Legislature(2013 - 2014)SENATE FINANCE 532
02/25/2014 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB64 | |
| SB138 | |
| Presentation: the Heads of Agreement and the Memorandum of Understanding, Risks, and Benefits | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 64 | TELECONFERENCED | |
| + | SB 138 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 23 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
February 25, 2014
9:10 a.m.
9:10:18 AM
CALL TO ORDER
Co-Chair Kelly called the Senate Finance Committee meeting
to order at 9:10 a.m.
MEMBERS PRESENT
Senator Pete Kelly, Co-Chair
Senator Kevin Meyer, Co-Chair
Senator Anna Fairclough, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Senator John Coghill; Jordan Schilling, Staff, Senator John
Coghill; Michael Pawlowski, Deputy Commissioner, Strategic
Finance, Department of Revenue; Joe Balash, Commissioner,
Department of Natural Resources; Angela Rodell,
Commissioner, Department of Revenue;
SUMMARY
SB 64 OMNIBUS CRIME/CORRECTIONS BILL
SB 64 was HEARD and HELD in committee for further
consideration.
SB 138 GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
SB 138 was HEARD and HELD in committee for
further consideration.
Presentation: The Heads of Agreement and the Memorandum of
Understanding, Risks, and Benefits
SENATE BILL NO. 64
"An Act establishing the Alaska Sentencing Commission;
relating to jail-time credit for offenders in court-
ordered treatment programs; allowing a reduction of
penalties for offenders successfully completing court-
ordered treatment programs for persons convicted of
driving while under the influence or refusing to
submit to a chemical test; relating to court
termination of a revocation of a person's driver's
license; relating to limitation of drivers' licenses;
relating to conditions of probation and parole; and
providing for an effective date."
9:11:15 AM
SENATOR JOHN COGHILL, related that the bill had the three
overriding goals of improving public safety, slowing the
growth of the prison population, and saving the state
money. He related that if things were not changed, the
Senate Finance Committee might to consider how to build the
state's next big prison. He stated that the bill was a
cooperative effort between himself, Senator Ellis, Senator
French, and Senator Dyson that had been under development
for well over a year and half. He continued that the bill
was the result of many hours of testimony and that the
sponsors had hammered out a good piece of legislation that
the committee would be able to appreciate. He thought that
there were several things in the bill that would help the
state turn the corner on a variety of things that "really
kicked the feet out from under us," which was the drug and
alcohol problem in Alaska. He stated that the legislation
would give the Department of Corrections (DOC), the
Department of Health and Social Services (DHSS), and the
Department of Law (DOL) real tools to help manage a
population that needed better avenues. He stated that
Alaska needed to figure out how to deal with the issue of
sobriety, as well as how to keep people accountable and not
spend the most amount on jail time. He spoke of the need
let people have as much freedom as possible and be
productive while still protecting public safety.y.
Senator Coghill related that in his mind, there were
several over-arching aspects as the bill was being put
together. He reported that he had always had an eye to the
victim and that in Alaska, victims were quite often left
without remedy. He thought that even as Alaska was trying
to give avenues for those who had offended, the state
wanted to make sure that the public was safe and that the
victims were given every opportunity for restoration; he
thought that there were avenues to do this under the 24/7
Sobriety Program. He reported that the 24-7 program allowed
people to be productive while under accountability, which
allowed them to pay restitution in other ways; he thought
that the bill fell into what Senator Dyson had pushed on
restorative justice. He added that the protection for the
victim and the need for accountability were heavily
embedded in the bill in the most cost-effective ways. He
noted that the legislation contained a sobriety program and
established the Alaska Criminal Justice Commission that
would study the question of whether there were areas of
Alaska's mandated sentencing laws that the legislature
should be looking at; the bill would provide the commission
with a list of things to think about and would require it
to come back to the legislature with a report.
Senator Coghill thought that through the Alaska Criminal
Justice Commission, it was time to examine how Alaska
looked at its criminal code, mandatory sentencing, and how
the sentencing had fit in real life; this would not be done
with the intent of how to be soft on crime, but to be as
real as possible in accountability. He stated that that
imbedded in the bill was a Probation Accountability and
Ccertain en Enforcement ??(PACE) program that acted
swiftly in the event of a parole violation. He noted that
the sponsors were requesting that a fund be established
within the bill that would allow the state to have a
programmatic approach for those exiting jail; he noted that
were several ways to setup of a fund and hoped that he
would have a clearer path forward on that issue the next
time the bill was before the committee.
Senator Coghill noted that thresholds for felony theft had
not been adjusted since 1978 and thought that it
represented an important thing to do because currently,
Alaska could produce felons for things that really did not
rise to the level of a felony; if under certain
circumstances, they more than once they could be a felon
if they offended more than once. He noted that under the
bill, some of these felonies needed to be adjusted and that
the time value ofand money and crime needed to be
considered. He noted that the sponsors were asking the DOC
epartment of Corrections and the Department of Health and
Social Services DHSS to assist in creating better risk and
needs assessments. He thought that the bill would help
protect the public and keep people more accountable. He
reported that the Senate Judiciary Committee had included a
section for people who picked up children and did not have
good identification; the section heldp people to a level of
accountability if they did not have the right to pick up a
child at school. He concluded that were multiple aspects in
the bill, but its real focus was public safety,
accountability, and avoiding building another prison that
would cost the state $300 million or more.
9:18:25 AM
Senator Dunleavy pointed to the fiscal notes attached to
the bill and inquired if the he bill's cost would represent
an increase to the budget or a transfer from another area.
Senator Coghill replied that the way the bill was written,
it would was a general fund appropriation to the stated,
but added that he would have his staff propose ways to
decrease that cost and produce a CS. He stated that
decreasing the bill's cost really revolved around the
recidivism fund. He observed that the legislation did have
an expected savings that was very hard to quantify which
was the reduction in cost of keeping people accountable
outside of jail versus a the higher cost of incarceration.
He related that the cost savings would be very hard to
quantify, but it was expected to occur. He thought that
there might be an estimation of what that savings was
sometimes in the future, but reiterated that he was unsure
if the DOCdepartment would be able to quantify the number.
9:20:30 AM
JORDAN SCHILLING, STAFF, SENATOR JOHN COGHILL, spoke to a
PowerPoint presentation titled "Senate Bill 64 Omnibus
Crime/Corrections bill" (copy on file). He spoke to slide 1
of the presentation and read off his talking points (copy
on file).:
SLIDE 1
Mr. Chairman, thank you for hearing Senate Bill 64
today in light of a full schedule.
Just to bring you up to speed on where SB 64 has been:
(2) senate state affairs
(2) joint judiciary
(7) senate judiciary
The Senate Judiciary Committee received input from the
Department of Law, Dept. of Corrections, the Court
system, Public Defender, and as a result of that
feedback, this CS was formed.
Today we go over version D.
9:21:34 AM
Mr. Schilling spoke to slide 2 and spoke from his talking
points.:
SLIDE 2
The state is not receiving good value for the money
spent on our corrections system. 2 out of 3 of our
prisoners return to prison quickly after release.
Most of these offenders return in the first 6 months -
which is one of the worst recidivism rates in the
country. So, we must ask ourselves: with state
revenues falling, is this how we want to spend our
money?
M
9:22:00 AM
Mr. Schilling spoke to a graph on slide 3 and reported that
currently, the price of incarceration was $159 per day,
per inmate and was about $54,000 per year, which was
approximately twice as much the cost in the Lower-48.
9:22:09 AM
Mr. Schilling addressed slide 4 and read from his talking
points.:
SLIDE 4
Today Alaska is at a crossroads. If the prison
population continues to grow at its current rate, the
state's prisons will be, yet again, at full capacity
in just two years. So, the state must today either
start planning to build a new prison, start sending
prisoners out-of-state, or, look at programs that are
proven to work - things other states are doing today -
to reduce recidivism, reduce our DOC budget, and put
off a huge capital expense (and an operating expense)
of building another prison.
Mr. Schilling related that the graph on slide 4 was from
the Legislative Finance Division. He stated that the red
line was the maximum capacity of the prison system and that
the blue line was the prisoner population. He stated that
the prison population in Alaska was growing at a steady 3
percent per year and that in 2016, where the blue and red
lines intersect, was when the system would be over
capacity. He stated that the horizontal cells at the bottom
of slide showed the budget and relayed that the lately, it
had increased about 7.3 percent per year.
9:23:14 AM
Co-Chair Kelly requested Mr. Schilling to repeat the
figure. Mr. Schilling confirmed that the corrections the
corrections budget had been increasing 7.3 percent per
year.
9:23:20 AM
Mr. Schilling pointed to slide 5 and read his talking
points.:
SLIDE 5
Many states have been faced with the same problem -
the problem of needing a new prison every 5 or 10
years. Those states identified the things driving
their prison growth and developed policies to address
them.
Over the last couple years, 15 of those states
actually closed prisons.
Texas and Kansas were among the first states to make
some big changes. Texas was faced with building 4 new
prisons. Instead of doing that, they funded some of
these programs, and they ended up not needing a single
new prison, and they actually closed a prison a few
years later… so we can look to what other states have
done to see what works.
Kentucky's omnibus corrections bill is projected to
save them $420 million over the next 10 years.
Arkansas' omnibus bill is expected to save $875
million.
We haven't done much in corrections reform. The vast
majority of Alaska's criminal statutes were rewritten
in 1982. The Alaska criminal code was based on the
best research at the time. Research, however, has
continued to advance during the last 25 years and much
has been learned about effective ways to address our
prison problem
9:24:29 AM
Mr. Schilling discussed slide 6 and related that the bill
had three main goals, which were to increase public safety,
reduce recidivism, and reduce costs.
M
9:24:38 AM
Mr. Schilling addressed slide 7 and spoke from his talking
points.:
SLIDE 7
Now, the DOC has similar goals. This is the mission
statement of the Department of Corrections.
1) Secure confinement
2) Reformative programs
3) Community Reintegration
That mission is pulled right from the Alaska
Constitution. So, it's not that their goals are
wrong, but it's how they allocate resources to achieve
those goals.
M
9:25:02 AM
Mr. Schilling spoke to the charts on slide 8 and read from
his talking points:
SLIDE 8
This is how they allocate those resources.
The Department places a major emphasis on secure
confinement, and barely any emphasis reformative
programs or community reintegration. Yet those are
the very areas where we can affect recidivism.
If we keep doing the same thing, we'll keep getting
the same results. These are the results we're getting
right now.
Mr. Schilling discussed the top pie chart on slide 8 and
stated that it depicted how DOC allocated its full-time
positions; 86 percent of the positions were focuseds on the
warehousing aspect, 4 percent wereas focused on reformative
programs, and 10 percent wereas for supervised release.
9:25:39 AM
Mr. Schilling directed the committee's attention to the
graph on slide 9 and addressed his talking points.:
SLIDE 9
The Department of Corrections made this graph and it
shows the drop in recidivism over the past few years.
While it may look like a dramatic decrease is
occurring, you'll notice this is about 1.5% reduction
over 4 years. That's not enough, and it's not
happening quick enough. At that rate, our prison
system will be at capacity by 2016. And 63% is still
one of the highest recidivism rates in the country.
M
9:26:12 AM
Mr. Schilling discussed slide 10 and spoke from his talking
points.
SLIDE 10
SB 64 has 8 main pieces to address our recidivism
problem:
· SB 64 establishes a 24/7 Sobriety Program used to
prevent offenders from drinking. The program
includes twice-a-day alcohol testing and swift
punishment if alcohol is consumed.
· SB 64 creates the Alaska Criminal Justice Commission
to evaluate the system and make recommendations.
· SB 64 expands a program called P.A.C.E. which is a
different way of doing probation that prevents
violations and new crimes.
