facilities.    He  opined that  the                                                               
administration has  designed the project "to  amicably transition                                                               
out of AGIA."                                                                                                                   
MR. MARKS, referencing  slide 9, "A. In-Kind Gas,"  said there is                                                               
a very  compelling reason  for the  state to  take its  taxes and                                                               
royalties in-kind,  as this considerably  helps the  economics of                                                               
the project for the producers and  sponsors.  Moving to slide 10,                                                               
he explained  that the  producers would pay  the state  its taxes                                                               
and  royalties  in-value  an  amount   of  money  equal  to  that                                                               
percentage of the gas.  Under  this system, the producers pay for                                                               
the capacity  in the pipeline  and slowly  get it back  over time                                                               
with the tariff  deduction.  Once the pipeline  is constructed it                                                               
cannot  be cancelled,  he  said, and  this is  the  owner of  the                                                               
pipeline's problem.   Under the current proposal,  when the state                                                               
takes its taxes as in-kind gas,  the state takes on the long-term                                                               
firm  transportation liability,  as  well as  other  risks.   The                                                               
state  will pay  to  ship  the gas,  no  matter  where, and  this                                                               
includes the capital  charges:  depreciation, return  on debt and                                                               
equity, and income taxes.  The  state will also incur a long-term                                                               
liability  for the  firm transportation  capacity, and  then this                                                               
liability becomes  an asset to the  owner of the pipeline,  as it                                                               
is a  25 percent reduction  in the  capital cost of  the pipeline                                                               
for the project  sponsors.  Mr. Marks said he  calculates this 25                                                               
percent reduction to be worth about $1-$2 in reducing the break-                                                                
even  price, and  about 1-2  percent for  increasing the  rate of                                                               
return.  The state does not need  to own the pipeline to take the                                                               
gas  in-kind, as  it is  much  more important  to the  producers'                                                               
economics.  He noted that, should the state take its gas in-                                                                    
kind, it  must market the  gas; whereas under the  current system                                                               
of receiving  gas in-value, the  state has the  marketing support                                                               
of the  producers.   In-kind could  create a  competition between                                                               
the  state and  the  producers  for marketing  of  the  gas.   He                                                               
pointed  out  that the  Heads  of  Agreement  has an  option  for                                                               
negotiation of agreement  to purchase and dispose  of the state's                                                               
gas.   He suggested that  the proposed bill  "beef that up."   In                                                               
exchange  for the  state taking  the gas  in-kind, the  producers                                                               
could agree  to market the state's  gas along with their  gas for                                                               
the same price.  He reported  that the in-value system offers the                                                               
state  a  better  opportunity  to  understand  the  market.    He                                                               
reminded the  committee that anything  in statute has  more clout                                                               
than any negotiations.                                                                                                          
MR. MARKS  turned to slide  11, "B. Regulation," saying  that the                                                               
proposal under the  Heads of Agreement is for  the Federal Energy                                                               
Regulatory  Commission  (FERC)  to regulate  the  pipeline  under                                                               
Section  3 of  the  Natural  Gas Act.    This  section is  mainly                                                               
designed for  licensing the siting, construction,  expansion, and                                                               
operation of  the LNG  import and  export terminals,  which would                                                               
also  include the  pipeline and  the treatment  plant because  it                                                               
includes facilities used to transport and process gas.                                                                          
5:04:38 PM                                                                                                                    
CO-CHAIR SADDLER  requested clarification  in regard to  the FERC                                                               
regulation regulating the entire pipeline.                                                                                      
MR. MARKS replied that the  definition for terminals in Section 3                                                               
includes  facilities to  transport  or process  gas, which  would                                                               
include the pipeline and the treatment plant.                                                                                   
CO-CHAIR SADDLER asked whether there  are any other similar FERC-                                                               
regulated pipelines.                                                                                                            
MR. MARKS answered that Oregon  LNG had applied for an interstate                                                               
FERC permit  to take gas out  of Washington and export  it out of                                                               
Oregon.   He said  he did  not know of  any active  LNG terminals                                                               
under  these parameters.   He  suggested  it would  be useful  to                                                               
consult with FERC as this is a lynchpin  to much of the plan.  He                                                               
noted that  the pipeline, the  terminal, and the  treatment plant                                                               
would not be  a common or contract carrier, but  would instead be                                                               
four separate industrial feed lines  for the three companies from                                                               
the  North  Slope to  Japan.    Hence,  there  would not  be  any                                                               
regulation of  tariff or expansion,  although state  ownership of                                                               
the pipeline would be necessary.                                                                                                
5:08:12 PM                                                                                                                    
MR.  MARKS  offered an  example  for  the expansion  of  in-state                                                               
needs, slide  12, "Example."   He posed  a scenario in  which the                                                               
pipeline has  an initial  disposition of  2.4 billion  cubic feet                                                               
per  day, with  the state  receiving 25  percent, or  0.6 billion                                                               
cubic feet  per day.  He  suggested that a need  for in-state gas                                                               
that is not  being received could be considered  with a provision                                                               
to the producers  to include any necessary  increase for in-state                                                               
gas.  He discussed another  regulatory issue for the producer gas                                                               
getting to  the consumers.  There  is an issue for  maintaining a                                                               
transparency for  the netback price  to the  value of the  gas on                                                               
the  North Slope,  which would  be covered  with regulation.   He                                                               
suggested a provision  in the statute which says  that gas bought                                                               
by the state from the producers would be reasonably priced.                                                                     
MR. MARKS referred  back to regulations on slide  11, and offered                                                               
an alternative for  the Regulatory Commission of  Alaska (RCA) to                                                               
regulate  in-state  and  export   pipeline  gas  treatment  under                                                               
AS 42.08.   He recognized  that regulation  is burdensome  to the                                                               
producers, but  said it is  the trade-off for a  natural monopoly                                                               
with the pipeline right of way.   The public gives away the right                                                               
of way in exchange for regulation.   He said treatment plants and                                                               
LNG facilities are not regulated in  the same way, as there could                                                               
be multiple  facilities.  He  suggested that  market efficiencies                                                               
could be  enhanced with a transparent  pipeline cost.  He  said a                                                               
very efficient market  system is currently in place  to deal with                                                               
oil sales  on the  North Slope,  as most  of the  small producers                                                               
sell  their oil  to the  producers that  own the  pipeline.   The                                                               
Trans-Alaska  Pipeline  System  (TAPS)  tariff  is  available  to                                                               
determine a reasonable  wellhead price.  In this  situation, if a                                                               
small  producer finds  gas, but  does not  want to  build an  LNG                                                               
facility,  it  could  make  sense   to  sell  to  the  producers,                                                               
especially  as the  throughput starts  to decline.   It  would be                                                               
necessary to have transparency to avoid any monopoly controls.                                                                  
MR.  MARKS  moved  to  slide  13,  "Ownership  and  Partnership,"                                                               
pointing out  that the state would  own a part of  the facilities                                                               
commensurate  with  its share  of  the  gas, currently  about  25                                                               
percent.   It is  proposed for TransCanada  to own  the treatment                                                               
plant, with the state having an  option to purchase 40 percent of                                                               
this.   The state ownership  allows for no regulation  on tariffs                                                               
and expansion,  and there  would be  lower tariffs  through lower                                                               
cost of capital.  He offered  two reasons for the state's need of                                                               
partnership:   help with cash  flow and expertise.   He suggested                                                               
the  state does  not need  a  partner for  expertise because  the                                                               
producers would  be guiding  the project  and the  Alaska Gasline                                                               
Development Corporation (AGDC) could  offer expertise as it would                                                               
own 100  percent of  the state's share  and could  hire technical                                                               
expertise.    He pointed  to  the  earlier stand-alone  pipeline,                                                               
which had been planned to move forward without partners.                                                                        
5:17:28 PM                                                                                                                    
CO-CHAIR  SADDLER   asked  whether   the  state  money   paid  to                                                               
