Legislature(2003 - 2004)

03/23/2004 09:04 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
     SENATE BILL NO. 271                                                                                                        
     "An  Act  amending  the  purpose  of  the  Alaska  Natural  Gas                                                            
     Development   Authority   to  include   planning,  developing,                                                             
     constructing,  managing,  or operating  an economically  viable                                                            
     gas pipeline project  from the North Slope of Alaska by a route                                                            
     that parallels  the Trans Alaska Pipeline System  or the Alaska                                                            
     Highway;  authorizing evaluation  of opportunities for  private                                                            
     sector  involvement   in the  project;  amending  requirements                                                             
     related to  the Authority's preparation of a  development plan;                                                            
     and providing for an effective date."                                                                                      
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair  Wilken  stated  this  bill,  sponsored  by  Senator  Ogan,                                                            
"expands the  responsibility of the  Alaska Natural Gas Development                                                             
Authority to include  the review of the economic viability  of a gas                                                            
pipeline that parallels the Trans Alaska Pipeline."                                                                             
SENATOR  SCOTT OGAN testified  that he  introduced this legislation                                                             
after  spending  time last  summer  with  Senator Dyson  at  various                                                            
meetings  in Canada.  Senator Ogan  stated that  in his capacity  as                                                            
chair of the Energy  Conference, he traveled through  Western Canada                                                            
to lobby the  province of British  Columbia to join the Conference.                                                             
He relayed  that he  learned that  the Trans  Canada pipeline  would                                                            
have adequate  capacity  to transport  natural gas  were a  pipeline                                                            
constructed in Alaska to the Canadian border.                                                                                   
AT EASE 9:07 AM / 9:07 AM                                                                                                       
Senator Ogan  opined that  Alaska "must have  all possible  tools in                                                            
the toolbox"  in its efforts  to develop  natural gas resources.  He                                                            
reminded   of   ongoing    negotiations   between   the    Murkowski                                                            
Administration  and Mid America Group.  He was unsure of  the status                                                            
of these negotiations,  but understood an agreement would be reached                                                            
for stranded gas development.                                                                                                   
Senator Ogan  indicated this legislation  would allow consideration                                                             
of constructing  a tax-free  natural gas pipeline  in Alaska  to the                                                            
Canadian  border. He  preferred that  the private  sector  undertake                                                            
this  project,  but  in  the  event   it  does  not,  he  said  this                                                            
legislation would provide  an opportunity for the State to undertake                                                            
the project.                                                                                                                    
Senator Ogan asserted that  a primary focus of the Energy Council is                                                            
determining  how  the  US  would  deal  with   the  upcoming  energy                                                            
shortage.  He commented  on  the inability  to  obtain  a permit  to                                                            
construct a nuclear power  site and the near impossibility to obtain                                                            
a permit to  operate a coal burning  facility. He reported  that the                                                            
supply of natural  gas available in  the Lower 48 is unable  to meet                                                            
demand and  subsequently the  costs have increased.  As a result  of                                                            
these factors, he expressed  this is the appropriate time for Alaska                                                            
to pursue development  of natural gas resources for  distribution to                                                            
other states.                                                                                                                   
Senator Ogan warned  that if Alaska does not take  advantage of this                                                            
opportunity  immediately, entities  from other  countries would.  He                                                            
cited that by  the year 2020, the US would import  between 11 and 24                                                            
percent of its liquefied  natural gas from other countries. He noted                                                            
this estimate includes  an assumed 4.5 billion cubic feet of natural                                                            
gas  produced in  Alaska.  He told  of "offshore"  facilities  under                                                            
construction,  some  of  which  are  undertaken  by  producers  also                                                            
operating in Alaska.                                                                                                            
Senator  Ogan spoke  of producers'  preference to  ship natural  gas                                                            
from tidewaters  because the expense  of approximately $2.5  billion                                                            
is  less than  the proposed  $7  or $8  billion project  in  Alaska.                                                            
However, he did  not deem this to threat the ability  to construct a                                                            
natural gas pipeline in Alaska.                                                                                                 
Senator Ogan informed that  a shared effort is the only feasible way                                                            
to finance a natural gas pipeline in Alaska.                                                                                    
Senator  Ogan pointed  out this  bill would  extend the termination                                                             
date of the Alaska  Natural Gas Development Authority  until January                                                            
1,  2005. He  also noted  the  addition of  subsection  (12) to  the                                                            
uncodified  law  enacted  in Section  5(a),  2002  General  Election                                                            
Ballot Measure  3, contained  in Section  4 of the  bill to  read as                                                            
                (12) an evaluation of the opportunities for private                                                             
