Legislature(2013 - 2014)

03/31/2014 02:05 PM RES

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02:05:28 PM Start
02:06:09 PM SB138
07:16:24 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
2:06:09 PM                                                                                                                    
CO-CHAIR FEIGE  announced that the  only order of  business would                                                               
be CS  FOR SENATE BILL NO.  138(FIN) am, "An Act  relating to the                                                               
purposes, powers,  and duties of  the Alaska  Gasline Development                                                               
Corporation;  relating to  an in-state  natural gas  pipeline, an                                                               
Alaska  liquefied  natural  gas project,  and  associated  funds;                                                               
requiring state  agencies and other entities  to expedite reviews                                                               
and  actions  related  to natural  gas  pipelines  and  projects;                                                               
relating to  the authorities  and duties  of the  commissioner of                                                               
natural resources relating to a  North Slope natural gas project,                                                               
oil and  gas and gas only  leases, and royalty gas  and other gas                                                               
received by the  state including gas received as  payment for the                                                               
production  tax on  gas;  relating  to the  tax  on  oil and  gas                                                               
production, on  oil production, and  on gas  production; relating                                                               
to the duties of the commissioner  of revenue relating to a North                                                               
Slope natural  gas project and  gas received as payment  for tax;                                                               
relating to confidential information  and public record status of                                                               
information provided  to or in  the custody of the  Department of                                                               
Natural  Resources and  the Department  of  Revenue; relating  to                                                               
apportionment factors of the Alaska  Net Income Tax Act; amending                                                               
the definition  of gross value  at the 'point of  production' for                                                               
gas for  purposes of the  oil and gas production  tax; clarifying                                                               
that the  exploration incentive credit,  the oil or  gas producer                                                               
education credit, and  the film production tax credit  may not be                                                               
taken against  the gas  production tax paid  in gas;  relating to                                                               
the  oil  or  gas  producer   education  credit;  requesting  the                                                               
governor to  establish an  interim advisory  board to  advise the                                                               
governor on  municipal involvement in  a North Slope  natural gas                                                               
project;  relating to  the development  of a  plan by  the Alaska                                                               
Energy  Authority   for  developing  infrastructure   to  deliver                                                               
affordable  energy to  areas  of  the state  that  will not  have                                                               
direct  access  to a  North  Slope  natural  gas pipeline  and  a                                                               
recommendation  of a  funding  source  for energy  infrastructure                                                               
development;  establishing  the  Alaska affordable  energy  fund;                                                               
requiring  the commissioner  of  revenue to  develop  a plan  and                                                               
suggest  legislation for  municipalities, regional  corporations,                                                               
and residents  of the state  to acquire ownership interests  in a                                                               
North  Slope  natural  gas pipeline  project;  making  conforming                                                               
amendments; and providing for an effective date."                                                                               
CO-CHAIR FEIGE invited the committee  to address questions to the                                                               
commissioners of  the Department  of Natural Resources  (DNR) and                                                               
the Department of Revenue (DOR) in relation to CSSB 138(FIN) am.                                                                
2:06:53 PM                                                                                                                    
REPRESENTATIVE  HAWKER  recalled  that  previous  testimony  from                                                               
Commissioner Rodell on the state's  debt capacity has been in the                                                               
context of  general obligation (GO) debt,  without any discussion                                                               
regarding revenue bonding debt.  He  asked if any bonding done by                                                               
the state would be done on a GO basis.                                                                                          
2:08:26 PM                                                                                                                    
ANGELA  RODELL,   Commissioner,  Department  of   Revenue  (DOR),                                                               
answered that it  is not exclusive.  She explained  that GO bonds                                                               
have  a  clear nexus  to  the  state's  debt capacity,  but  even                                                               
issuing revenue bonds  has a direct effect on  the state's credit                                                               
because  the state's  credit supports  the revenue  bonds in  the                                                               
form of sales contracts and commitments.                                                                                        
REPRESENTATIVE HAWKER  understood that revenue bonding  relies on                                                               
the  underlying  revenue  commitment  of  a  project,  and  asked                                                               
whether a  scenario in which the  state is both a  sponsor of the                                                               
project and, by owning a portion  of the gas, is underpinning the                                                               
financial resource, would disqualify a revenue bonding approach.                                                                
COMMISSIONER RODELL said no; however,  it would be incumbent upon                                                               
the  state as  to how  and who  issues the  revenue debt  that is                                                               
supported by the state gas contracts.   She said depending on how                                                               
the  debt structures  are generated  and  created -  even if  the                                                               
state itself issued  the revenue bonds based  on an appropriation                                                               
commitment of  some type -  a structure  that would be  "one step                                                               
below general obligation bonds" DOR  believes could work, and the                                                               
state would be able to gain  the benefit of the revenue, in spite                                                               
of  dedicated funds  strictures.   The  state should  be able  to                                                               
create a mechanism, either through  a leasing mechanism or other,                                                               
which  would allow  the state  to use  the revenue  to repay  its                                                               
participation in the project.                                                                                                   
REPRESENTATIVE HAWKER inquired  as to why the  concept of revenue                                                               
bonding has not been presented.                                                                                                 
2:10:23 PM                                                                                                                    
COMMISSIONER  RODELL  responded  that  DOR has  not  examined  GO                                                               
bonding  versus revenue  bonding  because the  state holds  great                                                               
capacity.    The further  bonding  is  removed from  the  state's                                                               
credit standing, the  less of an impact bonding has  on the debt.                                                               
Thus,  the most  conservative  approach is  that  the state  will                                                               
fully  support the  project  with  GO bonds;  bonds  of a  lesser                                                               
standing will increase capacity for  the state.  She advised that                                                               
her  previous  presentations  have  addressed  what  DOR  can  do                                                               
pledging the  full faith and  credit of  the state, which  is the                                                               
most conservative presentation possible.                                                                                        
CO-CHAIR FEIGE asked  at what point the state  must firmly commit                                                               
to one method of financing.                                                                                                     
COMMISSIONER  RODELL  expressed  her  belief that  as  the  state                                                               
enters  the  pre-Front-End   Engineering  and  Design  (pre-FEED)                                                               
stage, and considers entering contracts  such as an equity option                                                               
agreement,  a partnership  agreement,  or  a firm  transportation                                                               
[service] agreement  (FTSA), and  looks at  costs, there  will be                                                               
better   information   as   to   the  amount   of   the   state's                                                               
participation.   However, the determination  on financing  is not                                                               
necessary until  the final investment  decision (FID).   Although                                                               
some decisions will  be made during the  transition from pre-FEED                                                               
into FEED,  the state  will not  be in a  position to  issue debt                                                               
because the  state will not have  a clear estimate of  revenue to                                                               
pledge to the project.                                                                                                          
REPRESENTATIVE SEATON asked whether  the state has information as                                                               
to  the "hurdle  rate" the  producers will  use to  determine the                                                               
viability of a gas pipeline project.                                                                                            
COMMISSIONER RODELL indicated she did not.                                                                                      
2:13:42 PM                                                                                                                    
REPRESENTATIVE  SEATON   stated  his   concern  is  based   on  a                                                               
presentation by  Mr. Roger  Marks [petroleum  economist, contract                                                               
consultant  to Legislative  Budget  and Audit  Committee, at  the                                                               
hearing on  March 27,  2014] that  at the low  hurdle rate  of 12                                                               
percent  for  a project  costing  $65  billion,  there is  a  $17                                                               
breakeven point  on gas.  If  so, the project is  uneconomic, and                                                               
there is  no point in  progressing with the project  unless there                                                               
is something to gain.  He  suggested that if the producers in the                                                               
future  seek to  export natural  gas by  sea, this  project would                                                               
have  to  be  proven  uneconomic; therefore,  the  state  may  be                                                               
investing in a  project that has a hurdle rate  that will prevent                                                               
it from  completion and that  provides no future benefit  for the                                                               
state, but that will provide  a future benefit for the producers.                                                               
He  strongly urged  for  the state's  consultants  to reveal  the                                                               
information that  is needed so  that legislators are  assured the                                                               
state is directing its resources to a realistic project.                                                                        
2:16:01 PM                                                                                                                    
JOE  BALASH,  Commissioner,   Department  of  Natural  Resources,                                                               
acknowledged   that    some   of   information    [requested   by                                                               
Representative  Seaton]  can  found  in the  royalty  study  that                                                               
examined liquefied natural  gas (LNG) projects, such  as what are                                                               
typical  returns.   He referred  to previous  testimony from  the                                                               
producers  that "LNG  projects are  small  margin, but  long-term                                                               
cash generators,  and that they  provide an element  of stability                                                               
within  the portfolio  of their  companies in  the ways  in which                                                               
they  generate revenue."   He  agreed that  DNR is  accustomed to                                                               
"high teens  and beyond for  certain oil projects";  however, DNR                                                               
is unprepared  to provide a  specific [hurdle] number  [for LNG].                                                               
He offered to  provide information from the royalty  study to the                                                               
committee, but pointed  out that the key question  on whether the                                                               
project is  economic will be answered  by the terms of  the sales                                                               
and   purchase  agreements   (SPAs).     For  that   reason,  the                                                               
administration insisted on seeing  commitment and progress in the                                                               
Heads  of Agreement  (HOA) directing  that gas  marketing efforts                                                               
will  be  initiated  during  the  pre-FEED  phase,  because  only                                                               
through the marketing  process will the level of  support for the                                                               
project become known.                                                                                                           
REPRESENTATIVE  SEATON restated  that the  consultants should  be                                                               
able  to  gauge "within  a  reasonable  parameter" what  kind  of                                                               
return  the producers  require around  the world  before projects                                                               
are sanctioned.   He restated his concern and  opined the state's                                                               
intention is  for an  in-state pipeline, and  if this  project is                                                               
determined  to be  uneconomic  that  could be  a  precursor to  a                                                               
different  project  that  has  less  value  to  the  state.    He                                                               
encouraged the administration and the  oil and gas consultants to                                                               
work  together to  provide the  legislature a  hurdle rate  and a                                                               
breakeven point for this project.                                                                                               
2:20:30 PM                                                                                                                    
COMMISSIONER BALASH  agreed.  He  pointed out that  determining a                                                               
hurdle rate begins with the cost  of the project and DNR will use                                                               
the total cost estimate of  $45 [billion]; in contrast, Mr. Marks                                                               
began  with a  project  cost  of $65  billion.    In response  to                                                               
Representative  Seaton, he  said that  estimate includes  the LNG                                                               
liquefaction plant.                                                                                                             
CO-CHAIR FEIGE asked whether the  state has determined its hurdle                                                               
COMMISSIONER  BALASH  said   the  administration  has  considered                                                               
analysis that led  to the use of a common  discounting rate of 10                                                               
percent; the state  has also looked that the  opportunity cost of                                                               
capital  which indicates  6  percent, and  both  rates have  been                                                               
factored in as  the cost of capital to ensure  that the state can                                                               
clear  its cost  of  capital.   He cautioned  that  he would  not                                                               
characterize the given percentages as a hurdle analysis.                                                                        
CO-CHAIR FEIGE  agreed, adding that  the state can  also consider                                                               
the overall  benefit to  its finances and  its economy  by simply                                                               
going forward.                                                                                                                  
CO-CHAIR  SADDLER   asked  Commissioner  Rodell  to   comment  on                                                               
previous   testimony   expressing   the    view   that   a   firm                                                               
transportation commitment  is tantamount to an  obligation to the                                                               
state for equity debt.                                                                                                          
2:23:53 PM                                                                                                                    
COMMISSIONER RODELL disagreed, and  explained that there are many                                                               
contracts that  create a long-term  investment obligation  to the                                                               
state, but that are not  debt.  For example, long-term employment                                                               
contracts  related  to  the  Public  Employee  Retirement  System                                                               
(PERS) and the  Alaska Teachers' Retirement System  (TRS) are not                                                               
considered  a  liability   of  the  state.     In  addition,  the                                                               
expectation is that  the transportation costs in  the FTSAs would                                                               
be  recovered  in the  sales  contracts,  thereby offsetting  the                                                               
REPRESENTATIVE  SEATON said  his impression  is that  bond rating                                                               
agencies look at  the PERS/TERS liability as part  of the state's                                                               
COMMISSIONER RODELL recalled at  one time the unfunded [PERS/TERS                                                               
liability] was  not considered as  debt at all; currently,  it is                                                               
included [in debt] in terms  of understanding the state's overall                                                               
financial  position, but  is not  included in  the debt  capacity                                                               
calculations.  This is a  differentiation of types of obligations                                                               
- between debt  capacity or the state's financial  position - and                                                               