TransCanada was to develop expertise or necessary information.                                                                  
MR. MARKS clarified the state has paid $400 million to AGDC.                                                                    
MR. MARKS  questioned TransCanada's expertise for  gas treatment,                                                               
and suggested  asking them.  He  noted that in the  original AGIA                                                               
agreement,  TransCanada   had  declined  to  do   gas  treatment,                                                               
although the state had encouraged TransCanada to hire an expert.                                                                
REPRESENTATIVE HAWKER, regarding TransCanada  and the sequence of                                                               
transactions  as proposed  to the  legislature, inquired  whether                                                               
Mr. Marks is talking about upstream gas treatment or the LNG.                                                                   
MR. MARKS replied the upstream gas treatment.                                                                                   
5:19:11 PM                                                                                                                    
MR. MARKS continued his discussion  of slide 13, noting the state                                                               
does  not need  a  partner for  expertise, but  may  need a  cash                                                               
partner.   Thus, he said, the  state does not necessarily  need a                                                               
pipeline  company  for  a  partnership,   but  rather  a  general                                                               
investment  partner, of  which there  is  no shortage  as far  as                                                               
large investment banks  or private equity firms  that could serve                                                               
that function.                                                                                                                  
MR. MARKS  moved to slide 14  to address the question  of whether                                                               
the state  needs a  cash partner.   He suggested  "possibly not."                                                               
When  AGDC was  preparing its  financing plan  in 2011,  it hired                                                               
Citigroup,  the third  largest commercial  bank in  the U.S.,  to                                                               
advise them.  Citigroup discussed  the possibility of 100 percent                                                               
debt financing through  a combination of revenue  bonds and state                                                               
backing.   He  offered  his belief  that  the currently  proposed                                                               
[Alaska LNG Project] is less  risky than AGDC's $8 billion stand-                                                               
alone bullet project  that is without a partner.   He pointed out                                                               
that  the three  large  oil producers  are  participating in  the                                                               
[Alaska  LNG Project]  and  there are  much  larger gas  revenues                                                               
involved than in the stand-alone line.   He said 100 percent debt                                                               
financing would offer  the possibility for deferral  of most cash                                                               
flow  until  gas  starts  flowing,  given  that  the  payment  of                                                               
interest  during construction  is something  that is  negotiable.                                                               
This could have a short-term  impact on the state's credit rating                                                               
during  the  five-year construction  period,  but  that would  be                                                               
reversed once gas revenue starts coming in.                                                                                     
5:21:54 PM                                                                                                                    
MR. MARKS returned  to slide 10 to continue  discussing the issue                                                               
of  whether the  state  needs a  cash partner  and  the issue  of                                                               
limits on the state debt capacity.   He reiterated that under the                                                               
[Alaska LNG  Project] proposal  "when the  state takes  its taxes                                                               
and royalties as in-kind gas, the  state will take on a long-term                                                               
firm  transportation liability  to  TransCanada  for the  state's                                                               
share of the pipeline and gas  treatment plant."  Moving to slide                                                               
15, he said  "it has been suggested that there  are limits on how                                                               
much the  state can finance to  own the whole 25  percent because                                                               
of limits  on its debt  capacity."   Continuing, he said  "if the                                                               
state is taking its taxes and  royalties in-kind, for any part of                                                               
the project the  state does not own  it will have to  make a firm                                                               
transportation commitment  on that capacity, and  this commitment                                                               
is a  long-term liability, it is  a debt."  He  detailed that the                                                               
firm transportation commitment is ship  or pay, so no matter what                                                               
the cost of the line, or  what happens to the market or reserves,                                                               
the  state "is  on  the hook  for the  ship  or pay  commitment."                                                               
These firm  transportation commitments  are used by  the pipeline                                                               
company  as collateral  for financing,  and the  pipeline company                                                               
has priority  claims on the project  cash flows.  He  pointed out                                                               
that this  debt will have no  different impact on the  state debt                                                               
capacity  than  debt   used  to  finance  ownership.     So,  put                                                               
succinctly, there  are two  ways to  borrow money  with identical                                                               
obligations  to  repay  and  therefore  the  same  loss  of  debt                                                               
capacity:  the traditional note  for cash or signing an agreement                                                               
whereby the cash is given to the  creditor.  Debt is debt, and it                                                               
cannot  be  avoided by  having  someone  else  assume it  on  the                                                               
state's behalf.   He said he does  not know what the  limit is on                                                               
the state's debt capacity, but if  it is similar to what has been                                                               
described as why  the state cannot do ownership on  its own, this                                                               
would  also  preclude  the  state   from  taking  its  taxes  and                                                               
royalties in-kind.                                                                                                              
5:24:13 PM                                                                                                                    
MR. MARKS,  in response to Representative  Seaton, explained that                                                               
in previous  testimony the administration provided  three reasons                                                               
for  why the  state needs  a partner:   for  expertise; for  cash                                                               
because  of the  state's cash  flow;  and because,  if the  state                                                               
wants  to own  25  percent  of the  pipeline  under  any kind  of                                                               
debt/equity ratio, the  state cannot afford it  above a certainty                                                               
point because there is a limit on the state's debt capacity.                                                                    
CO-CHAIR  FEIGE  inquired  whether  Mr.  Marks  is  referring  to                                                               
testimony  before the  committee by  Commissioner Rodell  [of the                                                               
Department of  Revenue (DOR)].   He recalled  Commissioner Rodell                                                               
testifying it was  not necessarily a firm ceiling,  but the state                                                               
is somewhat limited  by a rule of thumb to  keep the debt service                                                               
down to 8 percent or less of the operating budget.                                                                              
MR. MARKS confirmed this is what he is referring to.                                                                            
MR.  MARKS, continuing  his  response  to Representative  Seaton,                                                               
related the administration made  the representation that, because                                                               
of this  limit on  the state's  debt ceiling,  the state  needs a                                                               
partner.   He pointed out  that a firm  transportation commitment                                                               
to TransCanada  is an equal  amount of  debt as owning  the whole                                                               
line and,  given that debt is  debt, it will have  the exact same                                                               
impact as  a debt  limit.   It would also  mean the  state cannot                                                               
take  the gas  in-kind because  the liability  incurred would  be                                                               
exactly the same as the state  owning 25 percent of the pipeline.                                                               
He  recalled his  and former  [DOR] Commissioner  Wilson Condon's                                                               
conversations several  years ago  with Moody's  Investors Service                                                               
in  which  Moody's  said  there  is no  question  that  the  firm                                                               
transportation commitment  is debt with  the same effect  on debt                                                               
capacity as any other debt.                                                                                                     
5:27:09 PM                                                                                                                    
MR.  MARKS, in  response  to Co-Chair  Saddler,  confirmed he  is                                                               
saying that firm  transportation commitment is the  same thing as                                                               
debt and  is accounted  as such  by credit  rating agencies.   To                                                               
explain further he  presented a scenario where the  state did not                                                               
have a  partner and financed  100 percent  debt for a  25 percent                                                               
ownership.  He  referred to the earlier testimony  that this much                                                               
debt exceeded  creditors comfort in  terms of the  state's credit                                                               
rating.  He offered a second  scenario with state ownership of 10                                                               
percent  and TransCanada  ownership  of 15  percent  of the  same                                                               
proposed project.   He relayed  that a state  firm transportation                                                               
commitment  to TransCanada  for the  15 percent  would carry  the                                                               
same amount of debt as ownership for the entire 25 percent.                                                                     
MR. MARKS,  in response to Representative  Seaton, confirmed that                                                               
should the state take the  royalty and tax in-kind, the long-term                                                               
shipping commitment would be considered  a debt for the amount of                                                               
gas taken in-kind, as it would have to be shipped.                                                                              
5:29:48 PM                                                                                                                    
MR. MARKS returned attention to  slide 14, noting the possibility                                                               