· SB 64 requires the Dept. of Corrections to conduct
more assessments of their prisoners.
· SB 64 establishes a Recidivism Reduction fund in the
Department of Corrections to grant money to
transitional re-entry programs.
· SB 64 increases the felony theft threshold from $500
to $750. The threshold was established in 1978 and
has never been adjusted for inflation.
o Lastly, SB 64 incentivizes treatment and expands
the ability to get credit for time in treatment.
Mr. Schilling inquired if Co-Chair Kelly would like him to
go through the bill section by section. Co-Chair Kelly
replied in the affirmative.
9:27:35 AM
Mr. Schilling pointed to slide 11 and addressed his talking
points.:
SLIDE 11
The first 3 sections of the bill fill a gap in our
criminal codes relating to attempted child abduction.
These sections of the bill resulted from an amendment
in Senate Judiciary.
Mr. Schilling related that while the first 3 Sections of
the legislation did not deal directly with recidivism, it
had a strong public safety aspect.
9:27:59 AM
Mr. Schilling discussed slide 12 and spoke from his talking
points.:
SLIDE 12
If a potential abductor goes to a school/daycare, and
attempts to pick up a child that doesn't belong to
them, the only charge currently on the books that can
be made against the person is Criminal Mischief.
These sections create a crime of "custodial
interference in the 2nd degree" if an attempted
abduction like that is made.
9:28:41 AM
Vice-Chair Fairclough inquired if there were comments or
discussions about cases of custody in and divorces
situations in the Senate Judiciary Committee. She wondered
what would happen if a mom who had custody of her child
sent a neighbor to pick up the kids and that because of the
volatility of the situation, a restraining order, or some
other unkownsituation, the school did not want to release
to a friend who the child knew;. sShe wondered how this a
situation like the one described above would be dealt with
and pointed out thought that the father might claim that it
was an abduction. Mr. Schilling responded that it was a
good question and relayed that the issue had been discussed
in the Senate Judiciary Committee. He directed the
committee's attention to page 2 on line 16 of the
legislation and stated that it was where the language was
added that stated that in order for a crime to be
committed, a person must have no legal right to pick up the
child; the language had been added to address the type of
situation that Vice-Chair Fairclough had referred to. He
explained that if someone who had custody of a child gave a
person permission to pick that child up, that would suffice
as a legal right.
M9:29:56 AM
Mr. Schilling addressed slide 13 and related that the next
15 sections of the bill, which were Sections 4-19, dealt
with Alaska's felony theft threshold.
9:30:08 AM
Mr. Schilling directed the committee's attention to slide
14 and discussed hise talking points.:
SLIDE 14
Sections 4-19 address the felony theft threshold.
The dividing line between a misdemeanor theft and a
felony theft is $500. If you steal something over
$500, it's a felony. If you steal something under
$500, it's a misdemeanor. That dividing line, the
felony threshold, was established by the legislature
over 30 years ago.
Because that amount has never been adjusted, it fails
to take into account 30 years of inflation. $500 in
1978 had much more purchasing power than it does
today. In fact, $500 in 1978 is equivalent to $1800
today. In other words, what amounted to a misdemeanor
30 years ago may now constitute a felony.
9:30:44 AM
Mr. Schilling discussed slide 15 and related that the graph
showed where Alaska was compared to other states on the
West Coast regarding felony theft thresholds. He reported
that Alaska had was one of the last holdouts that had a
felony threshold rate this low for theft. He added that the
graph needed to be updated and that not only had Colorado
adjusted theirs in 2007, but that it had done so again
recently. He stated that property crimes made up the
largest portion of Alaska's felonies and that the sponsors
were seeking a modest increase in the threshold from $500
to $750.
9:31:19 AM
Mr. Schilling addressed slide 16 and stated that the
following statutes were those that would need to be
adjusted if the felony theft threshold was changed from
$500 to $750:
Theft 2nd degree
Theft 3rd degree
Theft 4th degree
Concealment of merchandise
Removal of identification marks
Unlawful possession
Issuing a bad check
Fraudulent use of an access device
Vehicle theft in the 1st degree
Criminal mischief 3rd degree
Criminal mischief 4th degree
Criminal mischief 5th degree
Criminal simulation
Misapplication of property
Defrauding creditors.
Mr. Schilling spoke to slide 16 and stated that the reason
that there were 15 sections in the bill dealing with
statutes was because of the of the number of them of them
that were affected by the threshold change.
Mr. Shilling read from his talking points:
A felony conviction carries lifelong consequences.
There are thousands of consequences and barriers that
follow a felony for the rest of his or her life.
A felony conviction greatly diminishes the ability of
that individual to lead a productive life.
This problem disproportionately affects those in rural
Alaska. A basic window, if broken in Anchorage might
only be a misdemeanor, but that same window in rural
Alaska could trigger a felony. As inflation
continues, this problem will get worse.
One criticism we have heard is that some think theft
will increase.
Co-Chair Kelly inquired if the sponsor had had discussions
about the $750 dollar amount and thought that it did not
seem achieve that much. Mr. Schilling responded that when
Senator Coghill had originally introduced the idea several
years prior, the suggested new threshold had been $2,500
and that when the bill was again reintroduced the previous
session, it was at $1,500 , but and it was amended down to
$1,000; it was then amended again down to $750 in the
Senate Judiciary Committee. He agreed that the number was
not very significant if it was going by inflation.
9:32:40 AM
CoCo-Chair Kelly thought that the threshold in the bill
needed to higher than $750 and inquired if the cost of a
dented fender in the charge of criminal mischief would be
applied under the legislation. Mr. Schilling responded that
Co-Chair Kelly was correct.
9:33:10 AM
Vice-Chair Fairclough believed that small businesses are
the ones advocating for a smaller threshold because they
felt that breaking a storefront window in Anchorage rose to
the level of a felony.
Vice-Chair Fairclough referenced slide 15 and noted that
only 10 states were provided. She inquired if the 10 states
on the slide were the bottom 10 and requested a range
inside of the U.S. where the level might be set. She
recalled that the bill had been originally introduced with
a new felony theft threshold of $2,500 and now appeared to
still be second to the bottom at $750. She felt that
businesses were not aware of how much the current threshold
was costing the state in the form of corrections and the
Alaska Court System. She understood the offense and that
perhaps if businesses wanted to keep the threshold low,
they could help carry the burden. Mr. Schilling responded
that Vice-Chair Fairclough was correct in that not every
state was listed on slide 15 and that there were, in fact,
states that had a lower such threshold than Alaska. He
stated that it was also true that the National Federation
of Independent Business had pushed back on the bill's
concept.
9:34:44 AM
Mr. Schilling directed the committee's attention to slide
20 and thought that it was important to understand that
theft under $500 was still a class A misdemeanor and
carried up to a year in jail and up to a $10,000 fine;
furthermore, these crimes would not go unpunished, but the
threshold was being adjusted to track the original intent
of the legislature when it had put in the $500 limit.
9:35:04 AM
Vice-Chair Fairclough wondered what the bar graph on slide
15 represented inside of the U.S. She inquired whether it
represented the high and the low or another category. Mr.
Schilling responded that the x-axis was showing a dollar
amount and that Alaska's current bar was about $500; the
numbers next to the bars were the years that the thresholds
had been established. He noted that Alaska's threshold was
established in 1978, but the state just above it on the
chart, which was Nevada, had a threshold of $650 that was
established in 2011.
9:35:43 AM
Vice-Chair Fairclough commented that there were 50 states
and that she was looking for a range. She inquired if the
chart's states reflected the high and the low or were there
numbers that were not shown on the extrapolation for the
graph. Mr. Schilling responded that the graph did not
reflect a high or low range, but that he would produce the
information for the committee.
Vice-Chair Fairclough stated that she was trying to get a
range for the committee. Mr. Schilling replied that he had
a seen a low threshold of about $300, but that he could
not recall which state that was; he believed that $2,000
was the new threshold for Colorado.
Vice-Chair Fairclough inquired if Mr. Schilling thought
that the high was Colorado at $2,000. Mr. Schilling
responded that he believed that it was.
9:36:29 AM
Mr. Schilling spoke to slide 17 and. He related that there
had been concerns by the business community that the bill
would result in increased crime and theft; however, other
states had not seen those effects from similar legislation.
He pointed to slide 17, 18, and 19's graphs and related
that they graphs had come from the PEW Research Center,
which had conducted a lot of research on the issue. He
noted that Arkansas had raisedchanged its threshold in 2011
and that instances of theft remained unchanged.
M
9:36:55 AM
Mr. Schilling discussed slide 18 and related that Ohio had
increased its threshold in 2011; theft had actually dropped
there since then.
9:37:00 AM
Mr. Schilling discussed slide 19 and pointed out that South
Carolina had doubled its threshold in 2012; again, crime
was steady.
9:37:06 AM
Mr. Schilling addressed slide 20 and related that it was a
visual representation of what the sections did.
Mr. Shilling spoke to his talking points for slide 20:
These sections also raise the lower threshold of $50
that sits between a class A misdemeanor and a class B
misdemeanor to $250.
So, we propose to increase the threshold to $750.
It's a modest amount, but it's a step in the right
direction.
9:37:28 AM
Vice-Chair Fairclough inquired why the threshold was being
changed if there were results that showed it did not make a
difference on the crime rates. Mr. Schilling replied that
the purpose it was to reduce the number of people who were
receivingbeing felonies es for crimes above $500, but under
$750. He furthered that the sponsor was trying to reduce
the collateral consequences that followed someone for the
rest of their lives if they received a felony convictions.
He offered that it was becoming easier and easier to
receive a felony conviction.
9:38:06 AM
Co-Chair Kelly thought that the point was that the crime
level did not go up as a result of the changing the of
felony theft threshold; it could benefit the state by
having the cost be a lot less with the same amount of
crime. He observed that the sponsor was also trying to
address a human element with the change, but that it could
not be quantified.
9:38:27 AM
Vice-Chair Fairclough requested that the presentation be
directed back to slide 17 and noted that when she looked at
the graphs, she saw something different. She offerednoted
that in Arkansas, it appeared as though theft had been
trending downward until the threshold had been raised
there. Mr. Schilling responded that the uptick in the graph
was right before the state had changed the threshold and
that it appeared to him as though the line level was level
at the point at which it was changed.
Vice-Chair Fairclough observednoted that there was an
inflection downward in one of the categories of theft. Mr.
Schilling replied in the affirmative.
9:39:09 AM
Senator Bishop requested the average age of peoples of the
felons whothat committed felony theft. He wondered if most
of these types of crimes were committed by people who were
18 and 19 years old and expressed that he added that
wanted to help paint the picture. He added that felony
theft could be a barrier to a young person who was seeking
employment and noted that it prohibited these people from
working on the pipeline. Mr. Schilling responded that that
he would work with the Alaska Ccourt Sysystem to determine
if that was a number that he could obtain.
Vice-Chair Fairclough inquired if there had been discussion
regarding in the Senate Judiciary Committee about a judge's
discretion related to the bill. She relayedted that some
judges had indicated to her that sometimes the legislature
was so prescriptive in what it did that there was sometimes
very little latitude for judges to consider what was
happening in the court room or to an individual who might
be a troubled child who threw a rock or might be a multiple
offender. She further clarified the question and wondered
if the discussion of giving judges the flexibility of
weighing an individual perpetrator's circumstances in his
decision. Mr. Schilling responded that the issue had not
been discussed specifically in regards to the felony theft
threshold, but that he understood that giving judges very
little discretion was a problem.
9:41:19 AM
Vice-Chair Fairclough recalled the example of a mischievous
child breaking a window and thought that perhaps exceptions
could be made in certain cases. She appreciated the work of
the bill's sponsor but had heard from the judicial system
that the legislature was getting very prescriptive and that
a having justice versus prescriptive penalties was
something that was sometimes out of judges' hands.