she  asked for  clarification of  the question:  If the  question                                                               
relates to  debt capacity,  it is not  included; if  the question                                                               
relates   to  overall   financial   position   and  the   state's                                                               
obligations,  an  FTSA would  be  considered,  "in light  of  the                                                               
revenue that  it also  generates."   Although an  obligation, the                                                               
FTSAs will have matching revenue.                                                                                               
2:27:28 PM                                                                                                                    
REPRESENTATIVE SEATON  clarified that his question  is focused on                                                               
whether FTSAs change the financial  position of the state and its                                                               
bonding capability.   The committee has been  told by legislative                                                               
consultants  that  the state's  financial  ability  to borrow  is                                                               
COMMISSIONER  RODELL  affirmed  that  the  state  will  have  the                                                               
ability  to  borrow although  its  ability  is impacted.    One's                                                               
financial position  can be excellent  and not be penalized  for a                                                               
tremendous amount  of debt  on a per-capita  basis; one  can also                                                               
issue  a lot  of debt,  have a  weak financial  position, and  be                                                               
penalized in one's  credit rating.  The state has  worked hard to                                                               
avoid debt  and that -  along with  its resources and  reserves -                                                               
gives it management flexibility to  "work over a volatile revenue                                                               
system"  and  there  is  recognition that  the  state  has  taken                                                               
financial   measures   to   successfully  manage   its   volatile                                                               
REPRESENTATIVE TARR observed that  all parties have opportunities                                                               
to disengage from  the project, and that the  state has financial                                                               
obligations  should it  withdraw.    She asked  if  the state  is                                                               
financially obligated  to TransCanada  (TC) if  one of  the other                                                               
three partners withdraws from the partnership.                                                                                  
2:30:53 PM                                                                                                                    
COMMISSIONER BALASH  responded that  the terms of  the memorandum                                                               
of understanding  (MOU) [between TransCanada Alaska  Company LLC,                                                               
Foothills Pipe  Lines LTD., TransCanada Alaska  Development Inc.,                                                               
and the State of Alaska,  dated 12/12/13] spell out the following                                                               
circumstances:    during pre-FEED,  termination  can  be for  any                                                               
reason;  during  FEED   phase,  if  one  of   the  other  parties                                                               
terminates, so  can the state,  but with the obligation  to repay                                                               
TC's  development  costs  and allowance  for  funds  used  during                                                               
construction (AFUDC).                                                                                                           
REPRESENTATIVE TARR posed  a scenario where one  of the producers                                                               
terminates, but the state chooses to find another partner.                                                                      
COMMISSIONER BALASH advised that  the fundamental question is why                                                               
one  party  withdraws:  The  reason  may be  based  on  an  issue                                                               
specific to  the business  condition of that  party, or  based on                                                               
activities in  the marketplace or the  industry.  At the  risk of                                                               
speculation,  he  suggested that  if  one  party has  a  specific                                                               
problem,  the other  parties  would work  to  solve the  problem;                                                               
however, if there  is a withdrawal "there's probably  going to be                                                               
a sorting-out period.   How long that will be, is  it going to be                                                               
terminal?  [It is] impossible to  say at this point."  Under that                                                               
circumstance,  the state  would have  the choice  to maintain  or                                                               
terminate its shipping arrangement  with TC, pay TC's development                                                               
costs, and claim all of TC's equity rights in the project.                                                                      
2:34:02 PM                                                                                                                    
REPRESENTATIVE  HAWKER  asked  whether the  administration  still                                                               
maintains its  intent to incorporate  firmer language in  the MOU                                                               
related  to  the exit  from  the  Alaska Gasline  Inducement  Act                                                               
(AGIA)  [passed in  the 25th  Alaska State  Legislature].   Also,                                                               
during previous  testimony before  the committee on  3/28/14, Mr.                                                               
Tony  Palmer, Vice  President, TC,  stated that  - regarding  the                                                               
exit from  AGIA and entering a  relationship with TC -  the five-                                                               
year tag  obligation to  allow TC to  participate in  a similarly                                                               
situated project  does not  begin until the  state has  signed an                                                               
FTSA.    Representative Hawker  said,  "By  passing the  enabling                                                               
legislation here, are you able to  secure an exit from AGIA prior                                                               
to signing that FTSA?"                                                                                                          
COMMISSIONER BALASH said yes.   He explained that upon passage of                                                               
the  enabling   legislation  and   execution  of   the  precedent                                                               
agreement  (PA), Commissioner  Rodell  and he  would declare  the                                                               
AGIA project  uneconomic in order  to start  a process -  that is                                                               
delineated in statute  - whereby TC must respond with  one of two                                                               
alternatives:     agree  or   contest.     If  TC   contests  the                                                               
declaration, an arbitration  process will follow.   If TC agrees,                                                               
the    parties   will    finalize    accounting   and    complete                                                               
reimbursements.   Thus,  following  the passage  of the  proposed                                                               
bill in April,  2014, the state will complete and  execute the PA                                                               
and initiate the  termination of the AGIA license.   He concluded                                                               
that this is "an action  that Commissioner Rodell and I control."                                                               
Commissioner Balash  acknowledged there have been  some questions                                                               
raised about whether TC has  fully committed to agreeing with the                                                               
state   that  the   project   is   uneconomic,  considering   the                                                               
definitions for the "trigger event,"  and the execution of all of                                                               
the required agreements.  The  concerns about TC's willingness to                                                               
agree with the state are  understandable, but he pointed out that                                                               
if  the state  executes the  PA and  declares the  project to  be                                                               
uneconomic, in  order to contest, TC  would have to argue  that a                                                               
project  overland  to Alberta,  Canada  -  that the  other  three                                                               
producers are not a party to - is economic.                                                                                     
2:39:13 PM                                                                                                                    
REPRESENTATIVE HAWKER directed attention  to the MOU, Recital 11,                                                               
which read [original punctuation provided]:                                                                                     
     The  Commissioners have  committed that  after Enabling                                                                    
     Legislation  becomes  effective  and execution  of  the                                                                    
     commercial agreements  committing the ANS  Producers to                                                                    
     initiate the pre-FEED phase of  the Alaska LNG Project,                                                                    
     the Commissioners  will initiate the process  of making                                                                    
     a  determination  for   purposes  of  AS  43.90.240(a).                                                                    
     Because  it  is  not  economically  feasible  that  two                                                                    
     large-scale   pipeline  projects   will  be   developed                                                                    
     concurrently  to transport  Alaska North  Slope natural                                                                    
     gas  to market,  the  Commissioners  have committed  to                                                                    
     consider  the  commercial  agreements executed  by  and                                                                    
     between  the  State, TADI  and  the  ANS Producers  for                                                                    
     development  of  the  Alaska LNG  Project  as  material                                                                    
     evidence that  the Licensee's AGIA licensed  project is                                                                    
     uneconomic as provided in AS 43.90.240(a).                                                                                 
REPRESENTATIVE  HAWKER  stated  after  the  enabling  legislation                                                               
becomes effective,  the commissioners  will initiate  the process                                                               
of exiting AGIA.  He said  the enabling legislation is limited to                                                               
receiving  authorization to  negotiate and  enter the  transition                                                               
agreements, authorization to negotiate  and enter the termination                                                               
agreements,  and legislation  that funds  the state's  contingent                                                               
and direct obligations.  Thus  there is no obligation to complete                                                               
anything, but  simply to  have received the  authority.   He then                                                               
directed attention  to the MOU,  Recital 12 which  read [original                                                               
punctuation provided]:                                                                                                          
     The Licensee has committed that  upon the occurrence of                                                                    
     the Trigger  Event and the execution  of the Transition                                                                    
     Agreements, the  Licensee will  agree that  the project                                                                    
     licensed under  the AGIA  License is  uneconomic within                                                                    
     the meaning of AS 43.90.240(a).                                                                                            
REPRESENTATIVE HAWKER  said that the aforementioned  recital sets                                                               
out  when  TC agrees  the  project  is  uneconomic and  adds  the                                                               
occurrence  of   a  trigger  event   -  which  is   the  enabling                                                               
legislation  - and  the execution  of the  transition agreements.                                                               
The  transition  agreements are  the  Alaska  LNG Project  Equity                                                               
Option   Agreement  and   the  Alaska   LNG  Midstream   Services                                                               
Agreement, and he asked which one of these is the PA.                                                                           
2:40:41 PM                                                                                                                    
COMMISSIONER  BALASH  answered that  the  PA  is the  Alaska  LNG                                                               
Midstream Services  Agreement, which  will be  developed pursuant                                                               
to Exhibit C  to the MOU, and which is  targeted for execution in                                                               
the second quarter of 2014.                                                                                                     
REPRESENTATIVE  HAWKER, noting  the  discussion  with Mr.  Palmer                                                               
related to  this issue, said it  is not clear that  the state has                                                               
the  opportunity to  terminate  a relationship  with  TC and  not                                                               
incur the tag obligation until the FTSA is signed.                                                                              
COMMISSIONER  BALASH observed  that the  agreements are  based on                                                               
the law  of general application,  thus it  is awkward to  try and                                                               
micromanage  any  further agreement.    He  opined the  committee                                                               
might seek  to achieve clarification  through intent  language or                                                               
an  uncodified  section; however,  statements  on  record by  Mr.                                                               
Palmer, and  the administration's understanding of  the agreement                                                               
and the process, alleviate the need for further clarification.                                                                  
2:43:32 PM                                                                                                                    
CO-CHAIR  FEIGE read  Recital 12  [text  found above].   He  then                                                               
directed  attention to  Article  1.1 Defined  Terms  of the  MOU,                                                               
paragraph (s) which read [original punctuation provided]:                                                                       
      "Transition Agreements" mean the Alaska LNG Project                                                                     
      Equity Option Agreement and the Alaska LNG Midstream                                                                      
     Services Agreement.                                                                                                        
CO-CHAIR  FEIGE then  directed attention  to Article  1.1 Defined                                                               
Terms of the MOU, paragraph  (e) which read [original punctuation                                                               
     "Alaska  LNG  Midstream  Services  Agreement"  means  a                                                                  
     Precedent Agreement (or similar  agreement), and a Firm                                                                    
     Transportation Services Agreement  entered into between                                                                    
     TADI  and the  State containing  the terms  set out  in                                                                    
     Exhibit "C".                                                                                                               
and paragraph (g) which read [original punctuation provided]:                                                                   
     "Alaska LNG Project Equity Option Agreement" means an                                                                    
       agreement to be entered into between TADI and the                                                                        
     State containing the terms set out in Exhibit "B".                                                                         
CO-CHAIR FEIGE concluded that the  bulk of the agreements need to                                                               
be signed before TC will declare AGIA uneconomic.                                                                               
2:45:20 PM                                                                                                                    
COMMISSIONER  BALASH   understood  the  connection   between  the                                                               
definitions,  but  advised  that  is not  how  the  process  will                                                               
unfold, and there  is a misunderstanding that the  state needs to                                                               
execute the FTSA  right away.  He assured the  committee that the                                                               
direction of the articles, timelines,  and the terms in Exhibit C                                                               
of  the MOU  make clear  that the  PA will  be the  instrument to                                                               
govern pre-FEED.   The  FTSA is  connected to  FEED, and  will be                                                               
executed after  the legislature has  reviewed and approved  it as                                                               
part  of the  overall  package of  project-enabling contracts  in                                                               
late 2015 or 2016.                                                                                                              
CO-CHAIR  FEIGE surmised  that the  state  is not  out from  AGIA                                                               
until after that.                                                                                                               
COMMISSIONER BALASH  said he  expected that  the process  for the                                                               
release of the  license will occur in June, 2014;  the PA will be                                                               
executed, the state  will declare the project  uneconomic, and TC                                                               
will agree.                                                                                                                     
2:47:01 PM                                                                                                                    
CO-CHAIR SADDLER presented a scenario  in which after the project                                                               
is completed,  there is an  increase in in-state demand  for gas.                                                               
He  asked how  the additional  demand would  be met  and how  the                                                               
regulatory process would ensure that  the new customers would get                                                               
a fair price.                                                                                                                   
COMMISSIONER BALASH  explained that  the process would  depend on                                                               
whether the gas comes from the  north or the south.  For example,                                                               
additional gas to power a mine  north of Fairbanks may or may not                                                               
require  additional compression  if the  gas is  coming from  the                                                               
North Slope, but if more  compression is needed, Appendix A, Pro-                                                               
Expansion Principles  of the  HOA allows the  state and/or  TC to                                                               
initiate   an  expansion   and  bear   the  resulting   costs  of                                                               