     sector involvement  in the planning, development, construction,                                                            
     management,  and  operation of  the gas  transmission  pipeline                                                            
Senator Ogan  had understood  the omission  of this language  in the                                                            
original  ballot initiative  was an oversight.  He commented  to his                                                            
"comfort" in adding this  language. He asserted, "Usually government                                                            
is  good  at  fixing  things  until  they're   broke."  He  asserted                                                            
construction   of  a  pipeline  is  not  an  appropriate   role  for                                                            
government and that private  industry should finance such a project.                                                            
However,  he remarked that  involvement of  government could  garner                                                            
better financial terms  for private entities. He surmised that Trans                                                            
Canada, Mid  America Group,  or a producer  could take advantage  of                                                            
these financing opportunities.                                                                                                  
Co-Chair  Green asked if  the extension of  the termination  date to                                                            
January  1,  2005   would  be  adequate.  She  understood   concerns                                                            
regarding time constraints.                                                                                                     
Senator Ogan agreed  this is an "aggressive date".  He noted current                                                            
law provides  that the  Authority is terminated  one year  following                                                            
the first meeting of the  Board of Directors, which occurred in June                                                            
2003.  However,   he  stressed  the  immediate  need   to  secure  a                                                            
commitment  to construct  a pipeline.  He again  warned that  if not                                                            
done in Alaska,  natural gas supplies  for the U.S. would  come from                                                            
Co-Chair Green  requested a map showing  the current proposed  route                                                            
of a natural gas  pipeline and how a pipeline route,  as proposed in                                                            
this legislation would differ.                                                                                                  
Senator Ogan did not have  maps with him, but described the proposed                                                            
route  paralleling  the  Alaska-Canada  Highway  from Delta  to  the                                                            
Canadian border.                                                                                                                
Co-Chair Green requested maps be provided to her.                                                                               
Senator Olson asked if  the proposed pipeline to the Canadian border                                                            
would be tax-free and asked for clarification.                                                                                  
Senator Ogan  affirmed. He  explained that  if the government  owned                                                            
the  pipeline,   through,   the  Alaska   Natural  Gas  Development                                                             
Authority,  as  a quasi-public  private  corporation,  the  pipeline                                                            
would be tax  exempt. He compared  the Authority to the Alaska  Rail                                                            
Road Corporation,  in that its assets are not taxable.  He qualified                                                            
that an agreement  with affected communities for payment  in lieu of                                                            
taxes would  be necessary. He noted  such arrangements are  expected                                                            
for the  current proposed  pipeline route.  He surmised the  private                                                            
sector would  want to take advantage  of this tax-exempt  status. He                                                            
furthered  that the  State  would receive  a higher  return  because                                                            
royalties are  calculated after tariffs and taxes  are deducted from                                                            
the transportation  costs.  He remarked that  any efforts to  reduce                                                            
transportation costs would  result in higher profit and earnings for                                                            
the State.                                                                                                                      
Senator Hoffman asked about  the need to acquire right of way access                                                            
to lands in which the pipeline would traverse.                                                                                  
Senator  Ogan  replied  that  a  significant  portion  of  the  land                                                            
involved  is Tetlin-owned  and that  possibly other  lands owned  by                                                            
Doyon Limited located near  Tok could be affected. He noted the need                                                            
to acquire rights  of way, but pointed out the myriad  of landowners                                                            
in other areas of the state.                                                                                                    
Co-Chair Wilken  clarified that Senator Ogan's reference  to natural                                                            
gas supplied from  "offshore" sources does not relate  to operations                                                            
in the Gulf of  Mexico for example, but rather from  countries other                                                            
than the United States.                                                                                                         
Senator Ogan affirmed.                                                                                                          
Co-Chair Wilken referenced  a report "Alaska Natural Gas Development                                                            
Authority Benefits  to Alaskans" issued in September  2003 [copy not                                                            
provided]. He asked how  the information in this report differs from                                                            
the report required of  the Alaska Natural Gas Development Authority                                                            
by the  ballot initiative  of 2002  and referenced  in Section  4 of                                                            
this bill.                                                                                                                      
Senator Ogan did not know.                                                                                                      
HAROLD  HEINZE,   Chief  Executive   Officer,  Alaska  Natural   Gas                                                            
Development Authority,  testified via teleconference  from Anchorage                                                            
that  the  Authority's  motives  as  a  public  corporation  are  to                                                            
maximize benefits to Alaska.  Therefore, he stated, the Authority is                                                            