9:42:07 AM
Mr. Schilling addressed slide 22 and read off of his
talking points.
:
SLIDE 21
Alaska has, for decades, been in a long struggle with
alcohol. It has reached epidemic proportions and
costs the state millions each year. The societal cost
of alcohol is huge too - from FASD and suicide to
domestic violence and sexual assault.
Alcohol is a factor in many (if not most) crimes - For
example, alcohol is involved in 75% of domestic
violence offenses -- and if we can address that area,
alcohol abuse, we could see a huge reduction of
recidivism in Alaska.
Sections 20-22 establish 24/7 in pre-trial.
24/7 Sobriety is a program developed in 2005 in South
Dakota. It curbs alcohol use, it makes the public
safer, and it reduces recidivism. The best part is
that it costs the state next-to-nothing.
24/7 Sobriety is a growing trend in the U.S. There
are 3 states with an established program (SD, ND, &
MT), 11 states with pending legislation, and 5 more
states operating pilots.
The program has one goal: sobriety 24 hours per day, 7
days a week. The program requires the participant to:
1) refrain from alcohol and
2) show up twice-a-day for a breath alcohol test.
(The court may also order remote monitoring in certain
cases.)
9:43:42 AM
Mr. Schilling spoke to slide 22 and discussed his talking
points.:
Participation in the program can be required as a
condition of probation, parole, or pre-trial.
So, if an offender commits a crime, and alcohol is a
factor in that crime, the court can order that person
on 24/7 Sobriety, either as a condition of their
release before trial, or as part of their probation.
It is a particularly effective program for repeat DUI
offenders.
9:43:56 AM
Senator Hoffman requested that Mr. Schilling address the
how remote monitoring would work in rural Alaska. Mr.
Schilling deferred to DOC regarding where the department's
monitors could and could not be used; however, he had
information later in the presentation that would cover some
of the devices and ways that it would work in rural Alaska.
9:44:24 AM
Mr. Schilling continued to address slide 22 and spoke to
his talking points:
So, if an offender commits a crime, and alcohol is a
factor in that crime, the court can order that person
on 24/7 Sobriety, either as a condition of their
release before trial, or as part of their probation.
It is a particularly effective program for repeat DUI
offenders.
9:44:38 AM
Mr. Schilling addressed slide 23 and discussed his talking
points.:
SLIDE 23
All testing fees are paid by the participant, so it's
a self-funded program. The cost is anywhere from $4-5
dollars per day, which the offender pays - and that's
enough to sustain the program.
9:44:52 AM
Mr. Schilling discussed slide 24 and addressed his talking
points:
SLIDE 24
There are several ways to test: in-person, ankle
bracelet, home-based device, or a portable
Breathalyzer. While in the program, participants
remain in society, conduct their daily lives, go to
work, pay their fees, and fulfill their
responsibilities, as long as they remain sober.
Mr. Schilling spoke to slide 24 and stated that the device
on the far left side was a portable breathalyzer and the
one in the middle was a home-based device that was being
used in a pilot program in Anchorage; the device on the far
right was an ankle device referred to as the SCRAM bracelet
and was something that DOC was using.
9:45:28 AM
Mr. Schilling discussed slide 25 and addressed his talking
points.:
SLIDE 25
Someone can be on the program anywhere from a week to
a couple years.
The program was based on personal responsibility and
accountability, backed by swift and certain sanctions
if there is a violation. If the offender blows hot,
they receive a swift sanction (arrested immediately, a
quick hearing, and a short jail sentence, usually 1-3
days.)
M
9:45:52 AM
Mr. Schilling discussed slide 26 and read from his talking
points.:
SLIDE 26
The program works. Most people on the program quit
drinking completely, and another 30% quit drinking
after their first couple violations.
24/7 Sobriety is a public safety measure. South
Dakota has been collecting data on their program for
almost 10 years now, and the results are very
exciting.
Mr. Schilling pointed to slide 27 and addressed his talking
points.:
SLIDE 27
They have seen a 9% decrease in domestic violence and
a 12% decrease in drunk driving. The program is
reducing recidivism and saving them money.
The bottom line is: a majority of the people in the
program quit drinking completely, and that's good for
public safety and good for the budget.
9:46:29 AM
Mr. Schilling addressed slide 28 and read from his talking
points.:
SLIDE 28
The next section, 23, makes changes to AS 12.55.027.
This section of law lays out the requirements to
receive credit for time served in a treatment program.
By relaxing these requirements on treatment programs,
the program can offer better treatment, and
participants can more readily earn credit for time
served there. Remember, offenders have little
incentive to enter (and pay for) a treatment program
if they won't get credit for their time.
9:47:06 AM
Mr. Schilling discussed slide 29 and spoke to his talking
points.:
For 25 years, it was the Court that made
determinations of what counted as credit for time
served in a treatment program, based on years of
caselaw, starting with Nygren v. State in 1983. In
2007 the legislature enacted this section of law.
Now, it is laid out in statute, and is much more
restrictive than it was pre-2007. It leaves little
room for an offender to participate in activities that
programs would like to provide, such as going to a job
center, attending church, vocational classes, or going
to AA and NA meetings.
If we relax the requirements in this statute, it
encourages rehabilitation and treatment, and allows
treatment programs to do more. And it brings the
statute more in-line with how things were done prior
to 2007.
The way these changes are written in SB 64, we're
still preventing credit for time served for going to
dinner and a movie.
So, SB 64 says that in order to get credit for time
served, one must live in a treatment facility and can
only get a "day pass" for things like employment, voc.
tech classes, AA or NA meetings, and any other purpose
that is directly related to their treatment. This
encourages treatment, which is by far less expensive
than a prison bed.
9:48:39 AM
Mr. Schilling related that Sections 26 through 28 of the
bill dealt with the expansion of PACE.
a program called Probation Accountability and Certain
Enforcement (P.A.C.E).
Mr. Schilling pointed slide 30 and discussed his talking
points.:
SLIDE 30
When an offender is put on probation, they are given a
list of things they can't do - like use drugs. If
they violate the conditions of their probation by
using drugs, it's called a "probation violation" and
that can trigger you going back to jail. In Alaska,
we have a big problem with people on probation getting
these violations or committing new crimes and
repeatedly coming back into the prison system. This
revolving door of people coming in and out of the
prisons is one of the biggest drivers of our high
recidivism rate. But more important to this committee,
it is one of the biggest cost drivers to the
Department of Corrections.
9:49:28 AM
Mr. Schilling spoke to slide 31 and addressed his talking
points.:
SLIDE 31
There is a way to stop this revolving door. There is
a different way of doing probation and it's a program
called P.A.C.E. (Probationer Accountability and
Certain Enforcement).
Mr. Schilling pointed to the pie graph on slide 31. He
related that the green slice represented 14 percent and was
the amount of people who were serving time currently solely
based on a probation violation.
Mr. Schilling continued to address slide 31 and read from
his talking points.:
..it was first developed in Hawaii and is now being
used in 17 other states. It reduces the number of re-
arrests, reduces the amount of drug use, reduces the
number of missed appointments, and ultimately reduces
the number of people going back to jail.
It's an intensive program for offenders who have been
identified as likely to violate the conditions of
their probation. The program involves frequent and
random drug tests and responds to any violation with
swift, certain, and short terms of incarceration.
Probation-as-it's-currently-done-today comes with high
rates of violations. For example, despite rules
requiring sober living, probation-as-usual oftentimes
affords offenders opportunities to continue using
drugs, which in most cases means continuing to commit
other crimes. Drug testing tends to be too infrequent
and sanctions are too rare and too delayed. When
sanctions are imposed, they tend to be too severe
(months, or occasionally years, in prison) rather than
a 2-3 day jail term.
P.A.C.E. takes away the discretion of the Probation
Officer because when someone violates a condition of
his or her probation by, for example, testing positive
for drugs or missing an appointment, under P.A.C.E,
that individual is arrested immediately and brought to
court within 72 hours. At the court hearing, the judge
imposes a sanction of a short jail term, commonly two
to three days. If the offender violates his or her
terms again, the process is repeated. In short, every
single probation violation is dealt with quickly and a
sanction is imposed each time. In contrast, under
"probation as usual," revoking someone's probation or
holding a court hearing might not occur until several
probation violations are reported. As a result, the
process can require several costly court hearings over
a six-month period and can be generally characterized
as anything but "swift and certain."
This is more intensive probation, but it can be scaled
at low cost. In Hawaii, the program grew from 35
probationers to more than 1400 without adding
courtrooms, judges, court clerks, police officers, or
jail cells. To begin putting a tourniquet on our rate
of recidivism, this bill establishes PACE statewide
immediately, which the Department of Corrections
estimates needing additional personnel for.
Mr. Schilling observed that the bill did have a fiscal note
that accounted for the need of the additional personnel
within DOC.
9:52:25 AM
Co-Chair Kelly observed that the fiscal note for the bill
was for about $1.6 million and inquired if there was any
way to anticipate the savings that it would result in. Mr.
Schilling replied that there were ways to estimate the
savings and believed that the sponsor had a report from the
Division of Legislative Research to that effect. He thought
that the report was in members' packets (copy on file) and
stated that further along in the presentation, he would
discuss the reduced number of days in prison that people
had under P.A.C.E.
9:52:51 AM
Mr. Schilling continued to address slide 32 and stated that
P.A.C.E. probationers were 55 percent less likely to be
arrested for a new crime and were 72 percent less likely to
use drugs. He noted that the graph depicted a precipitous
drop off after the first violation of a positive
urinalysis.
9:53:14 AM
Mr. Schilling spoke to slide 33 and stated that P.A.C.E.
probationers were 61 percent less likely to skip
appointments.
9:53:22 AM
Mr. Schilling addressed to slide 34 and relayed that
P.A.C.E. probationers were ultimately 53 percent less
likely to have their probations revoked, which was where a
cost savings could be found because they were not coming
back to prison.
9:53:37 AM
Mr. Schilling spoke to slide 35. He stated that the graph
also reflected the likelihood of P.A.C.E. probationers'
probation being revoked, but it reflected the state's pilot
P.A.C.E. program in Anchorage.
9:53:47 AM
Mr. Schilling discussed slide 36 and stated that it showed
how many less days a P.A.C.E probationer would spend in
prison; they served 48 percent fewer days in prison. He
reported that when the cost of incarceration was $160 per
day, a 48 percent decrease was huge. He observed that each
new probation officer in Alaska paid for their own salary
and benefits if they kept just 2 people out of prison for a
year.
9:54:17 AM
Mr. Schilling directed the committee's attention to slide
37 and discussed his talking points.:
SLIDE 37
The Department of Corrections evaluates inmates to
figure out their risks and needs. This type of
evaluation can give the DOC an idea of the underlying
reasons that person committed the crime like if they
have a substance abuse or a mental health problem.
Based on this assessment, you have a good idea if the
offender needs to be in PACE, if he could use
substance abuse or mental health treatment, basically,
discovering what the underlying issue is.
9:54:45 AM
Mr. Schilling spoke to slide 38 and related his talking
points.:
SLIDE 38
The department uses a 54-item assessment, which
identifies problem areas in an offender's life and
helps predict their likelihood of recidivating.
The assessment looks into 10 areas like family/marital
issues, attitudes, substance abuse or alcohol issues,
etc.
However, when someone is sentenced to serve time in
prison here in Alaska, more often than not, we do not
evaluate or assess that person. The Department of
Corrections assesses less than half of the felons
coming through the system, and assesses hardly any
misdemeanants, even though misdemeanants are the
future felons.