construction.   The transportation cost  would be charged  by TC.                                                               
The price  of the gas  to consumers will  depend on the  terms of                                                               
the  sellers of  the  gas, and  if  it is  legacy  gas or  newly-                                                               
discovered gas.   He noted that the cause for  concern is whether                                                               
the  cost  of transportation  is  fair  because "commodities  are                                                               
commodities."   If North  Slope gas  becomes too  expensive, Cook                                                               
Inlet  gas can  be  made  available for  consumers  in the  north                                                               
through  an arrangement  of backhaul  service, and  a swap.   Gas                                                               
from the  north will be  taken off the  pipeline for the  mine at                                                               
Fairbanks, and  gas from  Cook Inlet will  be substituted  at the                                                               
southern  end of  the pipeline  for  delivery to  the LNG  plant.                                                               
This  would  alleviate the  need  for  compression or  additional                                                               
infrastructure  although  some  allowances  would  be  made.  The                                                               
agreement  with TC  is that  TC would  provide backhaul  service,                                                               
which will  cost very  little.  The  questions remaining  are the                                                               
costs  of  the  transportation  service   and  the  cost  of  the                                                               
commodity.   If North Slope  gas plus the  transportation service                                                               
costs more  than the gas  in Cook Inlet,  Cook Inlet gas  will be                                                               
the means  by which gas  is priced  and provided at  points along                                                               
the pipeline.   However, if  North Slope gas  plus transportation                                                               
is cheaper  than Cook Inlet  gas, the  source of the  supply will                                                               
likely be the North Slope.   He cautioned that the projected life                                                               
of  the project  is  25 years;  over time,  the  state will  have                                                               
contracted  most of  its  proven resource  from  Prudhoe Bay  and                                                               
Point Thomson, and there may not  be extra gas in the reservoirs,                                                               
but  with   the  infrastructure  in  place,   and  the  expansion                                                               
principles, DNR expects more gas to  be found.  For companies who                                                               
discover a small  amount of gas, likely markets  will be in-state                                                               
along  the pipeline  route.   Only  a large  volume  of gas  will                                                               
warrant a new LNG train at Nikiski.                                                                                             
2:52:44 PM                                                                                                                    
CO-CHAIR SADDLER restated his question:                                                                                         
     I'm not sure how, in  the absence of regulation ... you                                                                    
     can guarantee  or assure, assure  the public  that they                                                                    
     won't be  expected to  pay extraordinarily  high prices                                                                    
     for gas should the  demand exceed the initial capacity,                                                                    
     initial commitments.                                                                                                       
COMMISSIONER BALASH responded:                                                                                                  
     The question of  where the gas comes from:  Is it going                                                                    
     to come from the state,  or the other project sponsors,                                                                    
     or will it come from  third parties?  It's not knowable                                                                    
     today.   As far as  the state's ability to  supply that                                                                    
     need from  the state's  share of the  gas, is  going to                                                                    
     depend upon a number of things.                                                                                            
COMMISSIONER  BALASH  continued  to   explain  that  the  state's                                                               
ability to  supply gas will  depend on the obligations  the state                                                               
has  undertaken   through  a  commitment   to  capacity   in  the                                                               
infrastructure, and  sales to customers.   If the state  needs to                                                               
divert gas  from customers, it  may incur penalties  depending on                                                               
the terms of the SPA, which are unknown at this time.                                                                           
CO-CHAIR SADDLER  pointed out that  there are provisions  in Cook                                                               
Inlet  regulations  that  set out  allowances  for  rates  during                                                               
situations of extraordinary demand.   He asked whether an element                                                               
to the agreement could be  negotiated that the producers would be                                                               
required to supply the needed gas, if the state could not.                                                                      
2:55:30 PM                                                                                                                    
COMMISSIONER BALASH  advised that  the referenced  regulations in                                                               
Cook Inlet relate to the  regulatory authorization to export gas.                                                               
He  suggested that  this type  of  regulation would  be a  useful                                                               
topic for the  state and the other parties to  discuss as part of                                                               
the upcoming contracts.                                                                                                         
REPRESENTATIVE SEATON  turned to the  question of why one  of the                                                               
parties would  withdraw from the  project.  He asked  whether DNR                                                               
and  DOR have  considered the  gas  usage needed  at the  Kuparuk                                                               
River Unit to  fully recover the oil from  the Kuparuk reservoir,                                                               
and that  a large amount  of gas  is required to  recover viscous                                                               
oil  from  deeper  formations.    He  noted  that  ConocoPhillips                                                               
Alaska,  Inc.  (ConocoPhillips)  may  not   have  enough  gas  to                                                               
participate  in  the  project  and  surmised  the  gas  from  the                                                               
pipeline would  be at  a higher price  to ConocoPhillips  - which                                                               
would  be a  situation  similar to  the  impact of  manufacturing                                                               
costs on  gas exports - and  which may lead to  the withdrawal of                                                               
one of the partners.                                                                                                            
COMMISSIONER BALASH  opined this topic is  laden with assumptions                                                               
about a hypothetical situation.  He said:                                                                                       
     I think  ultimately the question  that you  are hitting                                                                    
     on is:   At what point are the commercial  needs of one                                                                    
     going  to be  used to  leverage the  commercial options                                                                    
     for everybody  else?   And that's  something that  is a                                                                    
     concern to  everybody in  this agreement.   We  are, we                                                                    
     are going to  be engaged in a Mexican  standoff for the                                                                    
     next six  years.  But  it's in everybody's  interest to                                                                    
     move  this project  forward and  realize the  benefits.                                                                    
     ... I'm comfortable that all  parties are motivated and                                                                    
     aligned  to see  this resource  commercialized in  this                                                                    
     way. ... Do this project in a large way, efficiently,                                                                      
      is going to maximize the value, not only for us, but                                                                      
     also for the other parties.                                                                                                
COMMISSIONER  BALASH continued,  observing that  geologically, as                                                               
one  moves  west  into   the  National  Petroleum  Reserve-Alaska                                                               
(NPRA),  the rocks  are  more gassy,  thus  the above  referenced                                                               
company will "have plenty of access to plenty of gas ...."                                                                      
3:00:43 PM                                                                                                                    
REPRESENTATIVE   SEATON   recalled   a   legislative   consultant                                                               
suggested  that the  state should  explore  investing at  project                                                               
sanction because the  state will not benefit from  a project that                                                               
does not  go forward, but the  preliminary work would lay  a base                                                               
for future  development by the producers.   As a matter  of fact,                                                               
investment by a  sovereign at project sanction  has been utilized                                                               
around  the world,  and  would  reduce the  risk  of the  state's                                                               
investment benefitting other parties.  He asked for comments.                                                                   
COMMISSIONER  BALASH acknowledged  the aforementioned  process is                                                               
known as carrying  the crown, because the  [sovereign] is carried                                                               
to the  point of sanction  and suffers no  risk.  In  Alaska, the                                                               
state's  policies  such  as   the  Exploration  Incentive  Credit                                                               
[corporate tax] program  has exposed the state  to certain risks,                                                               
thus when  considering the timing  of the  state's participation,                                                               
the administration sought early  participation during pre-FEED in                                                               
order to ensure influence on  the offtake point locations, and on                                                               
a project  design to accommodate  expansions of the  pipeline and                                                               
of  the liquefaction  plant.   These decisions  are made  largely                                                               
during the  pre-FEED phase.   Although waiting until  FID lessens                                                               
risk on the development side, opportunities would be lost.                                                                      
REPRESENTATIVE SEATON observed that  all of the pipeline projects                                                               
previously  discussed have  offtake points  and are  designed for                                                               
future expansion if economically sound;  he surmised the cost and                                                               
risk  reward ratio  is not  in  the state's  favor and  requested                                                               
additional  written  information  for  the purpose  of  making  a                                                               
3:06:02 PM                                                                                                                    
COMMISSIONER BALASH agreed to  provide the requested information.                                                               
He cautioned  against "trust[ing] the companies  to do everything                                                               
that's  right and  best for  us, or  if we're  supposed to  be an                                                               
owner-state and  actually look  out for  our own  interests ...."                                                               
The administration  values being involved and  having access when                                                               
decisions are being made.                                                                                                       
CO-CHAIR  FEIGE added  that  if the  state  does not  participate                                                               
early with  an investment commensurate with  its equity position,                                                               
the [producers]  may not  trust the  state to  invest at  a later                                                               
date, and the project may not go forward.                                                                                       
REPRESENTATIVE  OLSON recalled  the companies  operating in  Cook                                                               
Inlet were successful during the  winter because they worked on a                                                               
consensual  basis; when  ENSTAR  Natural Gas  Company needed  gas                                                               
from  Marathon and  ConocoPhillips, approvals  were granted  by a                                                               
phone call due to their  long-term relationship.  He advised that                                                               
putting  too   much  information  in  contracts   is  similar  to                                                               
overregulation by the Regulatory Commission  of Alaska (RCA).  He                                                               
expressed his  hope that  there is "a  little leeway  between the                                                               
willing  sellers and  willing buyers  on  how they  can handle  a                                                               
stress situation like that."                                                                                                    
3:09:08 PM                                                                                                                    
COMMISSIONER  BALASH  said  he  concurred  with  the  claim  that                                                               
overregulation almost killed Cook Inlet.                                                                                        
REPRESENTATIVE  HAWKER  restated  his concern  about  ambiguities                                                               
between  the  MOU and  testimony  heard  by  the committee.    He                                                               
returned  attention  to  the  MOU   Article  1.1  Defined  Terms,                                                               
paragraph (s)  [text found above],  and paragraph (r)  which read                                                               
[original punctuation provided]:                                                                                                
     "Precedent  Agreement"  means the  precedent  agreement                                                                  
     referred to in Alaska  LNG Midstream Services Agreement                                                                    
     Term Sheet attached hereto as Exhibit "C".                                                                                 
REPRESENTATIVE HAWKER stated  that Exhibit C is a  term sheet for                                                               
negotiating  and entering  into a  PA.   In his  experience, when                                                               
doing project work,  a term sheet is signed first.   The way this                                                               
is defined is  that withdrawing from AGIA  requires the execution                                                               
of the transition  agreements, which are the "term  sheet and the                                                               
Project Equity Option Agreement," and he remarked:                                                                              
     That's when the licensee is  supposed to agree that the                                                                    
     project license under  AGIA is uneconomic.   There is a                                                                    
     big   difference  between   signing  the   term  sheet,                                                                    
     executing   the   midstream   options   agreement   and                                                                    
     executing the  precedent agreement that is  referred to                                                                    
     in that term sheet.                                                                                                        
3:11:21 PM                                                                                                                    
COMMISSIONER  BALASH responded  that the  MOU is  the term  sheet                                                               
that  has already  been executed;  however, the  PA that  will be                                                               
drafted  and executed,  consistent with  the term  sheet and  the                                                               
enabling  legislation,  is scheduled  to  be  completed in  June,                                                               
REPRESENTATIVE HAWKER surmised there is  a requirement for the PA                                                               
to be executed.  He  asked whether Mr. Balash's earlier reference                                                               
to "uneconomic" was to the "Canadian  line  ... or are we talking                                                               
about the line,  the AGIA project as the  project plan amendments                                                               
have been  executed that  is no  longer contemplating  a Canadian                                                               
COMMISSIONER BALASH  advised that a review  of the correspondence                                                               
between  the licensee  and the  commissioners  would reveal  that                                                               
both parties sought not to change  the project for the purpose of                                                               
the  license.   In  fact,  the  project  remains the  project  to                                                               
Alberta, and that would be  the project determined to be economic                                                               
or uneconomic in the termination event.   He offered to prepare a                                                               
clarifying side letter.                                                                                                         
CO-CHAIR  SADDLER  referred  to [an  unidentified  document]  and                                                               
read,  "The  State  of  Alaska can  exercise  its  equity  option                                                               
buyback at  the earlier of  December 31st, 2015 or  the execution                                                               
of  the  contracts,   sign  the  contracts."  He   asked  if  the                                                               
aforementioned  timeline   provides  sufficient   information  to                                                               
decide whether or not to buy 40 percent.                                                                                        
3:14:37 PM                                                                                                                    
COMMISSIONER  BALASH responded  that  the timing  is expected  to                                                               
place the state  in a better position to  evaluate that question.                                                               
The  pre-FEED process  will be  largely  complete, and  marketing                                                               
discussions  will  have  taken  place  in  2014  and  2015.    In                                                               
addition, information  on interest  rates will be  available, and                                                               
the  project-enabling contract  process will  be back  before the                                                               