for  tax exempt  bonds through  the Alaska  Railroad Corporation.                                                               
He  said  legislation  in  1983 had  given  the  Alaska  Railroad                                                               
Corporation the ability  to incur tax exempt  debt for industrial                                                               
development  projects,  and  it  has  been  suggested  that  this                                                               
privilege could  be used  to finance the  gas pipeline.   Goldman                                                               
Sachs, Merrill Lynch,  and U.S. Senator Ted  Stevens had believed                                                               
that  this was  the case.   He  explained it  requires a  private                                                               
letter  ruling from  the IRS,  and necessitates  legal arguments.                                                               
Doing that could  cost about $100,000 and, while no  one has done                                                               
it, the benefits would include tax  exempt debt which is about 25                                                               
percent lower than taxable debt.                                                                                                
CO-CHAIR  SADDLER  asked  whether  there is  any  required  nexus                                                               
between  the  Alaska   Railroad  Corporation  industrial  bonding                                                               
capacity and the natural gas  pipeline, and whether there are any                                                               
limits to this lending capacity.                                                                                                
MR. MARKS  offered his belief  that there  are no limits  to this                                                               
lending capacity  and that there  is no need  for any nexus.   He                                                               
suggested  a possible  need for  railroad expansion  in order  to                                                               
facilitate  the  pipeline,  which  would  then  also  allow  non-                                                               
railroad  expenditures.   He said  "you don't  know if  you don't                                                               
ask," and cited the Citigroup concurrence of the possibility.                                                                   
5:33:02 PM                                                                                                                    
REPRESENTATIVE SEATON asked whether  there was Citigroup analysis                                                               
on  tax exempt  for  100  percent debt  of  the AGDC  stand-alone                                                               
MR. MARKS replied  that Citigroup had looked at  100 percent debt                                                               
through  a combination  of revenue  bonds and  general obligation                                                               
debt.   In addition to  this, some or all  of that debt  could be                                                               
tax  exempt   through  the  Alaska  Railroad   Corporation,  and,                                                               
although  it  was not  specifically  mentioned  in the  financing                                                               
plan, it was not mutually exclusive and all could be applied.                                                                   
CO-CHAIR FEIGE  asked whether  it is possible  for AGDC  to issue                                                               
the bonds, as it is a public corporation.                                                                                       
MR.  MARKS offered  his belief  that the  authority was  given to                                                               
AGDC in  HB 4, although  he is not  well versed  on it.   He said                                                               
there would  be no need  for a  cash partner because  100 percent                                                               
debt financing  and tax exempt  bonds would require little  or no                                                               
cash before gas  starts flowing.   The state's  credit rating and                                                               
tax exempt  debt could offer a  lower cost of capital  with lower                                                               
tariffs.   He suggested a  discussion with Citigroup  for further                                                               
5:35:17 PM                                                                                                                    
MR. MARKS  addressed slide  16, "Ownership:   Risk of  Failure to                                                               
Sanction," explaining  that this is the  other concern associated                                                               
with ownership.   He noted  that sponsors could spend  $2 billion                                                               
to get to  the financial investment decision (FID)  point only to                                                               
have the  project not  materialize.  He  pointed out  that, under                                                               
this proposal,  the state would  be liable for about  25 percent,                                                               
$500-$600  million   regardless  of  whether  it   exercises  its                                                               
ownership option  with TransCanada.   Although the  project could                                                               
be stopped if it  did not appear to be working  out, more than $2                                                               
billion could be  spent trying to narrow  the cost uncertainties.                                                               
He related  that similar projects  had cost estimates of  plus or                                                               
minus 10  percent when the sanction  point was reached, so  it is                                                               
necessary to spend  3-5 percent of the total  project cost, hence                                                               
the $2  billion cost.  He  reported that it is  necessary to know                                                               
the  costs  before  being  able   to  develop  the  detailed  gas                                                               
marketing plan.   He  advised that other  projects in  Asia could                                                               
step  in front  or prices  could crash,  so this  money could  be                                                               
spent for naught.   He said it is an issue  for whether the state                                                               
should  take on  this risk  or whether  the producers  are better                                                               
equipped to handle  that risk.  He suggested  that the producers,                                                               
through  diversification, could  be better  equipped as  they are                                                               
reviewing other  international projects;  whereas the  state only                                                               
has this project.  He said  this project is competing against the                                                               
producers'  other oil  projects, so  it  is not  a level  playing                                                               
field.   The  producers can  make active  decisions, whereas  the                                                               
state is  the passive recipient  of those decisions.   He pointed                                                               
out that  the three North  Slope producers  have a market  cap of                                                               
almost  $750 billion.   He  questioned whether  this money  would                                                               
make a material  difference to the viability of the  project.  He                                                               
suggested that there  is a tipping point, but it  is difficult to                                                               
know it.   The greater the interest by the  producers, he opined,                                                               
the less  they need the state  money.  He suggested  a balance of                                                               
four things:   how near  the state is  to the tipping  point; the                                                               
probability  of the  project;  the  size of  the  prize; and  how                                                               
material it  would be  for the  state to lose  $600 million.   He                                                               
proposed as an alternative to  offer an arrangement for the state                                                               
to buy into  the project once it is sanctioned,  and repay to the                                                               
producers the feasibility costs  with interest, which would allow                                                               
the state more time to determine how it wants to proceed.                                                                       
5:39:58 PM                                                                                                                    
MR. MARKS,  in response to  Co-Chair Saddler,  explained material                                                               
difference defines  how bad  it would  be for  the state  to walk                                                               
away from the project at FID.  It  is necessary to keep an eye on                                                               
the prize and decide if it is worth the risk.                                                                                   
REPRESENTATIVE  SEATON  asked  whether  "sanctioned"  is  a  term                                                               
typically used in projects which are being analyzed.                                                                            
MR.  MARKS replied  that it  is  not used  explicitly, but  often                                                               
implicitly when  governments take on  a share of  the development                                                               
costs.    He  said  most  other places  with  oil  first  perform                                                               
feasibility  studies and  then develop.    He allowed  it is  not                                                               
unusual  for  producers  to  take an  ownership  share  and  that                                                               
feasibility studies are not always shared.                                                                                      
5:42:18 PM                                                                                                                    
MR.  MARKS addressed  slide 17,  "3. Role  of AGIA  in Proposal,"                                                               
saying  public  comments  made by  the  administration  when  the                                                               
project was first introduced included:   an aggressive time frame                                                               
to get the  gas to market; a desire to  avoid a potential lengthy                                                               
and  costly legal  fight  over  ending the  AGIA  license; and  a                                                               
proposal designed to  end the AGIA license amicably.   He pointed                                                               
to the agreement for treble damages  the state would be liable to                                                               
pay to  TransCanada should  the state  give any  preferential tax                                                               
treatment or grant of money to  any competing project.  He raised                                                               
the questions of how much  expert partnership the state needs and                                                               
how much  cash partnership the state  needs.  He opined  that the                                                               
proposed plan has  been developed to give  TransCanada a material                                                               
role to avoid potential AGIA  liabilities.  He said the questions                                                               
should be asked as to whether  better terms could be available if                                                               
the state was not so constrained  by AGIA and whether these terms                                                               
could be renegotiated with TransCanada.                                                                                         
5:44:15 PM                                                                                                                    
MR. MARKS introduced slide 18,  "Areas Where State Could Possibly                                                               
Have Better Terms  If It Had No Partner or  a Different Partner."                                                               
He said if the state was not  compelled to have a partner for the                                                               
60-100 percent of  the gas treatment plant and  the pipeline, and                                                               
had the  opportunity to own  100 percent  of the 25  percent, and                                                               
could get good  terms with tax exempt debt, with  a lower cost of                                                               
capital, then the  state would receive higher gas  revenues and a                                                               
lower cost  of gas to  consumers.   The 60 percent  difference of                                                               