You can't link an offender to treatment if you don't
assess them. You can't understand the underlying,
root causes for their crimes if you don't assess them.
In speaking with the department, a risk-needs
assessment takes about 45 minutes to complete.
Mr. Schilling addressed slide 39 and read fromaddressed his
talking points.:
SLIDE 39
So, this section [Section 29] of the bill requires the
Department to perform a risk-needs assessment on all
offenders who have been sentenced to 30 days or more.
This will mean a significant increase in the number of
assessments the Department conducts. The Department
estimates needing additional probation officers to do
these assessments.
9:55:54 AM
Co-Chair Kelly wanted the record to reflect that Co-Chair
Meyer had rejoined the committee.
9:56:14 AM
Mr. Schilling discussed slide 40 and relayed his talking
points.:
SLIDE 40
When someone has served their entire sentence, they
are released from prison. Every state releases their
prisoners differently. Some states transition that
person into a halfway house or some other type of
gradually phased re-entry. But here in Alaska, more
often than not, these prisoners are released into the
parking lot of the prison without any resources
whatsoever. This is one of the root causes of our
high recidivism rate - we dress them in the clothes
they entered prison with, and we release them into the
parking lot. They don't have first month's rent or a
deposit, and they can't get a job. They certainly
can't afford treatment. And if you're from rural
Alaska, you're probably being released in a city
you're unfamiliar with. So, as a result, many of those
recently released go straight to a homeless shelter
and are back in jail in no time.
It's this approach to re-entry that is the main cause
of Alaska's high recidivism rate. Of all of the
recidivism we're seeing, most of it occurs in the
first 6 months.
If, during those first 6 months after release, we
could, put them in a transitional re-entry program - a
place with a structured environment, sober living,
treatment, and help getting a job or education in
their own communities -- we could greatly improve
their chances of not reoffending.
9:57:13 AM
Mr. Schilling discussed slide 44 and related his talking
points.:
This section creates a fund to start those types of
programs. This fund will distribute money to programs
that have those 4 things: case management, sober
living, substance abuse treatment, and work placement.
By putting some focus on re-entry, we can drastically
reduce our rate of recidivism. This fund would be
managed by the Department of Corrections, which comes
with a fiscal impact to administer the fund.
9:57:34 AM
Mr. Schilling discussed slide 46 and related that the bill
established the Alaska Criminal Justice Commission, which
was simply a commission that would review, analyze, and
evaluate the effect of laws and practices within the
state's criminal justice system. He stated that an original
CS to the bill had the commission set at 17 members, but
the amount had been reduced to 12; the commission had a
sunset date established of 5 years.
9:57:58 AM
MrR. Schilling addressed slide 47 and stated that the
Alaska Criminal Justice Commission had some powers and
duties that were essentially pulled from the state
constitution, did not have an executive director, was
staffed by the Alaska Judicial Council, and provided an
annual report to the legislature each year.
9:58:07 AM
Mr. Schilling discussed slide 49 and related the
applicability and transitional provisions in the bill. He
noted that the bill had an effective date of July 1 of the
current year; however, the legislation gave DOC the ability
to start working on the regulations immediately.
9:58:51 AM
AT EASE
10:12:06 AM
RECONVENED
SENATE BILL NO. 138
"An Act relating to the purposes of the Alaska Gasline
Development Corporation to advance to develop a large-
diameter natural gas pipeline project, including
treatment and liquefaction facilities; establishing
the large-diameter natural gas pipeline project fund;
creating a subsidiary related to a large-diameter
natural gas pipeline project, including treatment and
liquefaction facilities; relating to the authority of
the commissioner of natural resources to negotiate
contracts related to North Slope natural gas projects,
to enter into confidentiality agreements in support of
contract negotiations and implementation, and to take
custody of gas delivered to the state under an
election to pay the oil and gas production tax in
kind; relating to the sale, exchange, or disposal of
gas delivered to the state under an election to pay
the oil and gas production tax in kind; relating to
the duties of the commissioner of revenue to direct
the disposition of revenues received from gas
delivered to the state in kind and to consult with the
commissioner of natural resources on the custody and
disposition of gas delivered to the state in kind;
relating to the authority of the commissioner of
natural resources to propose modifications to existing
state oil and gas leases; making certain information
provided to the Department of Natural Resources and
the Department of Revenue exempt from inspection as a
public record; making certain tax information related
to an election to pay the oil and gas production tax
in kind exempt from tax confidentiality provisions;
relating to establishing under the oil and gas
production tax a gross tax rate for gas after 2021;
making the alternate minimum tax on oil and gas
produced north of 68 degrees North latitude after 2021
apply only to oil; relating to apportionment factors
of the Alaska Net Income Tax Act; authorizing a
producer's election to pay the oil and gas production
tax in kind for certain gas and relating to the
authorization; relating to monthly installment
payments of the oil and gas production tax; relating
to interest payments on monthly installment payments
of the oil and gas production tax; relating to
settlements between producers and royalty owners for
oil and gas production tax; relating to annual
statements by producers and explorers; relating to
annual production tax values; relating to lease
expenditures; amending the definition of gross value
at the 'point of production' for gas for purposes of
the oil and gas production tax; adding definitions
related to natural gas terms; clarifying that credit
may not be taken against the in-kind levy of the oil
and gas production tax for gas for purposes of the
exploration incentive credit, the oil or gas producer
education credit, and the film production tax credit;
making conforming amendments; and providing for an
effective date."
10:13:00 AM
^Presentation: The Heads of Agreement and the Memorandum of
Understanding, Risks, and Benefits
MICHAEL PAWLOWSKI, DEPUTY COMMISSIONER, STRATEGIC FINANCE,
DEPARTMENT OF REVENUE, began a PowerPoint presentation
titled "The Heads of Agreement and the Memorandum of
Understanding, Risks, and Benefits" (copy on file). He
recalled that the committee had heard from the
administration's consultants over the last several hearings
and that the current presentation would attempt to bring
back the prior ones before the committee as a summary and
would describe some of the thought processes of the
administration when it put together the Heads of Agreement
(HOA) and the Memorandum of Understanding (MOU) with
TransCanada. He noted that the presentation would also
provide context for the committee and comment on what had
been presented to date.
10:13:33 AM
Mr. Pawlowski spoke to slide 2 titled "Guidance Document &
SB 138." He related that there it was important to remember
that there were only three documents that the committee
would be working through. He reported that to date, the
committee had been focusing on the HOA, which broadly
described a roadmap to advance the large Alaska liquefied
natural gas (AKLNG) line through a phased process; it also
described key commercial terms. He stated that the MOU was
a document that described an agreement to transition out of
the Alaska Gasline Inducement Act (AGIA) license and into a
more traditional commercial relationship with TransCanada.
He stated that the HOA and MOU really described to the
legislature and the public how the administration would use
the power that it would be granted if SB 138 was passed;
they were guidance documents and a road map. He stated that
SB 138 would look at three big questions: should the state
participate in the in the AKLNG project, what percentage of
the gas share the state would take, what process was used
for the development of the project-enabling contracts, how
the legislature would work with the administration through
the phased process, as well as how the administration came
back for approval before the legislature in the future..
10:15:07 AM
Mr. Pawlowski addressed slide 3 titled "Introduction."
· Should the State participate in the AK LNG project?
· What are some of the benefits?
· What are some of the risks?
· Can the risks be mitigated?
· Should the State partner with TransCanada?
o Does partnering with TransCanada advance State
interests?
o What are the risks and benefits of partnering
with TransCanada?
10:15:54 AM
Mr. Pawlowski discussed slide 4. He stated that when you
looked at the AKLNG project, one of the most compelling
interests for the state to advance a project this large was
the potential revenues that it would bring to Alaska in the
latter part of the current decade and into the middle part
of the next one. He reported that the Department of Revenue
(DOR)administration saw the opportunity of the
commercialization of North Slope gGas as providing ato
provide significant additional revenue stream on top of
Alaska's already robust oil tax revenues. He stated that
the bill had additional benefits such as getting gas to
Alaskans, growing the economy, and creating jobs. He
concluded that for the Senate Finance Committee, the
administration would be diving further into how the project
would look regarding potential investments and revenues in
future presentations.
how the project would look regarding potential investments
and revenues.
10:16:50 AM
JOE BALASH, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
spoke to slide 5. He related that the slide had been
presented by Deepa Poduval from Black & and Veatch
Consulting the prior week and that it consolidated and
highlighted the key findings and recommendations of the
study that the Department of Natural Resources (DNR) had
commissioned the previous year on how to maximize the
state's royalty value. He recalled the history that was
being discussed in committee the previous Thursday and that
in 2012 the project had started to pick up steam; it was
clear at that point that liquid natural gas (LNG) was the
most likely path to the commercialization of North Slope
gas. He reported that as an institution, DNR had grown to
an understand how to protect the state's royalty interest
in a North American based project, but was not entirely
sure how to do that in an LNG project; the study from Black
&and Veatch was commissioned in order gain understanding of
what those differences were, as well as what risks and
opportunities an LNG project would present to the state DNR
from a royalty perspective. He stated that as DNR evaluated
not only the differences from a regulatory and commercial
standpoint, it had also evaluated its current set of fiscal
terms and fiscal regime in order to ascertain whether or
not there was anything DNR really needed to do.
Commissioner Balash offered that ultimately, as slide 5
would show, it became clear that with large, complex, and
expensive projects, there was a competitive window that
Alaska could fit into; however, the administration would
have to work to make sure state made it in the window. He
related that the findings of the study had really helped
inform the decision making of DNR and DOR regarding the
conversation that was going on with the producers in the
context of the HOA. He reminded the committee that the
administration had been struggling to overcome the
misalignment of interests between the state and the North-
Slope Lessees; it had been through the course of the Black
& and Veatch study that the administration had seen a path
whereby, if structured properly, state participation could
maximize the value proposition for Alaska's royalty, while
mitigating ed some of the risks that the state would be
exposed to if it were to take an equity position in the
project. He concluded that having the study conducted at
the same time as the discussions between the state and
producers had been beneficial to the process.
10:20:31 AM
Senator Hoffman inquired if the Black & and Veatch study
was available. Commissioner Balash replied in the
affirmative and added that he would provide it to the
committee.
10:20:40 AM
Commissioner Balash continued to speak to slide 5 and
pointed to the bottom-middle box. He related that the
inherent risks of state participation in the a project was
something that DNR had spent a lot of time trying to
understand, as well as resolving those risks with the
project sponsors.
10:21:09 AM
Commissioner Balash addressed slide 6.
The HOA: A Step Toward Mitigating Risks
The Heads of Agreement begins the process of
mitigating risks identified in the royalty study by
committing the Parties to a phased approach to the
project.
Key State concerns are recognized and Parties commit
to developing agreements during Pre-FEED and FEED.
•Marketing Risk
•Expansion Principles
•Regulatory Framework and 3rd Parties
Commissioner Balash stated that fundamentally, the parties
that were best situated to help the state mitigate the
various risks were the same ones that it would be in
partnership with. He reported that most of the risks either
came in the upstream in the management of the gas and
production or occurred downstream in the marketing aspects
of the LNG sales process; it was here that the
administration had found several ways that these things
could be managed. He stated the upstream side had balancing
agreements that would be necessary between the different
fields and leases and explainedstated that there were
varying royalty rates between the two primary fields of Pt.
Thompson and Prudhoe Bay; the exact order in which those
fields get produced could leave the state short or long on
its share of the gas. He explained that one of the things
that the administration would be seeking during the pPre-
FEED stage was to develop the offtake and balancing
agreements upstream with the North
-Slope producer; concurrently, it would be working on the
initial marketing efforts and potential disposition
agreements with those producers on an individual basis. He
stated that the producers had the expertise and marketing
professionals in the field that were dealing with LNG
buyers that were in Pacific markets.