legislature in late 2015.                                                                                                       
CO-CHAIR SADDLER then  asked whether there should  be a mechanism                                                               
in the agreement to delay  the deadline for executing the buyback                                                               
COMMISSIONER BALASH cautioned that  the additional amount of time                                                               
would be gained for a cost in negotiations.                                                                                     
3:16:40 PM                                                                                                                    
REPRESENTATIVE  HAWKER directed  attention to  CSSB 138(FIN)  am,                                                               
Sec. 31.25.120. Creation of subsidiaries which read:                                                                            
          Sec. 31.25.120. Creation of subsidiaries. The                                                                       
     corporation may create  subsidiary corporations for the                                                                    
     purpose  of  developing, constructing,  operating,  and                                                                    
     financing  in-state natural  gas  pipeline projects  or                                                                    
     other  transportation mechanisms;  for  the purpose  of                                                                    
     aiding  in  the development,  construction,  operation,                                                                    
     and   financing  of   in-state  natural   gas  pipeline                                                                    
     projects; or for the purpose  of acquiring [THE STATE'S                                                                    
     ROYALTY  SHARE OF  NATURAL GAS,]  natural gas  from the                                                                    
     North Slope, and natural gas  from other regions of the                                                                    
     state, including  the state's outer  continental shelf,                                                                    
     and  making that  natural gas  available to  markets in                                                                    
     the  state,  including  the delivery  of  natural  gas,                                                                    
     including  propane  and other  hydrocarbons  associated                                                                    
     with   natural  gas   other   than   oil,  to   coastal                                                                    
     communities  in the  state, or  for export.  Subject to                                                                  
     the limitations  for the use  of money  appropriated to                                                                
     the in-state  natural gas pipeline fund  (AS 31.25.100)                                                                
     and the  Alaska liquefied natural gas  project fund (AS                                                                
     31.25.110),  the  [A   SUBSIDIARY  CORPORATION  CREATED                                                                  
     UNDER  THIS  SECTION  MAY   BE  INCORPORATED  UNDER  AS                                                                    
     10.20.146  - 10.20.166.  THE] corporation  may transfer                                                                    
     assets  of  the  corporation to  a  subsidiary  created                                                                    
     under  this section.  A subsidiary  created under  this                                                                    
     section may  borrow money and  issue bonds  as evidence                                                                    
     of  that  borrowing  and  has all  the  powers  of  the                                                                    
     corporation that  the corporation grants to  it. Unless                                                                    
     otherwise  provided  by  the  corporation,  the  debts,                                                                    
     liabilities,   and   obligations    of   a   subsidiary                                                                    
     corporation  created under  this  section  are not  the                                                                    
     debts, liabilities, or obligations of the corporation.                                                                     
REPRESENTATIVE HAWKER stated that  following House Bill 4 [passed                                                               
in the  28th Alaska State Legislature]  differences arose between                                                               
DOL,  counsel  for  the Alaska  Gasline  Development  Corporation                                                               
(AGDC),  and legislative  counsel.   The original  intent was  to                                                               
authorize  AGDC  to  create  subsidiaries   as  needed,  but  DOL                                                               
interpreted   the   law   that  AGDC   could   only   incorporate                                                               
subsidiaries  under the  Alaska Nonprofit  Corporation Act.   The                                                               
bill attempts to  establish clarity that AGDC's  authority is not                                                               
restricted, and  he stressed  the intent of  the language  in the                                                               
bill is  to grant AGDC  the widest possible latitude  in creating                                                               
subsidiaries as  they are needed,  and that the  subsidiaries may                                                               
be either for-profit, or nonprofit.                                                                                             
3:18:54 PM                                                                                                                    
COMMISSIONER RODELL agreed that the  intent of the language is to                                                               
grant AGDC the  authority to create a subsidiary  for the state's                                                               
CO-CHAIR  SADDLER  asked  how   the  administration  weighed  the                                                               
potential  cost  benefits  of accepting  the  "breakup"  with  TC                                                               
versus  taking  the time  and  money  to renegotiate  for  better                                                               
COMMISSIONER  RODELL  explained  that  she  looked  at  financing                                                               
opportunities,  relevant   information,  and  the   state's  past                                                               
efforts so  far to commercialize  North Slope gas.   In addition,                                                               
she  explored  whether  the  state has  the  human  resources  to                                                               
proceed  to  the   project,  and  the  value   of  the  financial                                                               
relationship with  which TC  was willing to  commit.   In theory,                                                               
the state  could bring  in an  independent pipeline  company, but                                                               
then  would lose  the value  of TC's  knowledge, experience,  and                                                               
human  capital  resource  that  cannot  be  underestimated.    In                                                               
further response  to Co-Chair Saddler,  she pointed out  that the                                                               
AFUDC portion of  the project during pre-FEED is  estimated at $6                                                               
million,  and the  state does  not have  the capability  to build                                                               
equal infrastructure for an equal  appropriation, thus this value                                                               
is not overestimated.                                                                                                           
3:22:25 PM                                                                                                                    
COMMISSIONER BALASH  agreed, adding that  TC is more than  a bank                                                               
in this  context.   When the administration  first looked  at the                                                               
benefits  of state  participation it  assumed TC  would invest  a                                                               
small  percentage;   however,  ultimately  TC's   percentage  was                                                               
increased to provide  human capital and expertise.   In addition,                                                               
TC was prepared to deliver sufficient  value to the state and its                                                               
commitment to a  capital structure of 75  percent debt/25 percent                                                               
equity  for the  ratemaking purposes  of the  tariff is  not seen                                                               
often, and was a key  factor.  Typically, when pipeline companies                                                               
charge  a  lower  "equity  number"  it  is  related  to  existing                                                               
pipelines  or  those  under  expansion.   He  recalled  that  the                                                               
Federal  Energy Regulatory  Commission (FERC)  certificated terms                                                               
on  new construction  were provided  to the  committee, revealing                                                               
the best ratio was 60 percent  debt/40 percent equity.  There are                                                               
also examples of  higher than 12 percent return  on equity (ROE).                                                               
Although  these  examples  are   not  the  best  comparison,  the                                                               
administration's  consultants   provided  additional  information                                                               
specific to LNG  projects that showed a broad  spectrum of terms,                                                               
without an  international norm or  standard to follow.   Finally,                                                               
when considering the  size, scale, capital structure,  and ROE of                                                               
the project,  the state is  in a  good position.   Conversely, if                                                               
the  state  uses  a  competitive  process,  only  three  or  four                                                               
pipeline   companies  in   North  America   have  the   technical                                                               
experience and  financial capability  to bid,  and he  asked, "If                                                               
you tweak  one little term, how  much do you improve  the state's                                                               
bottom line?"   He  concluded that  this is a  fair deal  for the                                                               
state,  and the  opportunity  to improve  the  terms is  somewhat                                                               
3:29:51 PM                                                                                                                    
CO-CHAIR  FEIGE observed  that as  the  project proceeds  through                                                               
pre-FEED,   the  negotiated   contracts   will   return  to   the                                                               
legislature  for  approval.    He  asked  whether  they  will  be                                                               
submitted all  at once,  and how much  time the  legislature will                                                               
have to consider the contracts.                                                                                                 
COMMISSIONER  BALASH   expected  that  the  DNR   [evaluation  of                                                               
proposals for  the disposition of  royalty oil] will  come before                                                               
the legislature, together with the  contracts, in a comprehensive                                                               
way.  During the royalty oil  disposition process there will be a                                                               
public  notice and  comment period,  followed by  a review  and a                                                               
recommendation  by the  Alaska Royalty  Oil  and Gas  Development                                                               
Advisory Board,  a final finding  from the commissioner,  and the                                                               
introduction   of   legislation   to  approve   the   disposition                                                               
agreement.   Although some  longer timelines  will be  needed the                                                               
[legislative] committees will be briefed in executive sessions.                                                                 
REPRESENTATIVE  HAWKER directed  attention to  section 61  of the                                                               
bill which read:                                                                                                                
      * Sec. 61. The uncodified law of the State of Alaska                                                                    
     is amended by adding a new section to read:                                                                                
          TRANSITION:   REGULATIONS.   The   Department   of                                                                    
     Revenue  and the  Department of  Natural Resources  may                                                                    
     adopt   regulations   to   implement  this   Act.   The                                                                    
     regulations take effect  under AS 44.62 (Administrative                                                                    
     Procedure Act),  but not before  the effective  date of                                                                    
     the provisions of this Act being implemented.                                                                              
REPRESENTATIVE HAWKER  clarified that AGDC would  be adopting the                                                               
regulations  and  DOR and  DNR  would  not adopt  regulations  on                                                               
behalf of AGDC.                                                                                                                 
COMMISSIONER RODELL deferred to the Department of Lqw.                                                                          
3:34:17 PM                                                                                                                    
SUSAN  POLLARD, Assistant  Attorney  General, Oil,  Gas &  Mining                                                               
Section,  Civil  Division  (Juneau),  Department  of  Law  (DOL),                                                               
explained   that  the   section  contains   typical  transitional                                                               
language  to  allow agencies  to  begin  the regulations  process                                                               
prior to  the effective date  of the statute  because regulations                                                               
cannot become effective until after  the enabling statute becomes                                                               
effective.   There  is  no intent  that DOR  or  DNR would  adopt                                                               
regulations  for AGDC;  in  fact, AGDC  has  its own  regulations                                                               
outside of the Alaska Administrative Procedure Act.                                                                             
REPRESENTATIVE  HAWKER recalled  suggestions  from outside  legal                                                               
counsel related  to tax  and antitrust  statutes, that  the state                                                               
clarify  that AGDC  is a  political subdivision  and to  obtain a                                                               
private letter ruling [from the  Internal Revenue Service (IRS)].                                                               
Also, House Bill  4 included language that the debts  of AGDC are                                                               
not the  debts of the  state, which could  be used to  imply that                                                               
AGDC is  not a political subdivision  of the state.   He asked if                                                               
the  administration  was  in agreement  with  the  aforementioned                                                               
suggestions   and   whether   an   amendment   was   needed   for                                                               
clarification of AGDC's tax exempt status.                                                                                      
COMMISSIONER   RODELL   deferred   to    DOL.      Clearly,   the                                                               
administration does  not intend  that AGDC removes  the sovereign                                                               
authority of the state to tax.                                                                                                  
REPRESENTATIVE HAWKER restated his question.                                                                                    
3:39:01 PM                                                                                                                    
CHRIS POAG,  Assistant Attorney General, Labor  and State Affairs                                                               
Section,  Civil  Division  (Juneau),  Department  of  Law  (DOL),                                                               
pointed out that the subject is  future income that may be earned                                                               
by a public  corporation, and he opined that the  tax issue would                                                               
arise when  the state decides if  the investor is the  state.  If                                                               
that is  the case, it has  been long established by  IRS that the                                                               
state would  not be taxed.   However, if the income  is earned by                                                               
another  entity  such as  AGDC,  the  legislature would  want  to                                                               
engage  with tax  counsel on  the various  tax-exemption options.                                                               
For example,  if state  earns the  income - or  if the  entity is                                                               
considered to be an integral part of  the state - there is no tax                                                               
issue.  Furthermore,  IRS has ruled that  a political subdivision                                                               
is  also given  the statutorily-applied  immunity.    Sovereignty                                                               
has  three  attributes:   taxation,  eminent  domain, and  police                                                               
power,  thus these  attributes would  have to  be established  in                                                               
AGDC as  well as that it  is an integral  part of the state.   If                                                               
that failed,  Sections 115 or  501(c)(3) of the  Internal Revenue                                                               
Code  would be  utilized.   Although "a  little bit  premature at                                                               
this point in terms of  the enabling legislation," tax issues are                                                               
important  and if  AGDC becomes  the investor,  a private  letter                                                               
ruling  may  be  sought.    Regarding the  need  for  a  specific                                                               
amendment,  he advised  that IRS  is not  concerned with  labels;                                                               
more importantly, the Alaska Supreme  Court has ruled that public                                                               
corporations must be in a  department within the executive branch                                                               
of  government,  and  because  Alaska  does  not  have  political                                                               
subdivisions  in state  agencies, "It  would be  a little  odd, I                                                               
think,  to suggest  that AGCD  is a  political subdivision  under                                                               
state law."   Mr. Poag agreed that language to  clarify that debt                                                               
issued by  AGDC cannot  be considered  debt of  the state  may be                                                               
warranted,  but   cautioned  against  declaring  AGDC   to  be  a                                                               
political  subdivision of  the  state.   In  further response  to                                                               
Representative  Hawker,   he  confirmed  that  changes   are  not                                                               
3:44:33 PM                                                                                                                    
REPRESENTATIVE  TARR  asked  whether   there  is  an  established                                                               
process related  to how  profits earned by  AGDC or  a subsidiary                                                               
flow back to the state.                                                                                                         
MR. POAG  said the income would  be considered a source  of state                                                               
revenue to the general fund absent an implied exemption.                                                                        