ownership  with  lower  cost  of  capital  would  save  consumers                                                               
several hundred  dollars a  year for  the cost of  gas.   He said                                                               
there is  also a misalignment  of interests between  shippers and                                                               
non-shipper partners.  He pointed  to cost overruns and expensive                                                               
expansions  as  some  of  the   biggest  costs  to  the  program,                                                               
therefore a  non-shipper partner would  make money on  these cost                                                               
overruns, whereas the state would lose money.  He said that non-                                                                
shippers are not  motivated to keep costs down  and motivation is                                                               
important.  A different partnership  for the state, he opined, or                                                               
renegotiation  of  the  Memorandum of  Understanding  (MOU)  with                                                               
TransCanada, could  offer more preferable terms  to the proposal.                                                               
He suggested  it would have  been better  for the state  to share                                                               
the failure to  sanction risk, whereas under  the MOU termination                                                               
rights, if  the project does  not sanction, the state  must repay                                                               
TransCanada everything it has spent  since January 1, 2014.  This                                                               
could cost  the state up  to $270 million, regardless  of whether                                                               
the state  exercised its  ownership option.   He  maintained that                                                               
TransCanada's  placement of  all the  risk for  a failed  project                                                               
back  on the  state translates  to a  lack of  partnership during                                                               
this  period.   He said  there  are instances  in which  pipeline                                                               
companies have  assumed development  costs and incurred  the risk                                                               
of development  expenses that did  not result  in a project.   He                                                               
offered an example of open  season with precedent conditions that                                                               
were not  met, and  said this is  a risk of  doing business  as a                                                               
pipeline.   He  argued that  this non-assumption  of risk  should                                                               
result in a lower cost of  capital and suggested that a different                                                               
partner might  assume more  of the  risk.   He said  another term                                                               
that could  be improved in  the current  proposal is to  share in                                                               
the benefit  of lower interest  rates.   Currently, TransCanada's                                                               
proposed cost of  debt is 5 percent plus whatever  happens to 20-                                                               
year treasury  bills between now  and FID.   So, for  example, if                                                               
treasury bills increase 3 percent  between now and FID, that will                                                               
lock into an  8 percent cost of debt; whereas,  if interest rates                                                               
go down,  there are  often callable  features on  corporate bonds                                                               
that would allow TransCanada to  refinance a lower interest rate,                                                               
while the state would still be paying 8 percent.                                                                                
5:49:27 PM                                                                                                                    
MR.  MARKS  moved  to  slide  19, "Role  of  Financing  Terms  in                                                               
Tariffs," explaining  that much of  the cost  in a tariff  is the                                                               
financing cost, similar  to interest payments on  a home mortgage                                                               
that result  in a total payment  of three times the  price of the                                                               
house.  He pointed to the  weighted cost of capital, which is the                                                               
percent debt  times cost  of debt,  plus percentage  equity times                                                               
cost of equity.   Equity costs more than debt  because it is more                                                               
risky  given that  creditors have  access to  debt before  equity                                                               
gets paid.   Another reason  more equity creates a  higher tariff                                                               
is that  return on equity  is taxable  income that is  passed off                                                               
into the  tariff.  These  provisions effect  on each other:   the                                                               
more debt accrued,  the riskier the other debt  becomes which, in                                                               
turn, increases  the cost of  debt, making the equity  more risky                                                               
and increasing the  cost of equity.  He stated  that, in general,                                                               
it is optimal  to have less equity, resulting in  a lower cost of                                                               
debt and  equity, and lower tariffs.   The cost of  capital terms                                                               
can have  a wide  effect on  the tariff,  similar to  a mortgage.                                                               
Responding  to  Co-Chair Feige,  he  confirmed  this is  what  is                                                               
commonly referred  to as  the weighted  average cost  of capital.                                                               
Continuing, Mr. Marks noted that  these financing terms determine                                                               
the tariff, the gas revenues, and  the price of gas to consumers,                                                               
because the costs of the pipeline  and the interest are passed on                                                               
to the  consumer.  TransCanada  has proposed  a tariff term  of 5                                                               
percent  debt, 12  percent equity,  75/30 debt/equity,  which, he                                                               
pointed  out is  probably better  than what  the producers  could                                                               
offer and  is better than what  most FERC regulated lines  in the                                                               
Lower 48  would offer.   He reported that  the TAPS tariff  is 12                                                               
percent/5 percent  with 50/50 debt/equity.   He stated  that FERC                                                               
offers  much higher  returns  on equity  than  does the  Canadian                                                               
National Energy  Board as different  formulas are used.   He said                                                               
the  TransCanada  proposal  is  similar to  that  of  many  other                                                               
Canadian pipelines,  and he offered  some examples.   However, he                                                               
continued, with the option of 100  percent tax exempt debt, it is                                                               
plausible that  the capital  provisions could  be lower  than the                                                               
TransCanada proposal.                                                                                                           
5:53:40 PM                                                                                                                    
MR. MARKS  reviewed slide 20,  "Are Better Cost of  Capital Terms                                                               
Possible."  He  said that terms on existing pipelines  may not be                                                               
relevant because if the state only  needs a partner for cash then                                                               
what it  needs is a  co-investor rather than a  pipeline company.                                                               
A co-investor that  is an investment bank or  private equity firm                                                               
could  have  much lower  capital  requirements  than a  regulated                                                               
pipeline.  Additionally, the other  75 percent of the pipeline is                                                               
being  built be  well  financed,  well capitalized,  experienced,                                                               
major international oil corporations,  which could plausibly make                                                               
the project  less risky  and induce a  bidder for  lower returns.                                                               
He said bidders could offer a  trade-off and be willing to absorb                                                               
some of  the failure-to-sanction  risk in  exchange for  a higher                                                               
rate of return.                                                                                                                 
MR.  MARKS offered  suggestions  for  possible re-negotiation  of                                                               
terms with  TransCanada or a  different partner.  He  discussed a                                                               
higher ownership share than the 40  percent of the 25 percent for                                                               
the gas  treatment plant  and pipeline  currently offered  to the                                                               
state by TransCanada.  He said  lower cost of capital terms could                                                               
also lower  tariffs.  He  referenced some specific  provisions of                                                               
the MOU,  including the right  to exercise the  ownership option.                                                               
He cautioned that the Pre-Front-End  Engineering and Design (Pre-                                                               
FEED) might not be over by  the date for the ownership option, so                                                               
the  state  would  have  to make  the  decision  with  incomplete                                                               
information.   He  expressed his  lack of  understanding for  the                                                               
provision in  the termination clause  that requires the  state to                                                               
enter into a firm transportation  agreement by December 31, 2015,                                                               
or TransCanada  has the right  to terminate, suggesting  that the                                                               
administration  and TransCanada  should  be questioned  regarding                                                               
this clause.                                                                                                                    
5:56:53 PM                                                                                                                    
MR. MARKS introduced slide 21, "How  Bound is State by AGIA."  He                                                               
said that  if the state  was to proceed without  TransCanada, and                                                               
modify taxes  and take full ownership  of the full 25  percent or                                                               
maybe get a  different partner, the state  would  incur a risk of                                                               
legal  and   financial  exposure  through  the   license  project                                                               
assurance clause,  also known as  the triple damages clause.   He                                                               
read the clause from AS 43.90.440:   "If ... the state extends to                                                               
another person preferential royalty or  tax treatment or grant of                                                               
state money for  the purpose of facilitating  the construction of                                                               
a competing  natural gas pipeline  project in this state  ... the                                                               
licensee  is entitled  to payment  from  the state  of an  amount                                                               
equal  to  three  times  the total  amount  of  the  expenditures                                                               
incurred and  paid by the  licensee ..."   He explained  this was                                                               
included in the AGIA agreement  so the licensee had the exclusive                                                               
enjoyment  of  the  $500 million  reimbursement  inducement,  and                                                               