Commissioner Balash relayed that there were also some
broader interests of the state that the administration
wanted to keep in mind, first of which was the opportunity
for expansions. He stated that the opportunity for
expansions was something that had been important to DNR for
many years and offered that Alaska had tremendous potential
for additional gas development beyond Prudhoe Bay and Pt.
Thompson; expansion opportunities were key to maximizing
this potential. He added that the regulatory framework also
allowed for access by third parties. He reported that the
administration had chosen to use had a proprietary
construct that allowed the state to pay for its share of
the project, which it would through the tariffs anyway, but
also allowed the state to control the terms of that section
of the project. He stated that the administration felt that
the above approach was a broad way to solve multiple
problems, maximize the opportunity for the state from a
royalty perspective, and at the same time, mitigate the key
uncertainties that were identified; however, the agreements
necessary to mitigate those risks had to be developed in a
step-by-step fashion.
10:24:42 AM
Commissioner Balash spoke to slide 7. He related that while
there were some key principles laid out in the HOA, there
were a lot left that needed the details worked out; over
the next 18 months during pre-FEED, the state needed to
focus on putting those details on paper, obtain a clear
understanding what the obligations of the parties are to
one another, and how risks would be shared. He stated that
during pre-FEED, the state would be picking up its share of
the development cost, that there was an opportunity to have
TransCanada lighten the state's load a bit on those costs
from a cash perspective. He stated that what the
administration was trying to show on the slide's chart was
that the state's steps were going to be made commensurate
with of those taken my other parties. He related that the
administration was seeking 18 to 24 months and roughly $100
million in the collection of agreements and legislation to
explore an opportunity that it thought was tremendous. He
hoped that once the pre-FEED step was completed, the
project would be back before legislature for approval with
the additional detail and a body of additional agreements;
he added that approval for project's next step would come
with another commitment of 2 to 3 years and upwards of $400
million. He added that the $400 million could be a lesser
amount, depending on partnership opportunities.
10:26:35 AM
Senator Bishop requested Commissioner Balash to speak to
the state's consultants who were advising Alaska on the
issue and observed that the public might not be aware of
who was helping the state. Commissioner Balash replied that
that the state-gas team had people who dealt with the
companies on a daily basis, but behind them were the
state's consultants at Black and Veatch. He reported that
Black and Veatch was a global engineering firm that is
involved directly with the design and construction of LNG
project such as the AKLNG project; the company's business
consultancy, which Ms. Poduval was a member of, had
provided direct guidance and research regarding how these
sorts of agreements, as well as the commercial agreements
were put together. He related that Peter Abt, a managing
director at Black and Veatch, had several decades of global
gas experience, most recently working for GAZPROM in
Russia. He stated that aside from Black and Veatch, there
were some subcontractors on that contract that widened the
base of experience in assessing fiscal regimes and certain
market conditions, as well as intelligence. He stated that
one of the subcontractors, Daniel Johnston, was familiar
face and had advised either the legislature or the
administration in the past and contributed to the
competitiveness review on the project. He pointed out that
the state's outside counsel on the legal side was Greenburg
Traurig, which was also an international law firm. He
stated Ken Minesinger had served as general counsel to a
number of North American pipelines. Sinc******)
10:29:55 AM
////.
.
10:30:55 AM
Senator Hoffman directed the committee's attention to slide
7 and related that there were three 3 different categories
of funding that reflected the different levels of
commitment. He inquired when the legislature would need to
make those commitments and further queried if the payments
for 2016, 2017, and 2018 would have to be made in 2016 or
if they were spread out over three 3 different legislative
sessions. Commissioner Balash replied that there were
probably several ways to deal with that and which would
partially depend on whether the state still had a cash call
exposure through the liquefaction portion of the project;
the administration had identified a partnership possibility
with TransCanada and it may be able to identify additional
partners during the marketing phase in the liquefaction
portion. He stated that if the state was able to secure
those partners, there might not be a need for cash calls
during 2016, 2017, and 2018 on the part of the state;
however, no partners had been identified yet, so the slide
referenced $180 million to $450 million over the phase. He
stated that each party would be responsible for meeting
their cash-call requirements and that currently, the
frequency of the commitment was not yet written into the
agreement. He thought that it was premature to know with
certainty, but that the state could expect to have a
significant cash commitment in 2016.
10:33:06 AM
Commissioner Balash addressed slide 8 and related that
there were 3 major components of the project that all fit
together in order to produce LNG for marketing to the
Pacific markets. He stated that one of the components was
the gas treatment plant at Prudhoe Bay that would remove
the CO2, H2s, and other impurities that would result in a
very pure methane stream with some other potential
hydrocarbons to help keep the BTU content high; that gas
stream will be fed into the pipeline that will travel
throughout the state at a relatively high pressure and
would end into a liquefaction plant located at tidewater
that was expected to be in Nikiski.
10:34:11 AM
Commissioner Balash spoke to slide 9 and stated that the
question was what the state's share of the project would
be; a range of 20 percent to 25 percent had been identified
in the HOA as the state's share. He stated that range had
been determined through discussions with the companies, but
was also a reflection on the findings of Black and Veatch's
work to identify the minimum threshold for state
participation to make the risks Alaska was taking on worth
it. He noted that the set of commercial commitments in the
project were very long-term and that the administration
thought that having a share lower than 20 percent was too
low; conversely, the state's potential partners did not
want it to have an open-ended upper end and a top end
number 25 percent had been arrived at. He noted that the
legislation settled on state participation at about 22
percent and relayed that the number was calculated by
taking the state's royalty interest, which was fixed at
Prudhoe Bay and Pt. Thompson and expect it to produce
roughly 75/25 split between the two fields in the long-
term; on a blended basis, 13 percent was the figure for
royalty. He related that the 13 percent royalty share was
added to the production tax share to produce the total
state gas share number. He observed that the math was not
straightforward and that the production tax rate of 10.5
percent was out of 100 units of gas; it was not that 10.5
percent out of 100 units of gas but was that percentage
after the royalties were taking out. He expounded that the
state's total share of the gas was actually 10.5 percent of
the remaining 87 percent after royalty plus the 13 percent.
He concluded that the total state gas share would then be
used to determine the state's equity participation number
on the project's three major components. He pointed to the
slide's gray boxes and noted that the corresponding capital
investment required to achieve the state investment in the
3 percentages of 20, 22, or 25.
Co-Chair Kelly inquired if there was a slide that covered
risk and cash calls. Commissioner Balash replied that there
was a slide further back in the HOA section of the
presentation and that Commissioner Rodell would address it.
10:38:14 AM
Vice-Chair Fairclough thought that Commissioner Balash had
touched on her question on the blended rate on the royalty
gas. She recalled that in the Senate Resource Committee, a
floor had been set so that the Alaska's revenue from the
project could never go to zero and inquired if that
committee had set it at 10.5 percent. Commissioner Balash
believed that it was 12.5 percent.
Vice-Chair Fairclough inquired if 12.5 percent was the
average of the lease rates. Commissioner Balash replied
12.5 percent represented the base royalty rate for leases
that have an additional component like a net-profit share
or a sliding scale. Vice-Chair Fairclough wondered if it
should be set at a blended rate and thought that the Pt.
Thompsons lease was at a higher rate of 16 percent.
Commissioner Balash responded that there were some leases
that had a 16 percent rate, which was a 1/6 rate; however,
there were a lot of 1/7 leases.
Vice-Chair Fairclough relayed that the intent in setting a
floor in the Senate Resources Committee floor was to make
sure that Alaskans received the value that was negotiated
on the lease. She observed that the floor was set at the
low end and wondered if it should be blended because of the
discussion on the point of production. She noted that the
state would never go above the 15 percent gross tax as was
stated in the HOA and wondered about the play between 16
percent lease rate and Prudhoe Bay. She wondered how the
actual gas tax would be adjusted to stay within the range
of the blended number that the administration was showing
the committee.
10:40:44 AM
Co-Chair Kelly requested Commissioner Balash to restate
Vice-Chair Fairclough's original question before he
answered. Commissioner Balash replied that when DNR offered
acreage for lease at competitive sales, the terms of the
leases were noticed before the bids were brought in; it was
intended to be a transparent process. He related that when
Prudhoe Bay had been first put up for lease in 1969, the
terms were generally set at a 1/8 or 12.5 percent royalty
share. He reported that when Prudhoe Bay had first been
developed and the Trans-Alaska Pipeline System (TAPS) had
been constructed, there were additional sales in an around
Prudhoe Bay that offered terms at slightly different rates;
in some cases, the royalties were made higher and in
others, a net-profit share lease was offered for sale. He
explained that a net-profit share lease had a royalty rate
of 12.5 percent, but the bid variable was a percent of the
profit earned on that lease rather than being a bonus bid;
it was a payment that came in to DNR in addition to the
royalty. He reported that DNR had certain leases that had a
sliding scale royalty that had the base royalty set at 12.5
percent, 1/7, or 1/6, but the royalty rose upward as prices
increased. He observed that DNR had a large variety of
terms on its leases and recalled that after initial
production at Prudhoe Bay, the department began offering
some of its other leases at an even higher initial royalty
rate; that was generally why Pt. Thompson coming in a
higher royalty. He stated that Pt. Thompson had some leases
at mostly 1/7, some at 1/8, as well as some net profit
sharing and sliding scale leases; all of those leases get
blended together at the unit level and depending on the
field's production and how the individual tracks were
allocated for production purposes, it drove the math for
how much of the gas was "royalty gas."
Commissioner Balash continued to address Vice-Chair
Fairclough's question and stated that in the Prudhoe Bay
case, the track factors were fairly straight forward; DNR
had seen a lot of production and cycling of the gas, knew
where it was coming from, and knew how to allocate the
production. He stated that Prudhoe Bay's terms had been
rationalized among the producers and there was less chance
for disputes; however, when dealing with something as big
as SB 138's proposed gasline, production from both fields
would be needed to support the project. All of the proven
24 Trillion Cubic Feet (TCF) of Prudhoe Bay and all of the
proven 8+ TCF would be needed to support the sales and
purchase agreements (SPA) that would finance to project. He
relayed that the exact timing of when both of two fields
would be in production was not known currently and
furthered that part of the timing would depend on approvals
from the Alaska Oil and Gas Conservation Commission (AOGCC)
and part would depend on other construction windows. He
stated for example that if the state agreed on an overall
number that resulted in 22 percent state gas share and the
Pt. Thompson production came early, it may find it itself
with slightly more than 22 percent at that location; the
state wanted to avoid not having enough capacity in the
terms of infrastructure to move all of the state's gas in
the first year. Conversely, if Pt. Thompson gas was not
being produced in the first year and it was all from
Prudhoe Bay, the state could find itself short on gas
because Prudhoe Bay by itself would be slightly less than
22 percent. He stated that the challenge for all parties
involved was to develop a balancing agreement, so that
there was a way to long-term balance the 22 percent gas
share of the state as well as other parties shares
regardless of which field came online first; this was
something that the state and ConocoPhillips were very
aligned on because that company had a very different
ownership pattern for both fields.