3:45:52 PM                                                                                                                    
COMMISSIONER  RODELL  added  that  this  issue  is  clarified  in                                                               
section 1, paragraph (5) of the bill which read:                                                                                
     (5) advance an Alaska  liquefied natural gas project by                                                                
     developing   infrastructure   and   providing   related                                                              
     services,     including     services     related     to                                                                
     transportation,   liquefaction,   a  marine   terminal,                                                                
     marketing, and  commercial support; if  the corporation                                                                
     provides a  service under this paragraph  to the state,                                                                
     a public  corporation or instrumentality of  the state,                                                                
     a  political  subdivision  of  the  state,  or  another                                                                
     entity of the  state, the corporation may  not charge a                                                                
     fee  for the  service  in an  amount  greater than  the                                                                
     amount necessary  to reimburse the corporation  for the                                                                
     cost of the service;                                                                                                   
COMMISSIONER RODELL  explained the language makes  clear that the                                                               
intent of  AGDC is to provide  certain services to the  state and                                                               
that its income flows to the state.                                                                                             
3:46:35 PM                                                                                                                    
REPRESENTATIVE TARR surmised  that the bill was  changed to allow                                                               
a subsidiary  under a  limited liability  company (LLC)  become a                                                               
taxing  entity.   Under  this  circumstance,  she asked  how  the                                                               
financial relationship between the  state, AGDC, and a subsidiary                                                               
that is not tax-free, would work.                                                                                               
MR. POAG responded  that if AGDC created an LLC,  that is a pass-                                                               
through entity,  thus the income  would still be earned  by AGDC.                                                               
He  urged for  AGDC  to ensure  that if  its  subsidiary were  an                                                               
income-earning entity, it would be  a pass-through entity so that                                                               
AGDC  would qualify  for the  tax exemption,  or that  the entity                                                               
does  not  have  income  consequences.   On  the  other  hand,  a                                                               
subsidiary  for the  purpose  of  issuing debt  would  be set  up                                                               
differently than  one for  holding an  investment.   He concluded                                                               
that  each business  entity would  have to  be considered  in the                                                               
light of its potential uses and risks.                                                                                          
REPRESENTATIVE TARR  returned attention  to section  1, paragraph                                                               
(5)  and  asked  whether  it  is  necessary  to  consider  adding                                                               
language to the bill, "that  makes those relationships more clear                                                               
or,  ... under  other  scenarios where  those subsidiaries  might                                                               
have a  different corporate structure,  ... are  there unforeseen                                                               
things that could happen that we  would want to be aware of right                                                               
3:49:13 PM                                                                                                                    
MR.  POAG said  Representative  Tarr raised  a policy,  business-                                                               
judgment question, more than a legal question.  He remarked:                                                                    
     Certainly,  if   the  legislature  wanted   to  provide                                                                    
     clarity and  say now the  types of structures  that can                                                                    
     be  utilized, that  would provide  that direction.   Of                                                                    
     course it comes  at the expense of  allowing the entity                                                                    
     to  choose the  structure that's  most appropriate  for                                                                    
     the  particular  project.  ... This  construct  clearly                                                                    
     gives that  discretion to AGDC  to discern what  is the                                                                    
     best structure to utilize.                                                                                                 
CO-CHAIR SADDLER  referred to the  antitrust tax  concerns raised                                                               
in a  letter from consultants  Baker & Miller to  the Legislative                                                               
Budget and Audit  Committee, dated 3/23/14.  He  asked whether it                                                               
is  necessary  for  the  state to  protect  itself  by  including                                                               
language in the bill that the  state declares that the passage of                                                               
this  bill, and  the  implementation of  the  MOU, represent  the                                                               
state's  intent  to  displace  the role  of  competition  in  the                                                               
development and marketing of North Slope gas.                                                                                   
MR. POAG deferred to Mr. Minesinger.                                                                                            
3:50:56 PM                                                                                                                    
KENNETH  MINESINGER,  Attorney,  Global Energy  &  Infrastructure                                                               
Practice, Greenberg  Traurig LLP, provided a  brief background of                                                               
his work on  this project dating back to 2005,  and other oil and                                                               
gas  consulting.   Regarding the  memo  from Baker  & Miller,  he                                                               
opined  Baker &  Miller are  in  favor of  the general  structure                                                               
established  by  the  HOA  related  to  expansions  and  from  an                                                               
antitrust perspective.  Baker  & Miller recommended clarification                                                               
on the state's  intent to displace competition  and qualify AGDC,                                                               
or the  project, for  state action  immunity under  the antitrust                                                               
laws.  Mr. Minesinger agreed  with the recommendation in general,                                                               
but  he said  he would  need to  review specific  changes to  the                                                               
REPRESENTATIVE SEATON observed that as  the AGIA licensee, TC was                                                               
responsible for  securing the FERC  license and all of  the other                                                               
functions;  however,  under  the   proposed  system,  TC  is  not                                                               
employed as the pipeline developer,  but as the representative of                                                               
the state's equity stake in the pipeline.  He remarked:                                                                         
     I guess  I want to  make sure that  the contribution[s]                                                                    
     that  the  other parties  are  making  to the  pipeline                                                                    
     development  are  to  TransCanada  as  well.  If  we're                                                                    
     calling  them the  pipeline company,  and not  just the                                                                    
     State  of  Alaska  through  transfer  of  equity  share                                                                    
     bringing  them  in  and  paying  them,  and  the  other                                                                    
     parties participating  in other  ways, but  not similar                                                                    
     payment  structure to  a pipeline  company, because  no                                                                    
     longer are  they a  separate pipeline  company, they're                                                                    
     part of  us.  And  so I'm  concerned that we  have this                                                                    
     inequitable  contribution  into  TransCanada  which  no                                                                    
     longer fulfills the same role that they assumed under                                                                      
3:55:48 PM                                                                                                                    
COMMISSIONER  BALASH advised  that  there may  be some  confusion                                                               
about  the terms  of  the  agreement.   The  project  is a  joint                                                               
venture; a new company -  populated by representatives of each of                                                               
the sponsors  - will be  formed to build  the pipeline.   The new                                                               
joint venture  company will build  the project and TC  will bring                                                               
its pipeline expertise to the  venture.  Regarding the allocation                                                               
of costs, he  assured the committee that the costs  will be split                                                               
fairly and proportionally to each  party's respective interest in                                                               
the gas.   The  state's interest  will be  determined by  the tax                                                               
rate set in the proposed legislation.   Later in the project, the                                                               
costs incurred  by the joint  venture will  be billed out  to the                                                               
sponsors and the state will be  watching to ensure that the state                                                               
pay only its 25 percent.   TransCanada's role with the state will                                                               
be  in   the  ordering  of  the   payments  during  construction.                                                               
TransCanada's share,  or its  share on  the state's  behalf, will                                                               
dictate the payment schedule during  those years.  Ultimately, at                                                               
operation,  the  benefits  of TC's  ability  to  find  additional                                                               
business and new customers for state gas will pay big dividends.                                                                
3:59:04 PM                                                                                                                    
REPRESENTATIVE SEATON  noted that  previous testimony  before the                                                               
committee  raised  the  possibility   of  using  Alaska  Railroad                                                               
Corporation (ARRC) bonds  to secure AGDC debt.   He asked whether                                                               
DOR  is considering  using tax-exempt  ARRC bonds  - and  seeks a                                                               
private letter ruling from IRS - for this project.                                                                              
COMMISSIONER  RODELL said  DOR is  not seeking  a private  letter                                                               
ruling on  ARRC bonds  at this  time.   There is  concern whether                                                               
this project  would qualify, or  receive a favorable  IRS ruling,                                                               
due to  the differences  between the Alaska  LNG Project  and the                                                               
Alaska Stand  Alone Pipeline (ASAP).   Firstly, the  ASAP project                                                               
is solely an in-state pipeline, and  the Alaska LNG Project is an                                                               
export project  that will  benefit three  private companies.   In                                                               
addition,  tax  exemptions are  presumed  to  benefit the  public                                                               
good, and  although the state's  participation is for  the public                                                               
good, the  project overall is  to sell gas primarily  to overseas                                                               
markets in  order to make  a profit.  She  said there is  a "huge                                                               
risk"  of  not getting  an  affirmative  opinion from  a  private                                                               
letter ruling.  Secondly, there  are no provisions in statute for                                                               
DOR to  issue bonds through  ARRC.  Commissioner  Rodell stressed                                                               
the difference nature of the two gas pipeline projects.                                                                         
REPRESENTATIVE OLSON  returned to the possibility  of obtaining a                                                               
private letter ruling from IRS  on whether AGDC qualifies for tax                                                               
exemption.   He surmised it takes  one to two years  to receive a                                                               
private letter ruling.                                                                                                          
4:03:06 PM                                                                                                                    
COMMISSIONER  RODELL opined  the state  does not  need a  private                                                               
letter  ruling  for  AGDC's  participation   in  the  Alaska  LNG                                                               
Project.  Receiving a private  letter ruling on tax exemption can                                                               
take  a long  or a  short period  of time;  generally, an  entity                                                               
wants to be  confident of the outcome of the  ruling and prepared                                                               
to  deal  with   the  consequences.    In   further  response  to                                                               
Representative Olson, she  said a private letter  ruling will not                                                               
be  requested during  the pre-FEED  period.   In response  to Co-                                                               
Chair Feige, she confirmed the request would be prior to FID.                                                                   
CO-CHAIR SADDLER asked  whether an adverse ruling  is a potential                                                               
detriment to ARRC's bonding authority on other projects.                                                                        
COMMISSIONER RODELL said  ARRC has clear authority  to issue debt                                                               
through state statute.                                                                                                          
CO-CHAIR  SADDLER  inquired as  to  whether  FERC's authority  to                                                               
regulate  includes  the  transportation, shipping,  storage,  and                                                               
treatment of LNG,  and "how broad is the potential  scope of FERC                                                               
4:06:40 PM                                                                                                                    
MR. MINESINGER  said the relevant  provision in the  [Natural Gas                                                               
Act, 15  U.S.C. § 717b (NGA)]  has not been fully  interpreted by                                                               
FERC.   It  is  clear  that FERC  has  exclusive jurisdiction  to                                                               
regulate the  LNG liquefaction plant; however,  jurisdiction over                                                               
the regulation of the rates and  services of the pipeline and the                                                               
gas treatment plant (GTP) has  not been resolved.  The definition                                                               
of  an  LNG  terminal  in  the NGA  refers  to  liquefaction  and                                                               
transportation to the  terminal, but it is  debatable whether the                                                               
intent was  to "sweep  in an  800-mile pipeline  as part  of FERC                                                               
regulation of the LNG terminal  itself."  He concluded that there                                                               
is a lack of clarity on  how far FERC regulation extends upstream                                                               
of the liquefaction terminal.                                                                                                   
CO-CHAIR  SADDLER  asked  when  and   how  this  issue  would  be                                                               
MR.  MINESINGER  referred  to  the  HOA,  ARTICLE  6:  REGULATORY                                                               
FRAMEWORK,  ACCESS AND  EXPANSION.   Article  6.2 read  [original                                                               
punctuation provided]:                                                                                                          
        During Pre-FEED, the Alaska LNG Project will be                                                                         
     advanced under NGA Section 3.                                                                                              
MR. MINESINGER  explained that during  pre-FEED the  project will                                                               
be  advanced under  Section 3  of the  NGA and  the parties  will                                                               
engage with FERC staff to  discuss jurisdiction over the pipeline                                                               
and GTP.  Of special  interest are the commercial terms reflected                                                               
in the HOA, including the ability  of the state to provide access                                                               
to  third parties  and  the  ability of  any  of  the parties  to                                                               
undertake an expansion  of the project.  As provided  in the HOA,                                                               
this could occur during pre-FEED  by informal discussions or by a                                                               
formal petition  for declaratory order  from FERC.   He estimated                                                               
FERC's written response to a petition would take a few months.                                                                  
4:10:44 PM                                                                                                                    
REPRESENTATIVE TARR  returned to  the subject of  revenue, noting                                                               
that previous testimony has suggested  that the state will likely                                                               
want to  engage more partners during  the terminal, liquefaction,                                                               
and marketing phases  of the project.  Although it  is clear AGDC                                                               
and its  subsidiaries are  limited to  only paying  expenses, she                                                               
asked  how  the state  will  evaluate  the revenue  impact  other                                                               
future  commercial  partners  may  have  on  the  state's  annual                                                               
COMMISSIONER  RODELL   said  the   impact  on  revenue   will  be                                                               
determined on a case-by-case basis.   After pre-FEED, the state's                                                               
participation will  be better known  because after  the marketing                                                               
process begins,  buyers will bid on  the state's gas and  will be                                                               