would  not incur  the expenses  if  the state  offered a  similar                                                               
proposal to another  group.  He pointed out  three ambiguities in                                                               
this:   the meanings of  "preferential", "grant of  state money",                                                               
and  "total  amount".    Addressing   "total  amount",  he  noted                                                               
TransCanada has  been reimbursed about  $350 million of  the $550                                                               
million  it has  spent.    What is  ambiguous  is whether  "total                                                               
amount" means gross  or net.  If it means  gross, the state would                                                               
owe TransCanada  three times $550  million, about  $1.65 billion;                                                               
if it means  net, the state would owe $600  million.  The problem                                                               
is  that no  one  knows  exactly what  the  state's exposure  is.                                                               
Addressing  "preferential",  he  explained  that  when  AGIA  was                                                               
rolled out  in 2007 or  2008, the administration  and Legislative                                                               
Legal and Research  Services said the intent was  not to preclude                                                               
laws of general applicability.   Included in CSSB 138(FIN) am, is                                                               
something that could apply to a  North American pipeline, or to a                                                               
gas-to-liquids  (GTL) project,  or  to  ice-breaking LNG  tankers                                                               
going out of  Prudhoe, or to any LNG project;  so it is plausible                                                               
that  what   is  going  on   in  SB  138  would   not  constitute                                                               
preferential  tax treatment.   Most  ambiguous, he  continued, is                                                               
the  term  "grant of  state  money"  because  it was  not  widely                                                               
addressed during  the legislative hearings  on AGIA.   He related                                                               
that  when  asked   what  "grant  of  state   money"  means,  the                                                               
administration  said "the  outright unfettered  financial grant".                                                               
He  questioned  what that  means  and  whether  it could  mean  a                                                               
donation.  Arguably,  an appropriation to buy equity  and pay for                                                               
an asset may not be a grant,  he continued, but on the other hand                                                               
possibly  any  appropriation  could  be considered  a  grant  for                                                               
financial support for a competing project.                                                                                      
6:00:44 PM                                                                                                                    
MR. MARKS  directed attention to  slide 22, "Options"  to address                                                               
the question  of where  the aforementioned  leaves the  state for                                                               
dealing  with the  AGIA  constraints  and potentially  preferable                                                               
options,  He said one option  is to assess what the state's legal                                                               
exposure  is  and consideration  could  be  given to  outsourcing                                                               
legal expertise  for assessing the  exposure.  Another  option is                                                               
to  engage  TransCanada  and  ask  what it  would  do  if  Alaska                                                               
proceeded without it.   A third option is to  renegotiate some of                                                               
these terms to be similar to  those that could be received from a                                                               
competitor.  The  ambiguities to the state are  also ambiguous to                                                               
TransCanada.   Another option  is settlement, he  said.   To keep                                                               
TransCanada  whole,  the state  would  really  only have  to  pay                                                               
single damages  on net,  which would be  less than  $200 million.                                                               
The least preferable option, he  continued, is litigation because                                                               
it  takes time  with an  uncertain  outcome.   Some things  could                                                               
still proceed,  and maybe  the state  would win,  but even  if it                                                               
loses it potentially could have a better long-term outcome.                                                                     
6:02:16 PM                                                                                                                    
MR. MARKS turned to slide 23,  "4. Taxation:  Production Tax," to                                                               
discuss  the state  taking its  taxes  in-kind as  proposed.   He                                                               
believed this  makes sense because  it provides  economic benefit                                                               
for the  producers and  creates alignment  between the  state and                                                               
the producers.   He  pointed out  that for  in-kind taxes,  it is                                                               
sensible  to assess  this on  gross at  the point  of production.                                                               
Regarding an appropriate tax rate  is, he offered his belief that                                                               
fair share  is what can  be gotten in a  competitive environment,                                                               
which is jurisdictions with a similar risk and reward structure.                                                                
MR. MARKS directed attention to  slide 24, "Government Take - LNG                                                               
Projects,"  an  assessment produced  by  Daniel  Johnston in  the                                                               
Black &  Veatch report.   He  pointed out  the wide  variation in                                                               
take  among the  projects, and  offered his  belief that  similar                                                               
jurisdictions are  a matter  of judgment.   He  said Alaska  is a                                                               
high cost,  high risk  region, with a  government take  around 60                                                               
percent.   He pointed to  the U.S. outer continental  shelf (OCS)                                                               
project, which  has a 61  percent government take,  advising that                                                               
the project with  TransCanada should not have a  higher take than                                                               
the U.S.  OCS project.   He  estimated the  state take  should be                                                               
between  57  and  59  percent,  and  he  believed  the  enalytica                                                               
estimate was between 60 and 62  percent.  Using 58 percent as the                                                               
state  take, he  said  the federal  government  would receive  23                                                               
percent, the  state 35 percent,  and the producers  the remaining                                                               
42  percent.   Splitting that  42  percent three  ways among  the                                                               
producers, each  would receive a  14 percent share, so  the state                                                               
would  be  receiving  2.5  times  more  economic  rent  than  any                                                               
producer.   He said  he therefore agrees  with the  definition of                                                               
fair share that is in CSSB 138(FIN) am.                                                                                         
6:05:19 PM                                                                                                                    
MR. MARKS moved to slide  25, "Property Tax," offering his belief                                                               
that  property  tax based  on  value  is regressive  because  the                                                               
higher the cost,  the higher the tax, which adds  to the economic                                                               
risk for  a project.   An  increase in project  cost due  to cost                                                               
overruns  increases the  property tax  as well.   He  pointed out                                                               
that a property tax of 20  mills on a $50 billion project results                                                               
in a property  tax of $1 billion.  The  highest assessed property                                                               
tax for  TAPS was  1/5 of  this, $200 million,  and was  for oil,                                                               
which is a higher valued substance.   He pointed to a plethora of                                                               
litigation  over the  valuation  of  tax, which  has  to do  with                                                               
appraisal for  valuation which does  not usually work well  for a                                                               
unique asset.   He  said appraisal for  valuation works  well for                                                               
houses in a  community, but not with an asset  that does not have                                                               
any  similar comparisons.    He allowed  that  social impacts  to                                                               
local  municipalities  will  occur  during  construction  of  the                                                               
pipeline, but questioned whether  impacts are directly related to                                                               
value.   He noted that a  clause in the Heads  of Agreement (HOA)                                                               
suggests the  property tax be  based on cents per  thousand cubic                                                               
feet  (MCF) plus  impact  payments, instead  of  based on  value,                                                               
which he said makes sense in  terms of reducing the economic risk                                                               
of the project.                                                                                                                 
MR.  MARKS  concluded his  presentation  with  slide 26,  "Fiscal                                                               
Stability," noting that for the  past 20 years the producers have                                                               
expressed the need  continually for fiscal stability.   Given the                                                               
state's history over the past  25 years, he concurred that fiscal                                                               
stability is  important.  He  offered his  belief that SB  138 is                                                               
not  stable,  although  taking   gas  in-kind  stabilizes  things                                                               
somewhat.     He  said  a  future   legislature  could  introduce                                                               
additional assessments,  and suggested  there be  discussion with                                                               
the  producers as  to what  would constitute  adequate stability.                                                               
He directed attention to the  HOA, Section 9.3.2, which discusses                                                               
the   development  of   other  terms   to  make   contract  terms                                                               
predictable and durable.                                                                                                        
6:09:17 PM                                                                                                                    
CO-CHAIR SADDLER recalled  the earlier statement of  Mr. Marks in                                                               
support of  the need  for delay.   Co-Chair Saddler  posited that                                                               
falling gas prices and supply  growing faster than demand instead                                                               
supports moving  the project  faster rather  than slower  to take                                                               
advantage  of  the  fall of  commodity  prices  and  construction                                                               
expenses rising.                                                                                                                
MR. MARKS  replied competition  is what  the competition  is, and                                                               