Commissioner Balash continued to address Vice-Chair
Fairclough's questions and discussed the floor for the
purposes of SB 138. He stated that the authority DNR was
requesting was to modify the leases that had a net profit
share or sliding scale component so that it could fix a
number rather than having one that fluctuated; having
certain leases within units that went up and down would
make the balancing agreement harder to solve. He stated
that the question was what the fixed number would be. He
explained that if the base royalty rate in Prudhoe Bay was
12.5 percent and sliding scale went up as high as 20
percent, DNRY would probably ask for something closer to 20
percent and British Petroleum would probably want something
closer to 12.5 percent. He thought the Senate Resources
Committee had been trying to make sure that the State did
not receive under 12.5 percent; he thought that Vice-Chair
Fairclough was asking if that number should be higher than
12.5 percent to get closer to the expected blended number
and not lose value. He thought that state needed to pay
extra attention to number language that would work across
the North Slope and fields and not put the state in a
position where it could not resolve the number from a
commercial standpoint. He added that the state may want to
have a formula that was reflective of the base royalty rate
for any given lease plus a some number, so that the number
was not hard wired that may actually be lower than the base
rate, for example, at Pt. Thompson. He used 13 percent as
an example and stated that on a blended, long-term basis,
it would be the state's royalty share; however, if 13
percent was viable at Prudhoe Bay, it would be too low at
Pt. Thompson. He concluded that the state would want a more
formulaic floor instead of a set number.
10:50:02 AM
Vice-Chair Fairclough understood the interplay and the
point of production, but wondered if the state was forgoing
about 1.5 percent interest on gross because of its ability
to meet cash calls or the certainty in the alignment of the
other partners. She stated for example that if one was
looking at Pt. Thompson without blended rates and the
legislature wanted to tax gas at 10.5 percent, which was
added to the 16 percent lease, the state's share would be
about 26.5 percent; however, it was proposed that the cap
be 22 percent based on the blended rates. She noted that if
the state's tolerance for risk was greater, it could have a
cash call that when up to 25 percent; it would still be
missing an opportunity to make another 1.5 percent based on
the current lease structures that were determined years
prior if it was blended into the current proposal of a 10.5
percent gas tax. She inquired if her understanding was
correct. Mr. Pawlowski replied that Vice-Chair Fairclough
was correct and that the balancing agreements were critical
for the state and other parties; however, he clarified that
the 10.5 percent would not come out to 26.5 percent,
because the 10.5 was "after." He noted that what DNR was
trying to illustrate in slide 9 was the direct relationship
between the tax rate and state's investment in
infrastructure. He noted that these numbers did not
represent the state's total interest in the project and
that all that was being discussed were royalties,
production tax, and a share of infrastructure; in addition
to this, the state and local governments had property taxes
and there was also corporate income tax, which were both
separate from what was considered state revenues on the
project. The concept that was being advanced with bill was
the state-tax rate in combination with a royalty that would
set Alaska's share in the infrastructure.
10:53:21 AM
Vice-Chair Fairclough inquired if Alaska would see a rate
of return on its cash investments when it placed cash on
the table to mitigate risk. Mr. Pawlowski replied that the
return on investment that the Alaska would receive was laid
out in the TransCanada MOU if state used an equity option;
it was the exact same rate of return that TransCanada was
earning on its equity amount position. He added that the
return on state's investment on the liquefaction had not
been set yet and was part of what the concept going forward
needed to be. He concluded that the state would get a
return through the sale of its gas in the investment in the
infrastructure.
10:54:13 AM
Vice-Chair Fairclough wanted to be sure that the state was
discussing a single aspect inside the proposed investment
to strategy, but that there was more going on that the
state was trying to offer the lowest possible
transportation costs, which had not been gone through yet.
She appreciated the understanding that the administration
had regarding the balancing agreement and how important it
was. She noted that the balancing agreement was a future
agreement that would need to be brought back to legislature
for approval.
Co-Chair Kelly indicated that he and Senator Dunleavy had
to leave for another engagement.
10:55:11 AM
AT EASE
10:56:46 AM
RECONVENED
Co-Chair Meyer noted that several members were attending
the press availability due to time constraints.
10:57:16 AM
Commissioner Balash spoke to slide 10 and stated that it
was a re-illustration of the three major components of the
project with each of the parties' respective ownership
shares shown. He noted all parties would have a share of
the gas treatment facility, the pipeline, and the LNG plant
He explained that the benefit was in letting each party
setup financing in a way that suited its long-term
interests. He noted that for years, the state had been in
an adversarial footing relative to the three majors that
were on the slide regarding matters with TAPS and tariffs
charged. Through the state's lease agreements and the
production tax system, it did provide for a recognition of
the costs of transportation and the question was what that
cost was. He reported that the construction cost of
infrastructure was straightforward and relatively easy to
identify; how that cost was financed was what drove the
ultimate transportation charges. He reported that generally
the state was interested in lowest possible cost of
capital, which usually meant a higher debt component and
lower share or return; for that reason, DNR had paid a lot
of attention to the how the state's partners financed
infrastructure. He stated that in the construct that was
proposed in the HOA, the state taking on its share in all
three components meant that it did not have to care about
the relative financing of the three3 other partners because
it was not all being blended into a single tariff and was
not being used to calculate the production tax or royalty
values; instead, the state would be in a position to order
it's financing in a manner that it thought best served
Alaska's long-term interests or put together partnerships
on transportation services with terms that worked for
Alaska.
Commissioner Balash responded to Vice-Chair Furlough's
question regarding Alaska's return on equity (ROE) at the
LNG plant. He noted that regardless what the ROE was set
for on the state's share of the project, the Alaska was
paying itself and could set the ROE at 6 percent or 12
percent; however, if it was set at a higher number, it
would just mean that it would come out of the royalty
proceeds from LNG sales and result in a lower royalty
number. He concluded that as long as the state was charging
itself, it would be shifting funds from one pocket to
another in moving the ROE around. He stated that the ROE
became more important regarding the state's partners and
thought that Commissioner Rodell would be able to walk
through some slides on the MOU to illustrate that point.
11:01:10 AM
Commissioner Balash spoke to slide 11 and related that the
committee had seen it presented the prior week by Ms.
Poduval. The slide checked the royalty study's findings
against the HOA. He related that the alignment through
equity recommendation was achieved in a very direct manner
in the HOA. He added that DNR's and its contractor's
analysis showed that the current alignment improved the
economic metrics for producers and the commercial
attractiveness for the project; the alignment also took
some steps, though not all of them, to reduce overall
government take. He stated importantly, the current
alignment preserved the state's royalty value, but it did
not answer all of the questions; it did take steps to
manage some of the risks, but there were issues with the
capital costs that the HOA did not address directly. He
stated that there was some language in the HOA that DNR
thought had great potential to benefit the state and
mitigate the risks of RIK marketing and price exposure;
each of the producer companies were prepared to come
forward individually assist the state in the disposition
and sale of its LNG. He stated that DNR thought that
overall structure went a long way to providing a path
forward with 3rd-party access to the line and expansion
opportunities, which was an issue that the state and the
lessees were having trouble with; the construct seemed to
work for the state and lessees and held great promise.
11:04:04 AM
Commissioner Balash discussed slide 12.
Key Takeaways: Heads of Agreement
· LNG is a significant opportunity for Alaska and
Alaskans.
· Phased process with commensurate steps.
· Off-ramps for all Parties.
· Maintains AGDC momentum on Alaska Stand-Alone
Pipeline (ASAP).
· Creates opportunities to mitigate State risks
identified in royalty study.
· Major risk is cost of State participation
Commissioner Balash spoke to slide 12's first bullet point
and stated that the project was not only an opportunity in
terms of benefit to treasury, but also in the business and
job opportunities that it would represent. He thought that
the peak construction was estimated to result in about
15,000 jobs and after that peak, the long-range operation
would require something on the order of 1,000 jobs that
were be in Alaska as long as those SPAs were in place; the
SPAs would probably be in place for 20 or 30 years. He
stated that process itself took a phased approached and
that the legislation was not asking for a 20 or 30-year
commitment; the bill was asking for measured authority,
some time, and some cash. He reported that there were off-
ramps for all of the parties and that the HOA itself
expired at the end of 2015. He stated that the big risks
that the state might face in the project had been
identified and the state had begun to measure ways to
mitigate those risks; he thought that a lot of those
problems would be solved in the next phase through further
commercial negotiation and agreement with the other project
parties. He added that cost was a major risk for the State
of Alaska and stated it would be very important to monitor
the state's cash flows during the period of construction.
He noted that state needed to be careful of the role of
financing the opportunities for cash exposure during the
period of 2019-2023, which was where partnerships had the
greatest opportunity to mitigate the state's risks in the
future.
11:07:15 AM
Vice-Chair Fairclough noted that Commissioner Balash had
referenced the state's ROE and how it could have an impact
on tariff rates as the state was trying to provide lower-
cost energy to Alaskans. She requested Commissioner Balash
to expand on the comment; she was thinking about the
Insterstate Commerce Clause and how it would fit inside of
the state's ability to try to reduce the tariff charges.
She thought that the commissioner might want to mention
Federal Energy Regulatory Commission (FERC) regulation on
the pipe versus the rate. Commissioner Balash replied that
the state had traditionally relied on rate making on
pipelines to protect its interests, which was most easily
seen in the case of TAPS. He stated that over the last
decade and a half as Alaska had hoped for pipeline
connected to the Lower-48, the state would have been
relying on FERC and the Canadian side's National Energy
Board (NEB) to connect producing fields with a liquid and
transparent market place; this would have meant highly
regulated infrastructure to carry the gas from fields to
market in a very straight forward way to value the state's
royalty interest. He stated, however, as the project
focused to an LNG project, the state faced a different sort
of value proposition where it would no longer take its own
gas to a transparent and liquid hub; instead, that gas
would be taken to locked-in buyers who had agreed to
specific terms for very long period of time and were in a
propriety deal. He furthered that LNG market place was
generally not transparent or liquid and the value question
became a little cloudier. He noted that with LNG there was
still a pipeline involved, but there was the addition of a
liquefaction plant and that FERC did have some jurisdiction
over liquefaction facility, which was generally limited to
environmental health and safety matters; FERC did not
regulate for access by 3rd parties or rates. He observed
that the state faced a little bit of a question mark
because under the lease agreements, the state was entitled
to its royalty share, but the lessees were entitled to a
reasonable transportation deductions; because liquefaction
was part of the process of transporting gas, the question
was how to go about determining what the reasonable charge
was for liquefaction. He explained that that area of
liquefaction was not regulated, the state could not rely on
FERC to tell it the answer; the state was left largely to
settle those differences in commercial agreements or in
litigation.
Commissioner Balash continued to address Vice-Chair
Fairclough's comments and thought that the state needed to
look at the cost of that infrastructure, the debt relative
to equity was financed, and what the return on that equity
was. He stated that if the state was using its own money to
construct the project, it could charge a very relatively
high ROE; if it did that, it was subtracting value from the
market prince in the SPAs that got deducted and resulted in
a smaller and smaller wellhead value where royalty was
calculated. He stated that the higher the state pushed
those tariffs and the smaller it made that net-back, the
less value that was created for the Permanent Fund; it also
started to the affect the starting point for the price of
gas to Alaskans and the state faced an odd dilemma. He
explained that the state could arrange the financing so
that the liquefaction charge was really high and the
pipeline charge was really low, gas could be moved to
Alaskans at what would appear to be a low price; however,
the state would really be shifting the costs from one
pocket to another and would be susceptible to accusations
of interfering with the market place. He would rather not
speculate on where those lines where in order to preserve
them for future discussions with counsel and regulators;
however, there were some odd interplays that could occur
depending on the overall structure and what the price was
from a net-back perspective at the North Slope.
11:14:40 AM
Mr. Pawlowski spoke to Vice-Chair Fairclough's earlier
question regarding how Alaskans and other parties could see
what the cost of moving gas through the pipeline was and
stated that it was found in the MOU with TransCanada. He
thought given the proprietary nature of the project,
TransCanada brought in the best of both worlds in that
there was a 3rd party actor providing the transparent terms
for potential shippers. He thought that the terms
highlighted on slide 13 were very competitive compared to
other gasoline projects that were regulated by FERC.