interested in  having an equity  position in the project.   These                                                               
offers  will be  evaluated in  the context  of the  overall sales                                                               
agreements,  which  will come  back  before  the legislature  for                                                               
approval.   At  that time,  the administration  will provide  the                                                               
terms of  the sales agreements,  the benefits of bringing  in new                                                               
participation in  the project in  terms of revenue to  the state,                                                               
and the costs.   She advised that if the  cost of the prospective                                                               
participant  "well-exceeds" what  it is  willing to  pay for  the                                                               
gas, there is no benefit to the state to pursue a partnership.                                                                  
REPRESENTATIVE TARR  asked whether  is there a  [financial] point                                                               
that determines the  project is "no longer worth it  to the state                                                               
because the reduction to the annual revenue would be so great."                                                                 
4:14:19 PM                                                                                                                    
COMMISSIONER RODELL  was unwilling to  commit to a  certain level                                                               
given  the  possibility  of  other   factors.    For  example,  a                                                               
potential partner  may be  willing to  provide in-state  gas even                                                               
though the revenue  to the state in the  partnership agreement is                                                               
low.    Also,  in the  case  of  a  partner  such as  the  Alaska                                                               
Permanent Fund Corporation, the  administration may be willing to                                                               
make concessions.                                                                                                               
REPRESENTATIVE SEATON  asked a  question to  be addressed  by the                                                               
commissioners at  the meeting  on 4/2/14.   He observed  that oil                                                               
tax  fiscal certainty  is  not a  term to  be  negotiated in  the                                                               
contract;  however, gas  development credits  may offset  oil tax                                                               
revenues.  He  asked for the maximum amount of  credits for lease                                                               
expenditures  over  the  next several  years,  and  the  possible                                                               
liability to the state.                                                                                                         
4:16:27 PM                                                                                                                    
The House  Resources Standing Committee  meeting was  recessed at                                                               
4:16 p.m., to be continued at 6:00 p.m.                                                                                         
6:04:36 PM                                                                                                                    
CO-CHAIR  FEIGE called  the  House  Resources Standing  Committee                                                               
back to  order at 6:04  p.m.  Present at  the call back  to order                                                               
were  Representatives Hawker,  Olson,  Tarr,  Seaton, P.  Wilson,                                                               
Kawasaki, Saddler, and Feige.                                                                                                   
6:04:40 PM                                                                                                                    
CO-CHAIR FEIGE opened  public testimony on CSSB 138(FIN)  am.  He                                                               
informed the committee additional  written testimony was included                                                               
in the committee packet.                                                                                                        
6:05:42 PM                                                                                                                    
BILL WARREN  informed the committee  he is a 60-year  resident of                                                               
Alaska, expressed his long interest  in an in-state gas pipeline,                                                               
and supported  the involvement of the  Alaska Gasline Development                                                               
Corporation.   However,  in-state  gas for  residents outside  of                                                               
Anchorage  seems to  be an  afterthought, and  he questioned  the                                                               
project's alignment with Alaskans.   He said in-state gas is more                                                               
important than exporting LNG to  China because Alaska needs cheap                                                               
energy in  order to prosper, which  can happen with a  small bore                                                               
line from  Prudhoe Bay to  Fairbanks, and  the big line  can wait                                                               
for the  future.  He  strongly urged  for two pipelines  with one                                                               
being a small  in-state gas pipeline that could  be financed with                                                               
Alaska Railroad  Corporation bonds,  regulated by  the Regulatory                                                               
Commission of  Alaska, and  which would  go directly  to downtown                                                               
Fairbanks with  no need  for offtake ports.   The  pipeline could                                                               
provide  natural gas  and propane  for small  businesses and  for                                                               
residents.  Mr. Warren noted that  this has been a problem for 60                                                               
years and  urged for  action on  the in-state  gas pipeline.   He                                                               
said he was  glad that the House Resources  Standing Committee is                                                               
thoroughly vetting this project.                                                                                                
REPRESENTATIVE OLSON asked about an ongoing project in Nikiski.                                                                 
MR. WARREN  said Hillcorp has  increased production, but  has not                                                               
alleviated  the  need  for  in-state   gas  to  help  Cook  Inlet                                                               
establish a market for natural gas  and reopen the LNG plant.  He                                                               
pointed out  that a  lot of  the activity was  in search  of oil.                                                               
There are two jack-up rigs that "[are] a start."                                                                                
6:11:44 PM                                                                                                                    
TOM PATMOR  provided a brief  personal history of  his experience                                                               
in the  oil and construction  industries.  He said  oil companies                                                               
are  disreputable  and  not  to   be  trusted  and  gave  several                                                               
examples.   If  the  800-mile  pipeline does  not  get built,  he                                                               
suggested  building  a  pipeline   across  the  Alaska  Peninsula                                                               
because LNG tankers  could ship from Prudhoe (Bay)  to Naknek and                                                               
there would  be 300 miles of  pipeline that would only  cross one                                                               
river.    Mr.  Patmor  reminded the  committee  the  Trans-Alaska                                                               
Pipeline System  (TAPS) was to  cost $905 million, but  cost over                                                               
$8 billion, which was a tenfold increase in cost.                                                                               
6:16:38 PM                                                                                                                    
RICHARD FINEBERG  said a  North Slope natural  gas pipeline  is a                                                               
mistaken and  risky venture, and  the state should  instead focus                                                               
on continued  oil development.   He provided ten reasons  to vote                                                               
against  SB  138  and  keep the  successful  Alaska's  Clear  and                                                               
Equitable  Share   (ACES)  [passed  in  the   25th  Alaska  State                                                               
Legislature]  tax  regime:   10)  previous  attempts to  build  a                                                               
natural gas  pipeline have  failed; 9) the  production of  LNG is                                                               
doomed  because the  economy of  scale has  been reduced  without                                                               
reducing  cost; 8)  the LNG  project is  unwise due  to its  high                                                               
cost; 7) confusing testimony by  consultants before the House and                                                               
Senate;  6)  natural  gas  is undesirable  compared  to  oil;  5)                                                               
questions   regarding   the  administration's   credibility;   4)                                                               
questions  regarding   the  oil   companies'  veracity;   3)  oil                                                               
companies' profits  prove that Alaska's  current tax  regime does                                                               
not need an overhaul to  assure production; 2) profits from North                                                               
Slope  production under  ACES prove  its value  to investors;  1)                                                               
North  Slope profits  despite declining  production indicate  the                                                               
oil  industry   uses  highly  misleading   tactics.     To  avoid                                                               
repetition, he said, he stood by  his testimony that he has given                                                               
at previous  hearings.   Documented and  graphic support  for his                                                               
observations  can  be  found  on  his web  site  and  in  written                                                               
testimony  submitted to  the committee.   He  concluded that  the                                                               
industry  creates  a  misleading  impression  that  industry  net                                                               
revenues  decline when  oil prices  rise from  $80 per  barrel to                                                               
$130 per  barrel, but  the opposite  is the  case.   Mr. Fineberg                                                               
noted that his figures have  not been disclaimed by the industry.                                                               
He suggested the present political  system enables "tall tales to                                                               
6:24:16 PM                                                                                                                    
REPRESENTATIVE  TARR  asked  Mr.   Fineberg  to  provide  written                                                               
MR. FINEBERG  agreed to send  further information on a  ruling by                                                               
FERC Administrative Law Judge Cintron.                                                                                          
6:27:24 PM                                                                                                                    
LYNN  WILLIS  paraphrased from  a  written  statement as  follows                                                               
[original punctuation provided]:                                                                                                
     I   am   a   residential  consumer   of   Natural   Gas                                                                    
     representing  myself.  I  am extremely  leery  of  this                                                                    
     Legislation and  I believe, based  on our  track record                                                                    
     regarding gas  supply, I have  good reason to be  so. I                                                                    
     urge  you to  thoroughly  vet  this legislation  before                                                                    
     I have listened to the  testimony regarding SB138. I am                                                                    
     impressed with  the analysis and your  questions. Thank                                                                    
     you for inviting testimony that  was not invited by the                                                                    
     I am  sure you  have hired the  best and  the brightest                                                                    
     consultants  to  evaluate  this  proposition;  however,                                                                    
     didn't  you do  that  with AGIA?  Now  six years  later                                                                    
     after creation  of AGIA with  over 300  million dollars                                                                    
     gone  from the  state treasury  and with  at least  130                                                                    
     million more  owed to Trans  Canada we have  neither an                                                                    
     inch  of pipe  purchased nor  any application  from any                                                                    
     producer to AOGCC  for release of a  single molecule of                                                                    
     My  concern  is about  domestic  supply  of energy  for                                                                    
     Alaskans  including  natural   gas.  The  Alaska  State                                                                    
     Government  has yet  to create  a comprehensive  energy                                                                    
     plan  that   would  identify  the  primary   source  of                                                                    
     renewable and  non-renewable energy for each  region of                                                                    
     the  state for  electrical  generation, space  heating,                                                                    
     vehicle  mobility,  local   industrial  production  and                                                                    
     energy  resources for  export. This  failure to  have a                                                                    
     comprehensive plan results in  what we see currently as                                                                    
     we  purchase  study  after study  and/or  expend  state                                                                    
     revenue  in a  seemingly  endless pursuit  of the  next                                                                    
     best idea.                                                                                                                 
     We have spent how much  on the "Cook Inlet Renaissance"                                                                    
     for supply  contracts through 2018?  We have  spent how                                                                    
     much on the AGDC/ASAP project  which now seems about to                                                                    
     be  abandoned for  this AKLNG  project.  AGIA is  still                                                                    
     restricting  volume limits  for the  AGDC/ASAP project.                                                                    
     We won't  even consolidate  our natural gas  demands in                                                                    
     the rail  belt region  as we  pursue trucking  LNG into                                                                    
     Fairbanks. Aren't we now competing  with the Cook Inlet                                                                    
     gas  producers  and  haven't   we  created  the  almost                                                                    
     unbelievable  situation where,  to various  degrees, we                                                                    
     are expending  state funds to  pay for three  pipe line                                                                    
     efforts at the same time (AGIA, AGDC/ASAP, and AKLNG).                                                                     
     If  the House  emulates  the  Senate, this  Legislation                                                                    
     will become law.  Soon we will be  in pre-election pre-                                                                    
     feed and once again hopes of Alaskans will rise.                                                                           
     I  ask you  to not  restrict yourselves  to a  specific                                                                    
     time limit  to vet  this legislation.  If for  no other                                                                    
     reason  you  should  be   extremely  cautious  in  your                                                                    
     deliberations because  we are now in  deficit spending.                                                                    
     I would like to remind you  that we live in a sovereign                                                                    
     not an investment bank.                                                                                                    
     As you proceed toward passage  of SB 138 please reflect                                                                    
     on  testimony from  Professor Emeritus  Scott Goldsmith                                                                    
     who  has long  been associated  with the  University of                                                                    
     Alaska  Institute  of   Social  and  Economic  Research                                                                    
     (ISER).  Professor   Goldsmith  was  testifying   as  a                                                                    
     private citizen on March 25th  (at 73:10) before Senate                                                                    
     Finance.  At that  hearing, Professor  Goldsmith stated                                                                    
     that we  are now  drawing down our  cash reserves  at a                                                                    
     rate of about 7 million dollars per day.                                                                                   
     At that  rate of  spending we will  soon enough  not be                                                                    
     able to  afford business  as usual in  State Government                                                                    
     including  passing  legislation   that  might  cost  us                                                                    
     millions of  dollars just for testing  the viability of                                                                    
     the AKLNG  project as currently envisioned.  We need to                                                                    
     learn  as  much  as  we can,  including  exploring  our                                                                    
     options, before passage of SB 138. Thank you.                                                                              
6:30:45 PM                                                                                                                    
REPRESENTATIVE  OLSON  noted  three  or  four  of  the  committee                                                               
members voted against ACES and AGIA.                                                                                            
6:31:39 PM                                                                                                                    
CHARLES MCKEE  said he was  a resident  of Alaska since  1967 and                                                               
took part in the oil pipeline  primarily in Valdez.  At that time                                                               
it was  possible to  bring propane to  tidewater, and  he related                                                               
that  he  saw  the  propane   pipe  and  model  "being  unpacked,                                                               
photographed, and  then destroyed."   He gave a brief  history of                                                               
his experience with the Resource  Development Council for Alaska,                                                               
Inc.,  the administration  of former  Governor William  Sheffield                                                               
[1982-1986], and  the oil and  gas industry.   In regards  to the                                                               
Alaska LNG  project, he said he  was in favor of  small and large                                                               
projects  and  urged the  committee  to  maintain the  virtue  of                                                               
individuals,  which is  something corporations  lack.   Mr. McKee                                                               
said he  holds a copyright  on a technology  that is now  in use.                                                               