the fastest that  the project could reach market is  2024, a very                                                               
ambitious  goal.   He  said  the market  will  continue to  grow.                                                               
There  is  no short-term  window  of  opportunity and,  arguably,                                                               
prices could  go up over time.   The project will  be a challenge                                                               
no matter when it is started.                                                                                                   
CO-CHAIR   SADDLER   requested    clarification   regarding   the                                                               
suggestion by Mr. Marks to wait and address more issues.                                                                        
MR.  MARKS offered  his belief  that  waiting does  not make  the                                                               
project more or less competitive or  make it more or less viable,                                                               
and working out some things  could generate long-term benefits to                                                               
the state.                                                                                                                      
6:11:28 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI maintained  that the  MOU, the  HOA, and                                                               
the bill  put the state in  the position of caboose,  rather than                                                               
the  driver of  the train.    Although intent  language has  been                                                               
added to the  proposed bill, it does not have  the full effect of                                                               
law.    He  requested  clarification   from  Mr.  Marks,  as  the                                                               
consultant for Legislative Budget  and Audit Committee, regarding                                                               
whether the proposed bill should be  passed or should some of the                                                               
questions be answered before moving forward.                                                                                    
MR. MARKS  replied his role  is to offer  observations, questions                                                               
to ask, and  options to help in the decision  making, but whether                                                               
to pursue these is up to the committee.   He said the HOA and the                                                               
MOU are  not contracts,  but are  long-term policy  statements by                                                               
the parties  setting out guidelines  for direction.  There  is no                                                               
commitment  for action  in  either  of these,  and  they are  not                                                               
legally  immutable.   He  said  he has  offered  some options  to                                                               
consider  putting into  statute,  as anything  in statute  offers                                                               
more bargaining power and strength than negotiation.                                                                            
6:14:11 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI offered  his belief  that the  expansion                                                               
provisions  discussed  earlier  for lining  up  the  relationship                                                               
needed to  be added to  the proposed bill.   He reflected  on the                                                               
suggestions  for failed  partnership  and  better cost  capturing                                                               
terms and  asked whether  these should  be put  in statute  for a                                                               
stronger bargaining position.                                                                                                   
MR. MARKS agreed there is that option  if this is judged to be in                                                               
the  state's  best interest.    He  reiterated that  anything  in                                                               
statute does not  have to be negotiated and would  lead to better                                                               
terms.  He suggested listening  to the producers and TransCanada,                                                               
and engaging them for these options and any resulting problems.                                                                 
CO-CHAIR FEIGE pointed out that a  stipulation in the HOA and the                                                               
MOU is  that any enabling  legislation that is not  accepted will                                                               
allow the agreements to be terminated.                                                                                          
CO-CHAIR SADDLER reflected  that the main message  from Mr. Marks                                                               
is  that  there   are  many  ways  this  deal   could  have  been                                                               
structured.   He  inquired whether  Mr. Marks  has a  recommended                                                               
structure  or whether  Mr.  Marks  sees his  role  as poking  and                                                               
asking questions.                                                                                                               
MR. MARKS replied  he has posed many  questions which legislators                                                               
should ask and the answers  to these questions will determine the                                                               
direction to proceed.   For instance, can the  state finance this                                                               
project  with 100  percent debt?   Can  the state  get taxes  and                                                               
financing?   What is the  state's legal  exposure from AGIA?   He                                                               
said members have  the option to ask those questions  and then to                                                               
proceed from there.   At this point, there are  a lot of unknowns                                                               
that,  if known,  could offer  direction, eliminate  options, and                                                               
highlight where legislators might want to go.                                                                                   
6:17:40 PM                                                                                                                    
REPRESENTATIVE SEATON  drew attention  to slide 5,  recalling the                                                               
8-12 percent hurdle  rate mentioned by Mr. Marks.   He asked what                                                               
the hurdle rate would be for the project as current proposed.                                                                   
MR.  MARKS replied  that  is a  difficult  question because  [the                                                               
hurdle rate]  is a closely  guarded secret.   He noted  that 8-12                                                               
percent is  based on his  experience, although it is  dynamic and                                                               
affects  risk.    He  noted  a discount  rate,  or  hurdle  rate,                                                               
reflects the weighted average cost  of capital, which is the cost                                                               
to repay  people for the  use of money.   A lower  priced project                                                               
might be  subject to a  lower discount rate,  as there is  not as                                                               
much risk of the price going  down.  He allowed that the analyses                                                               
across the  spectrum of  prices and discount  rates offer  a very                                                               
complicated dynamic.                                                                                                            
6:20:20 PM                                                                                                                    
REPRESENTATIVE  SEATON understood  that the  hurdle rate  is also                                                               
the weighted cost of capital.   He inquired whether this would be                                                               
added to the cost and  would reflect the project break-even point                                                               
of $16-$17.                                                                                                                     
MR.  MARKS agreed  the cost  and  the hurdle  rate determine  the                                                               
break-even price.                                                                                                               
REPRESENTATIVE  SEATON requested  clarification  that the  hurdle                                                               
rate is  not for estimated  internal rates  of return by  the oil                                                               
and gas companies, but only for the project capital cost.                                                                       
MR.  MARKS responded  the hurdle  rate is  the necessary  rate of                                                               
return for the  project to be viable and  generating enough money                                                               
to  repay the  shareholders and  creditors.   A weighted  average                                                               
cost  of capital  of 10  percent  necessitates a  rate of  return                                                               
greater than 10 percent, and that is the hurdle rate.                                                                           
6:22:48 PM                                                                                                                    
CO-CHAIR  FEIGE,  reflecting  on  the  AGIA  process,  asked  why                                                               
TransCanada is "the  only real solid company that  bid under that                                                               
AGIA process."                                                                                                                  
MR. MARKS replied  there are two questions:  why  no one else bid                                                               
and why  did TransCanada bid.   He  offered his belief  that AGIA                                                               
had some  commercial problems,  as it was  really designed  for a                                                               
third party pipeline ownership with  its provisions for rolled-in                                                               
rates, which created big problems  for the producers.  He related                                                               
that  the  Palin  Administration preferred  a  third-party  owned                                                               
pipeline over  a producer-owned  pipeline, whereas  the producers                                                               
were clear  that this did not  work for them, and  it was obvious                                                               
to many observers  throughout the world that  the producers would                                                               
not offer a serious bid during the  open season.  It did not make                                                               
sense for  companies to offer an  AGIA bid, as the  project would                                                               
not  work  without  the  producers   that  wanted  to  build  the                                                               
pipeline.   Some of AGIA's  terms did not make  commercial sense;                                                               
it was still necessary for a  FERC certificate even with a failed                                                               
open season,  and this had never  been done prior.   There was no                                                               
big incentive  to spend to  get to open  season, so what  was put                                                               
out was  not developed.   Everyone knew  this, he said.   Besides                                                               
TransCanada, there were four other  bids, two from companies with                                                               
virtually  no assets,  and two  non-conforming bids.   He  opined                                                               
there were  three reasons for  the TransCanada bid:   TransCanada                                                               
had purchased  Foothills Pipe Lines  Ltd. and since  the pipeline                                                               
would proceed  through Canada, TransCanada was  familiar with the                                                               
territory;  the TransCanada  pipes were  running empty  and would                                                               
benefit  from  Alaska  gas;  and  TransCanada  had  strategically                                                               
figured its benefit from the treble damages clause.                                                                             
6:27:39 PM                                                                                                                    
CO-CHAIR SADDLER asked  whether the provision in the  HOA for the                                                               
producers  to  market  Alaska  gas alongside  their  own  gas  is                                                               