11:16:09 AM
ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE, spoke
to slide 13 and the memorandum of understanding. She stated
that the state's participation in the project would require
significant financial and human resources. DOR believed
that the path forward was to take advantage of the already
existing partnership with TransCanada under the Alaska
Gasline Inducement Act (AGIA) framework; this and the
investment made by both the state and TransCanada made the
company a natural partner to assist in moving the project
forward. She believed that the state did need a partner in
the project because at the end of the day it was a state
government and had an obligations to Alaskans to continue
to provide a safe and prosperous environment to live in.
She reported that the state did not have the right
expertise and that TransCanada was an independent pipeline
company that knew how to build pipelines; the company had
also spent the last 6 years developing an understanding the
environment and challenges that were unique to Alaska. She
stated for the above reasons, she and Commissioner Balash
had determined that entering into the MOU with TransCanada
was in the best interest of the state.
Commissioner Rodell addressed slide 13.
The Memorandum of Understanding
The MOU with TransCanada provides a roadmap for a
transition from the AGIA license to a more traditional
commercial relationship with TransCanada.
The MOU describes how the State will:
1. Abandon the AGIA license.
2. Partner with TransCanada in the midstream
(Transmission lines, GTP and Pipeline) of the AKLNG
project.
3. Provide for active interest in expansions.
Key Terms of MOU:
1. Favorable Debt to Equity Ratio
•75/25 ratio for rate-making purposes reduces the
State's tariff.
•Lower tariffs improve the State's overall cash flows.
2.Cash Contributions by TransCanada
•TransCanada as project developer reduces the State's
exposure to cash calls and obligations until the
pipeline is in service.
3.Improved Value to the Treasury
•When you consider the opportunity cost of utilizing
the State's capital (which earns 6% in the treasury),
our NPV is improved overall.
4.Expansions
•TransCanada committed to 70/30 capital structure for
expansions.
5.Gas to Alaskans
•At least 5 offtake points
•Distance sensitive rates with three zones for
delivery
11:19:06 AM
Commissioner Rodell spoke to slide 14.
MOU: Transporting Alaska's Gas: The MOU details
TransCanada's terms of service for transporting
Alaska's State Gas Share via the GTP and Pipeline. It
is further contemplated that a subsidiary corporation
of AGDC will be established to carry the State's
interest in the LNG plant.
Commissioner Rodell spoke to slide 14 and related that the
slide's diagram attempted to depict how the state
transitioned its gas share. She noted that TransCanada came
in with the state's gas share on the gas treatment facility
and transmission, as well as with the pipeline. The
subsidiary of AGDC would take the state's gas share in the
LNG facility.
11:19:41 AM
Commissioner Rodell addressed slide 15.
Exhibit B of the MOU: Contains a term sheet for the
State to exercise an equity option up to 40%* of the
partnership established by TransCanada for the
relevant portion of the midstream.
Commissioner Rodell stated that the option to exercise
equity on slide was important because it would allow the
state to make a decision if it wanted to take more on after
pre-FEED when more was known about what the demands of the
project and the demands on the state would be.
11:20:37 AM
Commissioner Rodell spoke to slide 16.
MOU: Describes how the State will share the
responsibility for its share of the project with
TransCanada
Commissioner Rodell stated that slide 16 was another
picture of what was discussed on the previous two slides
and did assume a 25 percent equity participation for the
ease of illustration.
11:20:54 AM
Commissioner Rodell discussed slide 17 and noted that it
was one of slides that Black & Veetch had included in a
previous presentation. She thought that it was important to
show because it depicted how the levers were interconnected
and what various decisions' impacts would be. She reported
that if the state wanted to decrease the equity by 5
percent and increase the debt, it represent the equivalent
of about $200 million in additional net present value (NPV)
to the state; there was clearly value in having a higher
debt, lower equity percentage. She noted that increasing
the ROE by 1 percent would result in a loss of $100 million
to the state. She noted that for each year of delay in the
project operation resulted in a loss $800 million in NPV to
the state. She relayed that the slide spoke to the value of
maintaining momentum and striving to get to the final
investment decision (FID) in 2018.
11:22:49 AM
C
Commissioner Rodell addressed slide 18 and stated that DOR
wanted to understand what the other pipelines had as the
debt/equity structures and ROE. She stated that the
information on the slide came from the public filings
within the FERC certificate orders; the pipelines were
natural gas pipelines located within North America that
showed that capital structures tended have much higher
equity than what was in the MOU with TransCanada. The ROE
of the slide's pipelines was 13 percent or 14 percent. She
offered that the slide showed that the state had negotiated
a fair deal with TransCanada and that it was the right way
to go.
11:23:42 AM
Commissioner Rodell spoke to slide 19 and related that one
of the things that DOR was working on, which she thought
would be presented to the committee at future meetings, was
a more detailed analysis of the cash calls and how it
interacted with state's budget, revenue projections, and
other commitments that the state had; however, that was not
included in the current presentation. She related that the
slide showed what kind of cash commitments the state was
being asked to make on the project. She reported that if
the state chose to go it alone, about $108 million would be
needed to fund Alaska's portion of the pre-feed, which was
in the fiscal notes for the FY15 budget. She clarified that
these exact amounts were not in budget, but that the FY15
notes attached to the bill would include amounts to fund
the state's investment in pre-Feed. She offered that if the
state chose not to exercise the 40 percent buyback option
with TransCanada, the state's investment for the pre-FEED
period would about $43 million; DOR would be asking for
money to repay TransCanada the 40 percent in the FY16
budget if the state decided to go forward with the option.
She pointed out that if the state wanted to go it alone,
the FEED stage would cost another $400 million; mostly
likely this amount would be included in the FY16 budget
with supplemental in FY17 and FY18 as the cash calls were
better understood. She stated that without using the buyout
option, FEED would cost the state about $180 million; if
the state chose to exercise the 40 percent buyback, the
cost looked closer to $340 million.
Commissioner Rodell continued to speak to slide 19 and
stated that the state would have to evidence that it had
the money to make the commitments either through
appropriation or some other mechanism. DOR was continuing
to explore what the other mechanisms might be available to
the state in terms of making that evidence. She stated that
DOR was looking at if it was possible pursue a line of
credit or letter of credit that the state could draw on
without running an appropriation risk.
Co-Chair Meyer stated that the committee did have SB 138 in
its possession and that it was ok to refer to the bill.
11:26:59 AM
Vice-Chair Fairclough was looking at the time value of
money wondered and the committee's deliberation of the $3
billion into the pension plan; she wondered why the state
would not set aside $452 million to get to pre-FEED. She
observed that the $452 million would earn interest in an
account and the state would still have all of its off-ramps
and cash. He thought that debt was part of the reason, but
requested an explanation of the reasons behind not doing
this. Commissioner Rodell replied that it was a good point
and that setting aside that money had value. She stated
that part of the reason DOR had not proposed setting aside
the funding were concerns of not wanting to create any
constitutional issues around dedicated funds if it was kept
inside the Constitutional Budget Reserve (CBR) Fund for
that purpose. She was concerned about the legislature's
ability to carve off a piece of that funding and how it
would appropriated out and not appear like a multi-year
appropriation. She thought that there was value in setting
that amount aside, but that what the potential competing
demands might be on the budgetary side needed to be
recognized. She added that DOR was working on a detailed
analysis of setting that money aside.
11:29:33 AM
Mr. Pawlowski added that one thing to be careful about when
thinking about how to structure setting money aside to get
to pre-FEED was the horizon over which the money could be
invested. He stated that when existing funds were used that
were leveraging off of the way the money was currently
invested now, it was important to pay close attention to
when the cash was actually needed. He thought that the
balance of whether the money was better managed in one fund
versus another fund was important, and if it was efficient
to keep it separate when it was part of the state's
reserves and was being managed under the current practices.
11:30:31 AM
Vice-Chair Fairclough thought that the timeframe was short
enough that the money could be issued as a grant to AGDC.
She noted that the legislature gave grants to non-profits
and understood that her idea was on a much larger scale.
She thought that the proposal for the $3 billion was to
transfer those assets in the form of its current state and
move the management responsibilities over the Alaska
Retirement Management Board (ARMB) versus paying for
selling products that the state was managing and rebuying
them, which would result in administrative cost overheads.
She added that the $3 billion would go to paying a debt
that actuarially was presented to the public on Alaska's
finances; she wondered if that was the difference in the
dedicated fund issue between the $3 billion infusion and
her suggestion of setting $452 million aside for the
project. Commissioner Rodell replied that the legislature
was restricted currently from carving off and dedicating
reserves for a specific cause and that the question was if
it was willing to make an appropriation either as a grant
or as appropriation to the Alaska Capital Corporation; the
legislature could also create a new vehicle to house the
money. She stated that there was tension surrounded how the
funding would be set aside and structurally created so that
it was clearly identified for the purpose of funding or
acting as a backstop to the state's participation in the
project during the pre-FEED and FEED gates; DOR would then
adjust the asset allocation and investment of that to take
into account when those cash calls were going to happen.
11:32:39 AM
Vice-Chair Fairclough stated that the state did not need
another new organization to be stood up and thought that
using an existing structure would be ideal.
11:33:13 AM
Co-Chair Meyer thought that Vice-Chair Fairclough had a
good point and recalled setting up a fund to put money in
for building a pipeline and other capital projects; he
thought that the fund was still available and was housed in
Alaska Housing Finance Corporation (AHFC). He thought that
fund was setup to earn good interest for money that sat
there and that there was possibility to do what Vice-Chair
Fairclough was suggesting. Mr. Pawlowski replied that the
legislation did contemplate the creation of a new fund
within AGDC, which was done to protect the missions of
AGDC, but Vice-Chair Fairclough's comments opened the
question of how the state would want to use the fund. He
thought that discussing the fund and its possible uses was
a good dialogue for the committee to have with the
administration.
11:34:17 AM
Senator Hoffman wondered if FID would take place late in
2018 or in 2019, as well as what form it would come in.
Commissioner Rodell relied that it was expected that the
state would be wrapping up the FEED stage at the end of the
2018 calendar year and that FID was expected at the start
of calendar year 2019.
11:34:53 AM
Senator Hoffman inquired what form the FID would be
presented in and whether it be legislation. Commissioner
Rodell replied that it would require legislation because it
was the point at which the state would decide if it really
wanted to move forward with the pipeline.
11:35:07 AM
Senator Hoffman inquired if that would take place in late
2018 or in 2019. Commissioner Rodell replied that it was
hard to say at this stage, but believed that it would most
likely occur during the regular session of 2019.
11:35:38 AM
Senator Hoffman noted that the timing was a big decision
because 2017 and 2018 would be one legislative session and
that 2019 and 2020 would be another. Commissioner Rodell
replied that Senator Hoffman raised a very valid point and
to the extent that FEED was successful, the administration
would be coming back for approval sooner rather than later.
11:36:07 AM
Vice-Chair Fairclough noted that the unique point at FID
would mean that the state had secured gas contracts for the
volume and would have a defined tariff number. She hoped
that if the state went that far, the economics would be
positive for Alaska. Commissioner Rodell replied that the
administration would also have much higher defined costs of
the project as well.
11:36:55 AM
Commissioner Rodell addressed slide 20 and stated that it
gave a pictorial of how having partners could reduce the
state's investment during peak construction and what the
value of sharing that risk was to the state. She reported
that if the state did the project without a partner, it
would have significant cash outlays throughout the period
and it reached in excess of potentially $3 billion per year
for 2 or 3 years during peak construction; that cash outlay
was reduced almost in half if the state allowed TransCanada
to carry all of the state's participation in the midstream
and the gas treatment facility.