TransCanada  is using  a process  called Keystone  Generators but                                                               
other technology is available, and  royalties for its use are due                                                               
to  him.     He  cautioned  against   government  non-competitive                                                               
contracts  for  pipeline  companies  that  use  modifications  of                                                               
years-old contracts for systems and specifications.                                                                             
6:40:05 PM                                                                                                                    
RICK  ROGERS, Executive  Director,  Resource Development  Council                                                               
for  Alaska,  Inc. (RDC),  informed  the  committee RDC  supports                                                               
policies  aimed   at  increasing  the  commercial   viability  of                                                               
developing  natural gas  resources,  especially in  the areas  of                                                               
alignment  and  durability.   The  HOA  signifies  the  essential                                                               
alignment not seen  in prior gas pipeline projects.   Unlike oil,                                                               
the  marketing of  LNG requires  long-term  durability in  fiscal                                                               
terms.   He noted  that CSSB  138(FIN) am has  required a  lot of                                                               
work and analysis,  and urged for continued due  diligence by the                                                               
committee in  order to have  a project that can  compete globally                                                               
and secure  the contracts  needed to sanction  the project.   Mr.                                                               
Rogers  opined  the  most  beneficial pipeline  for  the  use  of                                                               
natural gas by Alaskans is  a large-capacity pipeline, sanctioned                                                               
with  the producers,  and in  partnership  with the  state.   The                                                               
economics of the  project will determine its  completion, but the                                                               
proposed legislation  will provide  the project the  best chance.                                                               
Finally, he  said that the state  needs to maintain a  robust oil                                                               
industry on the North Slope because  oil pays the bills needed to                                                               
support the  infrastructure required to  produce gas.   He opined                                                               
that  it  is  important  to  defeat  Ballot  Measure  1  [in  the                                                               
statewide election of August, 2014]  to move the project forward.                                                               
Mr. Rogers  concluded that the  passage of the  proposed enabling                                                               
legislation  is   not  the  final  decision,   and  reminded  the                                                               
committee  of  the importance  of  alignment,  durability, and  a                                                               
vibrant oil industry to the success of the project.                                                                             
6:43:19 PM                                                                                                                    
REPRESENTATIVE   TARR  inquired   as   to   whether  Mr.   Rogers                                                               
specifically supports CSSB 138(FIN) am.                                                                                         
MR. ROGERS  expressed RDC's  support of  the general  premises of                                                               
the  proposed  bill  such  as moving  the  project  forward,  the                                                               
alignment,   the  general   structure,   and  the   business-like                                                               
agreement which puts the state in a position of partnership.                                                                    
6:45:07 PM                                                                                                                    
GRETCHEN O'BARR said her large  family has mostly left Alaska and                                                               
expressed  her total  support for  any legislation  that is  pro-                                                               
business and jobs.   She opined the legislation is  moving in the                                                               
right direction although mistakes have been made in the past.                                                                   
6:46:07 PM                                                                                                                    
GEORGE PIERCE expressed  his belief that Alaskans  should own the                                                               
controlling interests in their resources.   He questioned whether                                                               
a  pipeline  connecting  the  Arctic to  TAPS  will  benefit  the                                                               
producers or Alaskans.  He  referred to previous testimony by Mr.                                                               
Roger Marks, legislative consultant,  who expressed concern about                                                               
a state partnership  with TransCanada.  Mr. Pierce  asked why the                                                               
state  should  give  "gasline  decision-making  control"  to  its                                                               
competitors.     He cautioned  against funding  an expensive  gas                                                               
pipeline study  even though  the state  will not  be part  of the                                                               
decision  process.   In a  manner  similar to  the Point  Thomson                                                               
settlement, an  agreement was  executed by  the state  before any                                                               
details were made  public.  Mr. Pierce pointed out  that only the                                                               
state  - but  not the  producers -  must pay  TransCanada if  the                                                               
project fails.   Also, there  are unanswered  questions regarding                                                               
the MOU  between the  state and TransCanada.   He  strongly urged                                                               
for  additional advice  from experts  and for  the state  to stop                                                               
wasting money on yearly pipeline proposals.                                                                                     
6:49:24 PM                                                                                                                    
LISA  WEISSLER  disclosed she  is  a  former  state oil  and  gas                                                               
attorney and a  former legislative staffer who  worked during the                                                               
gas  fiscal  contract  days.   She  paraphrased  from  a  written                                                               
statement as follows [original punctuation provided]:                                                                           
     Among  the many  questions and  concerns regarding  the                                                                    
     AlaskaLNG  Project, I  am particularly  concerned about                                                                    
     what   terms  will   be   in  any   "project--enabling"                                                                    
     contracts negotiated  by the Administration,   how much                                                                    
     pressure there will be on  the legislature to authorize                                                                    
     one  or more  contracts  next year,  and  the level  of                                                                    
     public participation in the decision--making process.                                                                      
     Under  the Heads  of Agreement,  Article 4,  the Alaska                                                                    
     LNG Parties  will continue  Pre--FEED  work through  to                                                                    
     completion  "provided  Enabling Legislation  acceptable                                                                    
     to the  Parties is passed and  other support referenced                                                                    
     in  Article 10  is  maintained or  progressed."   Under                                                                    
     Article 7, in addition  to providing for a confidential                                                                    
     negotiation  process,  acceptable Enabling  Legislation                                                                    
     will  allow for  the negotiation  of project--enabling                                                                     
     contract  terms  that could  address  a  wide range  of                                                                    
     topics from  state participation to upstream  costs and                                                                    
     lease  expenditures  to  any other  terms  the  Parties                                                                    
     consider  necessary to  advance the  project.   Some of                                                                    
     these  contract terms  are addressed  as principles  in                                                                    
     the HOA, but many of the  terms under Article 7 are yet                                                                    
     to be negotiated.                                                                                                          
     Among other  thing, Article 10 calls  for State support                                                                    
     of use of  eminent domain rights to  facilitate the LNG                                                                    
     project;  appropriations,  permitting  and  legislation                                                                    
     for   the    construction   of    infrastructure;   and                                                                    
     unspecified  support  for  a  "healthy,  long-term  oil                                                                    
     business."   The list is  non-inclusive so  there could                                                                    
     be more.                                                                                                                   
     At  least some  of  the State  support  for Article  10                                                                    
     items  likely to  be included  as terms  in a  project-                                                                    
     enabling  contract.    Since  the  HOA  indicates  that                                                                    
     continuation   of  Pre-FEED   work  to   completion  is                                                                    
     contingent on  State support,  there could  be enormous                                                                    
     pressure  on  the  legislature  to  ratify  a  proposed                                                                    
     contract with such terms.                                                                                                  
     SG  138  is  the  Enabling Legislation  and  gives  the                                                                    
     commissioner  of the  Department  of Natural  Resources                                                                    
     full discretion  to negotiate  any terms  for inclusion                                                                    
     in the  proposed contracts.  Though  the Administration                                                                    
     has testified  they will keep the  legislature informed                                                                    
     on  a  confidential  basis  as  negotiations  progress,                                                                    
     there  is  nothing in  SB  138  to assure  consultation                                                                    
     occurs  or any  requirement for  involving the  public.                                                                    
     That  means  that  Alaskans will  not  see  a  proposed                                                                    
     project-enabling   contract  until   the  contract   is                                                                    
     brought  to the  legislature for  an up  or down  vote,                                                                    
     with little opportunity to comment.                                                                                        
     Similar  to what  was required  under the  Stranded Gas                                                                    
     Development Act, it is reasonable  to include in SB 138                                                                    
     a  requirement   for  a  best  interest   findings  and                                                                    
     determination  for a  proposed contract  that would  be                                                                    
     subject to  public review  and comment  and legislative                                                                    
     consultation.   Reasons to  support such  a requirement                                                                    
          State participation in the LNG project and                                                                            
     associated obligations  is a significant  public policy                                                                    
     decision  with  long-term  consequences to  the  fiscal                                                                    
     future of the  state.  Alaskans have the  right to know                                                                    
     the basis  for the  Administration's decisions  and the                                                                    
     right to weigh in on these decisions.                                                                                      
          The public comment period will give legislators                                                                       
     advance opportunity  to consider contract terms  and to                                                                    
     hear  from  their  constituents before  a  contract  is                                                                    
     formally    presented    to   the    legislature    for                                                                    
          There was a findings and determination with a                                                                         
     public  comment period  prepared for  the Stranded  Gas                                                                    
     Fiscal Contract so we know it is doable.                                                                                   
     A draft amendment follows:                                                                                                 
     CSSB 138(FIN) am                                                                                                         
     Best Interest Findings Amendment                                                                                         
     AS 38.05 is amended by adding new sections to read:                                                                        
     [Sec. 1]. Preliminary findings  and determination for a                                                                  
     North Slope natural gas project contract.                                                                                
     (a) If  the commissioner  develops a  proposed contract                                                                    
     under  AS  38.05.020(b)(11)  - (12),  the  commissioner                                                                    
     shall  make preliminary  findings  and a  determination                                                                    
     that  the  proposed  contract terms  are  in  the  best                                                                    
     interest of the state.                                                                                                     
     (b)   In   making    the   preliminary   findings   and                                                                    
     determination  required by  (a)  of  this section,  the                                                                    
     commissioner shall  address the  reasonably foreseeable                                                                    
     effects of the proposed  contract on the public revenue                                                                    
     and public  services, and shall describe  the principal                                                                    
     factors upon which the determination                                                                                       
     made under (a) of this section is based.                                                                                   
     [Sec. 2]. Notice and comment regarding the contract.                                                                     
     The commissioner shall                                                                                                     
     (1) give  reasonable public  notice of  the preliminary                                                                    
     findings and determination made under [Sec. 1].                                                                            
     (2)  make   available  to   the  public   the  proposed                                                                    
     contract, the  commissioner's preliminary  findings and                                                                    
     determination, and,  to the  extent the  information is                                                                    
     not required to be kept confidential under                                                                                 
     AS   38.05.020(b)(12),    the   supporting   financial,                                                                    
     technical, and market data,  including the work papers,                                                                    
     analyses,  and   recommendations  of   any  independent                                                                    
     contractors  used by  the state  during development  of                                                                    
     the contract;                                                                                                              
     (3) offer  to appear before the  Legislative Budget and                                                                    
     Audit Committee  to provide the  committee a  review of                                                                    
     the    commissioner's    preliminary    findings    and                                                                    
     determination,   the   proposed   contract,   and   the                                                                    
     supporting  financial, technical,  and market  data; if                                                                    
     the Legislative Budget and  Audit Committee accepts the                                                                    
     commissioner's offer,  the committee shall  give notice                                                                    
     of  the  committee's  meeting to  the  public  and  all                                                                    
     members   of  the   legislature;   if  the   financial,                                                                    
     technical, and market data that  is to be provided must                                                                    
     be  kept confidential  under  AS 38.05.020(b)(12),  the                                                                    
     commissioner   may   not   release   the   confidential                                                                    
     information  during a  public  portion  of a  committee                                                                    
     meeting; and                                                                                                               
     (4)  establish a  period of  at least  30 days  for the                                                                    
     public  and members  of the  legislature to  comment on                                                                    
     the proposed contract and  the preliminary findings and                                                                    
     determination made under [Sec. 1].                                                                                         
      [Sec.  3].  Coordination  of  public  and  legislative                                                                  
     To  the  extent  practicable,  the  commissioner  shall                                                                    
     coordinate  the  public  comment  opportunity  provided                                                                    
     under  [Sec. 3](4)  with a  review  by the  Legislative                                                                    
     Budget and Audit Committee under                                                                                           
     [Sec. 3](3).                                                                                                               
     [Sec. 4].  Final findings, determination,  and proposed                                                                  
     amendments; execution of the contract.                                                                                   
     (a)  Within  30 days  after  the  close of  the  public                                                                    
     comment period under [Sec. 3](4), the commissioner                                                                         