sufficient to overcome concerns.                                                                                                
MR. MARKS replied  the HOA states that the  producers are willing                                                               
to negotiate an agreement to purchase  and dispose of oil.  Under                                                               
the  current in-value  system,  the producers  sell  oil and  the                                                               
state gets a  cut of that, and he suggested  "this could possibly                                                               
be beefed up, possibly in the statute."                                                                                         
CO-CHAIR  SADDLER asked  whether  Mr. Marks  recommends that  the                                                               
state should negotiate for a better deal.                                                                                       
MR. MARKS expressed his agreement.                                                                                              
REPRESENTATIVE KAWASAKI  requested a  comparison of  this project                                                               
to the Stranded Gas Development Act (SGDA).                                                                                     
MR. MARKS responded the proposed SGDA  was not a perfect deal; it                                                               
"was  the  governor's call  and  he  was  elected to  make  those                                                               
calls."   Reflecting on  which is  the better  deal, he  said the                                                               
proposed  economic  return of  25  percent  for this  project  is                                                               
better,  which  trumps any  other  possible  downside issues  for                                                               
having a partner.                                                                                                               
REPRESENTATIVE  KAWASAKI  requested  a comparison  to  the  risks                                                               
under this proposal versus SGDA.                                                                                                
MR. MARKS offered his recollection  that the 20 percent ownership                                                               
of SGDA  would also  incur 20 percent  of the  development costs.                                                               
The  SGDA was  a much  lower cost  project so  there was  a lower                                                               
percentage of a lower cost.                                                                                                     
REPRESENTATIVE  KAWASAKI referenced  the off-ramps  [in the  MOU]                                                               
and the  ability to re-view  some of  the issues.   He questioned                                                               
the domino effect of changes to  the proposed bill.  He requested                                                               
a reiteration of earlier comments on the termination clause.                                                                    
MR. MARKS  answered the termination clause  allows TransCanada to                                                               
terminate  if the  point of  FID is  reached and  there is  not a                                                               
project.  The state would  owe TransCanada for all expenses since                                                               
January 1,  2014, regardless of  whether the state  had exercised                                                               
its ownership option.   He pointed out that this  option could be                                                               
exercised prior to Pre-FEED.                                                                                                    
REPRESENTATIVE  KAWASAKI asked  whether these  are adequate  off-                                                               
MR. MARKS replied  that, in terms of  the commercial relationship                                                               
with TransCanada, if the project  moves forward as written in the                                                               
MOU from Pre-FEED  to FEED the state would  owe TransCanada about                                                               
$270 million if the project does not happen.                                                                                    
6:34:23 PM                                                                                                                    
CO-CHAIR SADDLER,  referencing slide 13, asked  about the state's                                                               
need for a cash partner instead  of an expert partner.  Recalling                                                               
Mr.  Marks's  statement  that  the  state  could,  instead  of  a                                                               
partnership,  use  debt  equity or  Alaska  Railroad  Corporation                                                               
bonds, he asked  for a better definition of  a general investment                                                               
partner,  what return  should be  expected, and  what debt/equity                                                               
ratios a partner would accept.                                                                                                  
MR. MARKS  responded that  if the state  needs a  partnership for                                                               
cash and  not expertise, then the  partner does not need  to be a                                                               
pipeline  company.   The need  for a  co-investor for  cash would                                                               
allow a  competitive bid to find  out the return necessary  to an                                                               
investor.   He speculated that a  cash investor may ask  for less                                                               
than a regulated  pipeline company, although it  is unknown until                                                               
REPRESENTATIVE  SEATON,  regarding  return on  investment  for  a                                                               
regulated pipeline company, inquired whether  this is a return on                                                               
equity or  a combination of debt  and equity.  He  suggested that                                                               
none of these could compete  with the Alaska Railroad Corporation                                                               
tax-exempt bond structure, if that is a possibility.                                                                            
MR. MARKS  offered his  belief that this  is correct,  citing the                                                               
aforementioned Citigroup opinion for tax-exempt debt.                                                                           
6:37:46 PM                                                                                                                    
CO-CHAIR FEIGE  directed attention to  slide 11, and  asked about                                                               
the  enhanced market  efficiencies  with  a transparent  pipeline                                                               
cost.   He opined  there would  be transparency  as an  owner, no                                                               
matter what the option.                                                                                                         
MR. MARKS replied he was  referencing the market efficiencies for                                                               
small gas  producers that may want  to sell gas, but  do not want                                                               
to ship or liquefy gas.   He said he envisions this process under                                                               
Section 3, noting  that the use of  "confidential" is everywhere.                                                               
He questioned whether the public would  ever know the cost of the                                                               
pipeline,  and therefore,  a third  party  will not  know what  a                                                               
reasonable discount is for selling its gas.                                                                                     
CO-CHAIR FEIGE requested clarification to that scenario.                                                                        
MR. MARKS explained that this  hypothetical situation envisions a                                                               
decline in gas production, allowing  space in the pipeline.  When                                                               
the oil  companies buy  gas from the  small producers,  the small                                                               
producers make  a profit  because they have  no oil  spill risks;                                                               
for  example,  many small  producers  have  stopped shipping  oil                                                               
after the incident with the Exxon  Valdez.  Instead, they sell on                                                               
the North  Slope, and this  efficiency makes money  for everyone.                                                               
He  said there  would be  a similar  hypothetical situation  with                                                               
gas.  Transparency in these costs facilitates efficient markets.                                                                
CO-CHAIR  FEIGE   requested  clarification   in  regard   to  the                                                               
expansion capabilities negotiated into the  MOU and the HOA being                                                               
insufficient.   He  suggested there  would be  a cost  associated                                                               
with  expansion in  capacity of  the pipeline  and it  seems fair                                                               
that those  costs be borne by  someone.  Per the  agreement, this                                                               
cost would  not be  borne by  one of the  original partners.   He                                                               
expressed  his  understanding  that   the  design  allows  for  a                                                               
significant expansion  of throughput, however someone  should pay                                                               
for this addition.                                                                                                              
MR. MARKS  expressed his agreement,  but said he was  assessing a                                                               
situation whereby expansion was not  necessary as there was a bit                                                               
of  excess  capacity   available  in  the  pipeline.     In  this                                                               
situation, a small producer would sell to a large producer.                                                                     
6:45:14 PM                                                                                                                    
CO-CHAIR FEIGE reflected on discussions  regarding AGIA and SGDA,                                                               
and noted  that neither had  succeeded in a pipeline  to monetize                                                               
North  Slope  gas.    He  asked whether  the  proposed  bill  has                                                               
addressed the flaws in these prior pieces of legislation.                                                                       
MR.  MARKS replied  it  was not  the  previous legislations  that                                                               
stopped  the proposed  projects; it  was the  market because  the                                                               
market drives everything  for a project.  Hopefully  there is now                                                               
a market.                                                                                                                       
CO-CHAIR  SADDLER  requested  Mr.  Marks'  opinion  on  the  pro-                                                               
expansion alignment and whether it would benefit the state.                                                                     
MR. MARKS  replied that with an  absence of regulation no  one is                                                               
compelled to expand.  Under a  FERC or RCA regulated pipeline, if                                                               
the expansion is large enough to  make economic sense, then it is                                                               
mandated by the  regulators.  He directed attention  to Section 3                                                               
of the Natural Gas Act, which  states that no one is compelled to                                                               
expand.  He offered his belief  that ownership of the pipeline by                                                               
the  state  would  ensure  reasonable  expansion  provisions,  if                                                               
necessary, as  the state  could be the  expansion source  of last                                                               
resort.   He  maintained  this  will work  if  the state  pursues                                                               
reasonable terms and not high rates of return.                                                                                  
CO-CHAIR SADDLER  stated there are  advantages for  the consumers                                                               
to have a  regulated pipeline, and asked  whether the contractual                                                               
arrangements are intrinsically worse.                                                                                           