11:37:53 AM
Vice-Chair Fairclough if TransCanada would still be as
likely, based on their rate of return for shareholders, to
mitigate cash calls during FID if the state set aside the
money she had referenced earlier to get the state to pre-
FEED and the decision points; this way state would not be
paying TransCanada interest on equity. She wondered if
there was any kind of interplay or dependency in the
current negotiated contracts that allowed TransCanada to
not go forward with the state's option at FID if the state
had not been an active participant in the project in the
years prior. Commissioner Rodell thought that when the FID
decisions were reached there would a re-assessment by both
sides and that as the MOU was currently written,
TransCanada and the state could decide to not to continue
that partnership. She added that the administration
expected to continue going forward with the project. She
stated that TransCanada not being able raise the money and
not being able procure debt to finance the state's share
portion was a an off-ramp in the MOU; in this case, the
state would have to come up with the funding. She stated
that there was risk that TransCanada would not be able to
go forward with the project, but the possible reasons for
that happening were finance risks that all participants
were exposed to.
11:40:09 AM
Vice-Chair Fairclough noted that if the project reached
FID, the numbers would be much more refined and that the
project could should be able stand on its own and be
economically viable for both the State of Alaska and a
potential equity provider.
11:40:30 AM
Commissioner Rodell addressed slide 21.
CAN THE STATE GO IT ALONE? - STATE'S DEBT CAPACITY
• Financing the State's share of the AKLNG Project on
the State's balance sheet - key issues:
• At what cost of debt?
• Debt servicing as what % of general fund
unrestricted revenue.
Scenario 1
(lower interest)
• SOA Debt at 4.6%
• Debt Service limited to 3% of GFUR
Scenario 2
• SOA Debt at 4.9%
• Debt Service limited to 5% of GFUR
Scenario 3
(higher interest)
• SOA Debt at 5.6%
• Debt Service limited to 6% of GFUR
* High-level, indicative assumptions based on input
from Department of Revenue
Commissioner Rodell spoke slide 21 and stated that DOR had
given Black & Veatch certain assumptions when making the
scenarios. She pointed out that in Scenario 1 it was
assumed that the debt would be appropriation debt would be
AA+ rated because it would be one notch below the state's
AAA credit rating. She noted that the assumption that the
scenarios would use appropriation debt was because general
obligation debt required a vote of the people and that
there were currently no revenues available to finance under
a straight revenue construct. She addressed Scenario 1's
debt service and stated that it assumed the state's current
debt obligation of 5 percent of unrestricted General Fund
Revenue; the scenario would take the state up to 8 percent,
which was considered good a financial construct. She noted
that Scenario 2 would add 5 percent and would take the
total obligations of the state up to 10 percent of its
unrestricted General Fund Revenue; it would be at a A
rating and would cost more because of the lower credit
rating. She stated that Scenario 3 would have BBB rating.
Commissioner Rodell continued to address slide 21 and
related that the more unrestricted General Fund Revenues
that the state attached to the project over and above its
current debt commitments the lower the rating and the
higher cost. She pointed out that Scenario 1 provided the
lowest cost of debt, but it also gave out the least amount
of proceeds; under Scenario 3 had the most proceeds
produced, but at a higher cost.
11:43:15 AM
Commissioner Rodell addressed slide 22 and stated that when
Black & Veatch had formulated the different scenarios, it
had started off at the 20 percent equity stake because the
company thought that it was a good place to start. She
stated that the slide showed that if the state did not
partner for the project, the state would generate
approximately $3.5 billion-$6 billion in debt depending on
the interest the rate; the remaining balance would have to
come from equity. She noted that with the partnership with
TransCanada in scenarios 2 and 3, the state was able to
fund a larger proportion of its participation with debt
progressively in each one.
11:44:22 AM
Co-Chair Meyer thought that Alaska was not currently over-
leveraged with debt, but wondered if there was any concern
that the SB 138's project would get the state in over its
head regarding debt. Commissioner Rodell responded that
there was concern about how the extra debt would affect the
state's position and fathered that the state's revenue
source was volatile during the projects time period and
seemed to be going down. She concluded that DOR did have
concerns regarding how much debt the state could take on,
but that the state was not over-leveraged; the state was
not using all of the capacity that was available to it. She
relayed that the state had to recognize that it had debt
obligations that were in the form unissued general
obligation that had already been authorized by the voters
and the School Debt Reimbursement Program; the
reimbursement program did not have any limits or caps. She
stated that the pension liability was recognized by the
rating agencies as a state liability. She offered that how
the state structured its partnerships, as well as how it
would participate in the project was very important due to
the above concerns; additionally, the concerns were the
reasons that the state going it alone was a very
troublesome option from her standpoint.
11:46:14 AM
Co-Chair Meyer noted that the prospect of the state going
forward with the project alone was troubling to him and
other committee members as well and pointed out that some
of the debt, such as the School Debt Reimbursement Program,
could not be controlled. He explained that under the
reimbursement program, the state would have to pay 70
percent of the costs of building a new school if the
municipality passed a new school.
11:46:39 AM
Senator Hoffman noted that the state did not know what its
credit rating would be in 8 years and that it may not be
AAA, especially with the bleed of at least $1 billion out
of the general fund over that time period. He thought that
Alaska credit rating could drop drastically and noted that
he did not hear DOR discussing that eventuality. He thought
that the state balancing its own finances would be a key
factor in getting loans. Commissioner Rodell replied that
the point was valid and that she had been assuming that the
state would continue to balance its checkbook; however, the
Senator Hoffman was correct that there were scenarios under
which the pressures of spending versus revenues created a
downgrade on the state's credit rating. She explain that
the uncertainty was why slide 21 arranged the debt to show
what a A and BBB rated structure would look like. She
thought that another risk that had not been recognized in
the presentation regarding debt was what the future demands
on state infrastructure would be to support the project.
11:48:34 AM
Mr. Pawlowski directed the committee back to slide 4 and
related that it represented the tension that the
administration struggled with internally. He commented on
the slide's projection and relayed it reflected Black &
Veatch taking DOR's risk analysis, very conservative
revenue forecast case and running a future project based on
it. He reported that where the blue line would go after
2018 or 2019, depended a lot on what happened with the
projections the department was currently providing the
state and the upside potential, which was presented in the
Revenue Source Book. He relayed that upside potential
reflected higher levels of production that DOR saw
indications of, but were not counting on. He stated that in
the long-term, commercializing North Slope gas had the
potential to provide a material additional revenue stream
and that as the department looked at the long-term versus
short-term, it tried to manage the short term responsibly
enough to get to the longer-term blend of oil and plus gas
revenue, which would provide a robust revenue future for
the state; this was ultimately what DOR was trying to with
the HOA and with the partnership with TransCanada.
11:50:16 AM
Senator Hoffman noted that it was an eight-year span and
that oil and gas over the last eight years fluctuated
widely. He did not see much fluctuation in DOR's chart. He
stated that no one had a crystal ball and no one had
predicted the price of oil to be $114 per barrel. He
thought that state did not know what would happen to the
price of oil or gas.
11:51:08 AM
Vice-Chair Fairclough recalled the prior discussion of the
bullet pipeline versus a big line and that there had been
an attempt to get consensus for years for a bullet line to
get to provide energy in state, specifically for rural
Alaska; there had been great opposition to the bullet line
because of the worry of the tariffs being too high. She
stated that the legislature had the big line before it as
an option and that it was absolutely uncertain; she was
unsure of Alaska's tolerance for risk on the project. She
noted, however, that Alaska currently had the reverses to
take it through that number and that if it stalled for even
two years, the timeline was pushed and the reserves became
even more dependent on the volatility of that particular
moment in time.
11:52:38 AM
CCommissioner Rodell spoke to slide 23.
Key Takeaways: MOU
· Delays in momentum will generally outweigh gains in
commercial terms.
· Partnering with TransCanada:
· Advances key State interests (expansion & access)
during Pre-FEED and FEED.
· Supports larger State Gas Share by sharing risk in
construction.
· Provides transition out of AGIA with passage of
enabling legislation.
· Off-ramps exist with TransCanada in MOU.
Commissioner Rodell reported that the state would be
revisiting the project and how the state would move forward
every legislative session because there would be decisions
to be made at each point regarding contracts or
appropriations.
11:53:40 AM
Commissioner Rodell discussed slide 24.
Summary
· State participation in the AK LNG project:
· Maximizes the value of the State's resources.
· Improves competitiveness of AK LNG project.
· Puts State in a position to mitigate risks.
· Partnering with TransCanada:
· Advances key State interests (expansion & access)
during Pre-FEED and FEED.
· Supports larger State Gas Share by sharing risk in
construction.
· Phased process allows all Parties to mitigate risks.
11:54:17 AM
Senator Dunleavy noted that as he listened to the questions
and comments and he was thinking about the four quarters of
partnership between ConocoPhillips, BP, ExxonMobil and the
State of Alaska. He inquired if there was anything
preventing the state from talking to and taking on
additional partners that may want gas in order to lower the
state's risk on the project even further. Commissioner
Rodell replied in the negative and added that she expected
that the state moved closer to FEED and FID and had more
certain information, that buyers would be interested in
getting a piece of the transmission facility to ensure
access. She concluded that in 5 years, the financial
construct for the state's portion of the project would look
very different from the current plan.
11:56:01 AM
Senator Dunleavy noted that the presentation had various
scenarios of investment for the state and the return and
observed that this was for the state's quadrant. He
observed that the state could bring in partners that would
help reduce that load within its own quadrant. Commissioner
Rodell replied in the affirmative.
11:56:22 AM
Co-Chair Kelly directed the presentation back to slide 24
and requested an explanation of the state's ability to
mitigate risk. Mr. Pawlowski responded that Senator
Dunleavy had pointed to one place where risk mitigation was
possible. He explained that the when the state had a share
of the project and freedom to bring in partners, as was the
case with TransCanada, Alaska had an opportunity to share
some of the risk; for instance, if an LNG buyer wanted to
enter into a long-term contract with the Alaska, the state
may ask the long-term buy to shoulder the take or pay
commitment in moving the gas from the North Slope all the
way through the project. He related that being an active
participant in the project opened doors for the state to
have an asset to share and enabled a wide variety of
opportunities to explore during pre-FEED.
11:58:02 AM
Senator Hoffman directed the presentation back to slide 13
and discussed the two bullet points under key term #5,
which were the 5 take-off points and distance sensitive
rates to 3 zones to delivery. He thought that somewhere
along the long line before FID, the time frame and the
specifics of the delivery of gas to all Alaskans needed to
be worked out in order to let the state's residents know
that the project would make Alaska a more affordable place
to live. He thought that getting gas to all Alaskans was
critical element of the project for Alaskans.
11:59:18 AM
Senator Dunleavy inquired if it was the state's
responsibility of delivering cheap gas to Alaskans or if
the entire concept worked to that end and was a
responsibility shared by all of the partners. Mr. Pawlowski
replied that the terms of the MOU was solely dictating to
TransCanada how it would charge for gas moving in state;
however, the actual shares of what would be delivered in
state and what that would look like was yet to be
determined. He concluded that the structure of how that
responsibility would be managed was all part of the design
work and development in pre-FEED. HE concluded that gas
would be provided to Alaskans and the MOU with TransCanada
set specific rates to protect Alaskans with the distance
sensitive delivery.
Senator Dunleavy stated that the concept of getting
affordable gas to all Alaskans was very important to people
in Alaska and that he would be looking at this element and
the risk versus income. He noted that one could invest in
an ideas, but that how much the state would invest in the
project versus how much it would get out of it, as well as
getting affordable gas to Alaskan was what would drive his
decisions on the issue.
12:01:29 PM
SB 138 was HEARD and HELD in committee for further
consideration.
12:01:47 PM
Co-Chair Kelly discussed the following meeting's agenda.
ADJOURNMENT
12:02:25 PM
The meeting was adjourned at 12:02 p.m.