     of natural resources shall                                                                                                 
     (1) prepare  a summary of the  public comments received                                                                    
     in   response  to   the  proposed   contract  and   the                                                                    
     preliminary findings and determination;                                                                                    
     (2)  after   consultation  with  the   commissioner  of                                                                    
     revenue,  prepare a  list  of  proposed amendments,  if                                                                    
     any, to the proposed  contract that the commissioner of                                                                    
     natural resources  determines are necessary  to respond                                                                    
     to public comments;                                                                                                        
     (3)  make  final findings  and  a  determination as  to                                                                    
     whether the  proposed contract, including  any proposed                                                                    
     amendments prepared  under (2)  of this  subsection, is                                                                    
     in the best interest of the state.                                                                                         
     (b) After considering the material  described in (a) of                                                                    
     this section  and securing the  agreement of  the other                                                                    
     parties   to  the   proposed  contract   regarding  any                                                                    
     proposed   amendments  prepared   under  (a)   of  this                                                                    
     section,  if  the   commissioner  determines  that  the                                                                    
     contract  is in  the best  interest of  the state,  the                                                                    
     commissioner   shall  submit   the   contract  to   the                                                                    
     (c)    The    commissioner's   final    findings    and                                                                    
     determination  under  (a)  of this  section  are  final                                                                    
     agency decisions.                                                                                                          
     [Sec. 5]. Legislative authorization.                                                                                     
     The governor  may transmit  a contract  developed under                                                                    
     AS 38.05.020(b)(11) - (12)  to the legislature together                                                                    
     with  a  request  for   authorization  to  execute  the                                                                    
     contract. A contract developed under                                                                                       
     AS  38.05.020(b)(11)  - (12)  is  not  binding upon  or                                                                    
     enforceable against  the state or other  parties to the                                                                    
     contract unless  the governor is authorized  to execute                                                                    
     the contract  by law. The  state and the  other parties                                                                    
     to  the contract  may execute  the  contract within  60                                                                    
     days after  the effective  date of the  law authorizing                                                                    
     the contract.                                                                                                              
6:54:08 PM                                                                                                                    
CO-CHAIR SADDLER asked who Ms. Weissler worked for during her                                                                   
time with the legislature.                                                                                                      
MS. WEISSLER said she worked as a legislative staffer for                                                                       
Representatives Sam Cotton, Ethan Berkowitz, and Beth Kerttula,                                                                 
and Senator Hollis French.                                                                                                      
6:54:41 PM                                                                                                                    
RACHAEL   PETRO,  President/CEO,   Alaska  Chamber   of  Commerce                                                               
(Chamber),   informed  the   committee  the   Chamber  represents                                                               
hundreds  of   businesses,  manufacturers,  and   local  chambers                                                               
throughout  Alaska.   Ms. Petro  said  the execution  of the  HOA                                                               
between Alaska businesses and the  state was welcome news and the                                                               
Chamber  supports  the  principles  found in  the  HOA  and  CSSB
138(FIN) am  as follows:   state participation  in an  Alaska gas                                                               
project;  the state  taking a  percentage  of gas  share and  tax                                                               
share;  state participation  at the  same percentage  as the  gas                                                               
share; establishing a clear process  to move the project forward,                                                               
including the tools necessary  to develop confidential agreements                                                               
and contracts;  and a public process  with legislative oversight,                                                               
review, and  approval.  Also,  the Chamber believes the  best way                                                               
for  Alaska  to  develop  its  resources  is  for  the  state  to                                                               
participate as  a business partner.   Members of the  Chamber are                                                               
aware  that to  succeed  the state  must  provide a  competitive,                                                               
predictable, and  stable business  environment.  In  summary, the                                                               
Chamber   supports   the   aforementioned  principles   and   the                                                               
committee's due diligence on the proposed legislation.                                                                          
6:56:47 PM                                                                                                                    
REPRESENTATIVE SEATON asked whether  the Chamber's perspective is                                                               
that  previous  state  public-private partnerships  such  as  the                                                               
Barley  Project, the  Kodiak  Launch Complex,  and  the Knik  Arm                                                               
Bridge and  Toll Authority were  beneficial to the state,  and if                                                               
this model is  used similar issues may arise with  the Alaska LNG                                                               
MS. PETRO  said that Alaska  does not  have a good  track record;                                                               
however, the partners  in the HOA are  very successful businesses                                                               
and that is the basis of  the Chamber's support of the principles                                                               
in the HOA.                                                                                                                     
REPRESENTATIVE SEATON asked if the  problems are not caused by "a                                                               
mix of  the regulator and  the sovereign into  private business,"                                                               
were the problems caused by  the people involved.  Representative                                                               
Seaton remarked:                                                                                                                
     We  want to  promote business  in this  state, and  I'm                                                                    
     just trying to  get a feeling whether that  is the most                                                                    
     successful  model that  we've  been using,  and why  it                                                                    
     would be so different if we did it this time.                                                                              
6:58:53 PM                                                                                                                    
MS.  PETRO opined  this project  is significantly  different than                                                               
anything the state  has done.  The principles of  a gated process                                                               
are  distinct  and allow  for  opportunities  for the  state  [to                                                               
review the  project].  In  addition, the businesses  involved "do                                                               
not  take  risks  lightly."  Ms.  Petro  said  the  state  has  a                                                               
responsibility to develop  its resources and act  like a business                                                               
partner.   She acknowledged that  Chamber members  have expressed                                                               
concern about  inappropriate levels of state  involvement in past                                                               
7:00:23 PM                                                                                                                    
REPRESENTATIVE TARR inquired as to  why the Chamber is supporting                                                               
the principles of the bill but not the version under discussion.                                                                
MS. PETRO explained  that the Chamber supports  the HOA document,                                                               
but has not fully reviewed the bill.                                                                                            
REPRESENTATIVE  TARR  stated that  one  of  the more  contentious                                                               
issues in  the bill is the  payment in lieu of  taxes (PILT) that                                                               
will go  to local  communities.   Because the  Chamber represents                                                               
local chambers,  and local chambers may  take different positions                                                               
on this  or other  issues, she  asked for  the Chamber's  role in                                                               
resolving conflicts.                                                                                                            
MS. PETRO acknowledged  [local issues] are one of  the reasons it                                                               
is not  easy for  the Chamber  to come to  an agreement,  as each                                                               
local member has  a seat on its board of  directors.  The Chamber                                                               
agrees  on  many  "high-level principles  and  positions."    She                                                               
encouraged the  committee to continue  its deliberation  with the                                                               
municipalities on  this issue,  adding that  the Chamber  has not                                                               
discussed this.                                                                                                                 
REPRESENTATIVE  TARR inquired  as  to whether  the Chamber  would                                                               
discuss this issue before the legislature votes on the bill.                                                                    
MS. PETRO said probably not.                                                                                                    
REPRESENTATIVE KAWASAKI  asked whether  the Chamber  supports the                                                               
MOU with TransCanada.                                                                                                           
MS.  PETRO said  the Chamber  has not  had a  discussion on  that                                                               
portion of the bill.                                                                                                            
7:03:51 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI  noted  that  the  committee  has  heard                                                               
testimony from smaller pipeline producers  that later access to a                                                               
"mainline"  such  as  TAPS  is   sometimes  difficult,  thus  the                                                               
legislature  decided to  include  expansion  principles to  allow                                                               
small producers  to access the pipeline  through rolled-in tariff                                                               
rates.  He asked whether  the Chamber would support the expansion                                                               
principles in the proposed legislation.                                                                                         
MS.  PETRO  advised  that  is   not  something  the  Chamber  has                                                               
7:05:16 PM                                                                                                                    
DON  ETHERIDGE,   Lobbyist,  Alaska  AFL-CIO   State  Federation,                                                               
expressed the  Alaska AFL-CIO State  Federation's support  of the                                                               
legislation although there will be  changes and corrections.  His                                                               
organization supports  the idea  of building  a gas  pipeline and                                                               
getting gas to  Alaskans, especially the local  hire language and                                                               
the training funds  provisions included in the HOA.   The problem                                                               
during the  construction of TAPS  was that [Alaska] did  not have                                                               
enough  trained   workers;  however,  organized  labor   now  has                                                               
training  schools preparing  workers for  gas pipeline  and other                                                               
pipeline work.   He said that as  a result of local  hire on this                                                               
project, during  construction money will  come back to  the state                                                               
through local people who will spend their wages at home.                                                                        
REPRESENTATIVE KAWASAKI  recalled during testimony on  AGIA there                                                               
was  intense debate  related to  project labor  agreements (PLAs)                                                               
until the substantive portion of  AGIA required a commitment to a                                                               
PLA.  Currently, language in the  proposed bill, the HOA, and the                                                               
MOU is vague  although the Senate version of the  bill includes a                                                               
letter  of  intent, which  does  not  carry  the full  weight  of                                                               
legislation.  He  asked whether Mr. Etheridge would  "like to see                                                               
[that language] tightened."                                                                                                     
MR. ETHERIDGE remarked:                                                                                                         
     We  have reached  an agreement  with the  folks on  the                                                                    
     Senate  side that  we wouldn't  mess with  any of  that                                                                    
     language if  we were able  to keep our  language that's                                                                    
     in there now ... so  that's our commitment, is to leave                                                                    
     it  alone. ...   We'd  love  to see  it tightened,  but                                                                    
     we're  not  going  to  work  towards  that,  we're  not                                                                    
     advocating for it ....                                                                                                     
7:08:56 PM                                                                                                                    
CO-CHAIR FEIGE asked  whether there is currently  enough work for                                                               
those who  have been trained until  pipeline construction begins;                                                               
ideally,  Alaskans  will  have sufficient  experience  to  become                                                               
supervisors on the project.                                                                                                     
MR. ETHERIDGE  advised that  jobs are provided  for those  in the                                                               
training programs;  in fact, with  the present level  of activity                                                               
on the  North Slope, the  training programs have expanded.   Even                                                               
though some  of the trained  workers have  left to work  in North                                                               
Dakota, they are gaining experience.                                                                                            
REPRESENTATIVE  TARR confirmed  that the  language Mr.  Etheridge                                                               
referenced in the HOA is related to local hire.                                                                                 
MR.  ETHERIDGE said  that  is  right, and  the  letter of  intent                                                               
attached to the bill.                                                                                                           
7:11:13 PM                                                                                                                    
PAUL GROSSI,  Lobbyist, Alaska  State Pipe  Trades UA  Local 375;                                                               
Ironworker  Management Progressive  Action Cooperative,  informed                                                               
the committee  that the organizations  he represents  support the                                                               
bill - to the  extent that it will build the  pipeline - for four                                                               
basic reasons:  the jobs on  the pipeline will be for Alaskans to                                                               
the full extent of the law  through a PLA; there will be in-state                                                               
access to  gas; there will  be gas for commercial  and industrial                                                               
development;  and  there  will   be  adequate  state  revenue  to                                                               
continue   state-funded  programs   and  for   capital  projects.                                                               
Because this  is a complicated  process, those he  represents are                                                               
dependent  upon legislators  to  ensure  that the  aforementioned                                                               
provisions are included in the bill.                                                                                            
REPRESENTATIVE TARR observed that access  to gas for Alaskans has                                                               
been  an issue  and that  the  provisions in  the bill  currently                                                               
under  review  intend for  in-state  gas  to  be available  at  a                                                               
comparable cost; however, there is  concern that in-state gas may                                                               
be at  a higher cost.   If that is  the case, she asked,  "Do you                                                               
think that your position would be the same?"                                                                                    
MR. GROSSI  was unsure  whether Alaska will  always have  the low                                                               
cost  gas  that it  has  now,  and the  future  price  of gas  is                                                               
unknown.  He  restated that it is  the committee's responsibility                                                               
to ensure that Alaskans have gas at a "reasonable" cost.                                                                        
7:15:20 PM                                                                                                                    
CO-CHAIR FEIGE, after ascertaining that no one else wished to                                                                   
testify, closed public testimony on CSSB 138(FIN) am.                                                                           
[CSSB 138(FIN) am was held over.]                                                                                               

Document Name Date/Time Subjects