MR. MARKS said he envisions  consumers receiving gas based on the                                                               
state's  capacity, as  the state  will be  well motivated  to put                                                               
reasonable terms on what it charges its citizens.                                                                               
6:48:57 PM                                                                                                                    
REPRESENTATIVE SEATON, regarding  expansion and non-transparency,                                                               
surmised the problem  is that no one would be  able to figure out                                                               
the wellhead value, so no one  would know what a reasonable price                                                               
of gas is at the wellhead.                                                                                                      
MR. MARKS confirmed that is the problem.                                                                                        
REPRESENTATIVE SEATON  noted the terms  state that any  party can                                                               
expand but no one has to expand.   A party choosing not to expand                                                               
has no liability  for cost.  However, he noted,  if the increased                                                               
volume lowers the  cost, even those who chose not  to expand will                                                               
benefit from  the lower cost.   Each party's costs  are different                                                               
and not  known.    He asked whether it  makes sense for  the non-                                                               
participants in  the expansion to  share in the benefits  but not                                                               
the liabilities.                                                                                                                
MR. MARKS replied  pipelines live and die by  economies of scale;                                                               
the bigger the pipeline, the  lower the per-unit cost.  Expansion                                                               
usually lowers  the per-unit cost.   He explained  that expansion                                                               
benefits from the  base capacity, so it makes sense  for the base                                                               
capacity  to  benefit  if  the  expansion  lowers  the  cost  for                                                               
REPRESENTATIVE SEATON  noted that AGIA has  the same arrangement,                                                               
but if  the expansion costs  more there is  a liability up  to 15                                                               
percent above the current rate; if  it costs less, then all share                                                               
in the benefits.   He pointed out that there  was not any sharing                                                               
of the  upside cost.  He  inquired how to figure  the benefit for                                                               
increased flow  in [the Alaska  LNG Project] pipeline  when there                                                               
is no unified tariff.                                                                                                           
MR. MARKS  answered there are  four pipes within [the  Alaska LNG                                                               
Project]  pipeline.   If someone  wants  expansion capacity,  the                                                               
state would be  the expansion source.  There would  be a per-unit                                                               
cost, but  he said it  unclear regarding the transparency  of the                                                               
REPRESENTATIVE SEATON  commented "it sounds  about as foggy  as I                                                               
thought it was."                                                                                                                
6:54:25 PM                                                                                                                    
CO-CHAIR SADDLER asked whether,  from Mr. Marks' perspective with                                                               
other worldwide LNG  projects, there are any  special concerns or                                                               
challenges for marketing this volume of gas.                                                                                    
MR. MARKS  replied there are huge  challenges due to the  size of                                                               
the  project  and  having  to  amortize  the  pipeline.    It  is                                                               
necessary "to put  a lot of gas through to  get the per-unit cost                                                               
down,  which makes  a  marketing  challenge."   In  Asia, gas  is                                                               
marketed  contract  by contract,  utility  by  utility, which  is                                                               
different than  in the  Lower 48.   The  Asian market  is growing                                                               
about 2 billion  cubic feet per day per year.   At an expenditure                                                               
of $65 billion, the state does  not want the pipeline to be empty                                                               
for very long; the gas must  be sold quickly because a slow ramp-                                                               
up has a negative  effect on the rate of return.   He pointed out                                                               
the necessity to market  a lot of gas in a  short period of time.                                                               
This proposed project  will produce 2.4 billion  cubic feet (BCF)                                                               
per day,  so it could  take four years  to market this  much gas,                                                               
meaning  the pipeline  would be  empty for  three years.   If  it                                                               
takes four years to get 2.4 BCF  a day, and the market is growing                                                               
only 2.0 BCF  a day, this project must capture  30 percent of the                                                               
incremental market in Asia every year, which is quite ambitious.                                                                
MR.  MARKS, responding  further  to  Co-Chair Saddler,  explained                                                               
that with a  market growth of 2  BCF per day, it  is not possible                                                               
to get 2.4  BCF a day into  the market in the  first year because                                                               
the  market  is  growing  slow  and  lots  of  other  people  are                                                               
competing to  sell gas to this  market, and the gas  must be sold                                                               
utility by utility by utility.   The size of this project makes a                                                               
challenge because of needing to get  a lot of gas into the market                                                               
in  a short  amount  of time  while the  market  is only  growing                                                               
incrementally so fast.  To  capture 30 percent of the incremental                                                               
market in  Asia for  four years  in a row  is an  ambitious task.                                                               
Even in this  good case the pipeline will be  partially empty for                                                               
three years,  so if it  takes five  years to market  the pipeline                                                               
will be empty even longer.   This is one of the unique commercial                                                               
challenges of this project because  of it being an 800-mile-long,                                                               
high-cost pipeline.                                                                                                             
CO-CHAIR SADDLER  offered his understanding that  LNG projects do                                                               
not typically  start at  that low level  of utilization  and then                                                               
take years to catch up.                                                                                                         
MR. MARKS  replied the  other LNG  projects are  smaller projects                                                               
that do not have to sell as much gas, so it is easier to market.                                                                
6:58:29 PM                                                                                                                    
CO-CHAIR FEIGE pointed  out that Alaska has the  advantage of not                                                               
having to drill the  wells to produce the gas, so  as soon as the                                                               
gas is  contracted for, there  is the  certainty that the  gas is                                                               
there and is available immediately  upon pipeline completion.  He                                                               
asked  whether   that  counteracts  any  of   the  aforementioned                                                               
MR. MARKS responded it would counteract  "a little bit."  He drew                                                               
attention to slide  5, which depicts the upstream  costs, but not                                                               
the  project pipeline  costs for  various new  LNG projects.   He                                                               
allowed Alaska  may have a low  upstream cost because the  gas is                                                               
already being  produced.   He said  the break  even cost  that he                                                               
calculated more  than offset  the upstream  cost for  these other                                                               
projects.   Most of the  depicted projects are not  developed and                                                               
not being  produced, but  they are proven.   While  producing the                                                               
gas will not be cheap, it  is not the biggest challenge for those                                                               
projects;  their biggest  challenge  is getting  into the  market                                                               
with the cost of the LNG part, not the producing gas part.                                                                      
7:00:09 PM                                                                                                                    
REPRESENTATIVE P.  WILSON recounted that people  have mentioned a                                                               
bigger  size pipeline.   She  asked whether  there is  an optimal                                                               
size for a pipeline relative to cost.                                                                                           
MR. MARKS  answered that  when the  state was  previously talking                                                               
about a pipeline to North  America, the size contemplated was 4.5                                                               
BCF per day.   If that gas  can be gotten into the  market, it is                                                               
easy to sell --  just put it into the pipeline  grid and it goes.                                                               
But Asia is a challenge.   A larger pipeline would bring down the                                                               
per-unit cost,  but necessitates the sale  of more gas.   Asia is                                                               
the exact opposite  problem that the state had  in North America,                                                               
so the  producers have tried to  find the sweet spot  to make the                                                               
pipeline as large as possible but  not so big that the gas cannot                                                               
be gotten  into the  market.   He pointed  out that  although the                                                               
market is growing,  and given how much of  the incremental market                                                               
Alaska would have to capture each  year, it is still ambitious to                                                               
get even  a smaller amount of  gas into the market,  which is one                                                               
of the big problems with this project.                                                                                          
REPRESENTATIVE SEATON requested the  committee receive in writing                                                               
the questions that Mr. Marks has suggested asking.                                                                              
MR.  MARKS  suggested the  request  be  made to  the  Legislative                                                               
Budget and Audit Committee and he will be happy to provide them.                                                                
[CSSB 138(FIN) am was held over.]                                                                                               

Document Name Date/Time Subjects
HRES - Roger Marks 3.27.14.pdf HRES 3/27/2014 4:30:00 PM
SB 138
LB&A Roger Marks Report 2.18.14.pdf HRES 3/27/2014 4:30:00 PM
SB 138