"willing  to  do  or  not do  lots  of  things."  He  explained  the                                                            
Authority has  "no particular interest" in participating  in the gas                                                            
development   business  unless  "very   identifiable  benefits"   to                                                            
Alaskans  are  involved.  He  exampled  that  of  all  the  rhetoric                                                            
pertaining to development  and transportation of Alaskan natural gas                                                            
pipeline, the  Authority is the only  party addressing the  issue of                                                            
delivering  gas  to  the  Cook  Inlet  area.    Regarding   specific                                                            
projects, he  relayed that the Authority  welcomes this legislation                                                             
because  it allows  the  Authority  to contribute  to  the  "State's                                                            
overall  team effort  in the  broadest  sense and  without any  real                                                            
restriction."  He cautioned, however,  that this legislation  should                                                            
not be construed  as a directive to the Authority  to pursue certain                                                            
actions. He  spoke of the Authority's  "unique financing  abilities"                                                            
regarding  taxes, debt,  debt structure,  interest  rates and  other                                                            
variables that  could potentially  lower the financing costs  of any                                                            
project. He surmised this  is an appropriate role for the Authority,                                                            
if it would assist in progressing the project.                                                                                  
Mr. Heinze stressed that  the Authority never considered using State                                                            
funds to finance  any natural gas  pipeline project and rather  that                                                            
funding should be from  "the normal money sources that are available                                                            
to the private  sector." He explained that State involvement  allows                                                            
greater flexibility  and lower interest  rates for a private  entity                                                            
funding  the project.  He remarked  that if the  Authority does  not                                                            
"test" itself  "against the normal market, we think  the State could                                                            
make a very bad mistake."                                                                                                       
Mr.  Heinze  reminded  that  the provisions  of  Ballot  Measure  3,                                                            
creating  the  Authority  specifically  provide  for a  natural  gas                                                            
pipeline  from Prudhoe  Bay to Valdez  in the  Prince William  Sound                                                            
with a spur line from Glennallen  into the Cook Inlet area. He noted                                                            
this  bill broadens  that  perspective  to  allow the  Authority  to                                                            
consider  a  pipeline  route  following  the Alcan  Highway  to  the                                                            
Canadian  border. He  stressed the  value of having  this option  to                                                            
allow  the Authority  to  choose a  route in  the  best interest  of                                                            
Mr. Heinze informed that  a route following the Alyeska Trans Alaska                                                            
Pipeline  from Prudhoe  Bay  to Valdez  has  rights  of way  already                                                            
acquired  though the  pipeline  corridor.  He noted  that the  Yukon                                                            
Pacific  Corporation  has  acquired   right  of  ways  from  private                                                            
landowners for  this route, which the Authority would  acquire for a                                                            
natural  gas pipeline.  He  also noted  that under  imminent  domain                                                            
laws, private-owned  lands could be  acquired at fair market  value.                                                            
He furthered  that the portion of  the route between Glennallen  and                                                            
the Cook  Inlet is  largely located  on State-owned  land and  as an                                                            
agency of State government  the Authority could utilize these lands.                                                            
Mr. Heinze  compared  this to the  proposed route  along the  Alaska                                                            
Canadian Highway,  which would be  located on a significant  portion                                                            
of private-owned  land and State-owned  land. He understood  that no                                                            
party has obtained  rights of way for this route.  He considered the                                                            
right of  way issues  in Alaska  relatively minor  in comparison  to                                                            
lands in  Canada located  along the  proposed route.  He stated  the                                                            
Trans Canada  organization would have  to address First Nations  and                                                            
other landowner issues.                                                                                                         
Mr. Heinze spoke  to the proposed extension of the  termination date                                                            
of  the Authority.  He  noted  the first  meeting  of  the Board  of                                                            
Directors  was  held on  June  16,  2003 and  according  to  current                                                            
statute, the Authority  would expire one year from that date on June                                                            
13,  2004.   He  agreed   that  meeting   this  deadline  would   be                                                            
challenging, but  assured it could be accomplished  "within a couple                                                            
of months".  He did not oppose an  extension to the end of  the year                                                            
2004, but informed  that the Authority intends to  complete its work                                                            
by the end of the 2004 summer.                                                                                                  
Mr. Heinze  reported that the Authority  has not adopted  a business                                                            
structure   and  must  first  investigate   whether  it   should  be                                                            
classified as  a nonprofit organization, a corporation  "with a very                                                            
low profit  objective,  a utility,  or another  status. He  remarked                                                            
upon  the "tremendous   opportunity"  the Authority  had  to  become                                                            
exempt  from federal  income  tax, to  issue tax-exempt  bonds,  and                                                            
achieve favorable  debt to equity ratios and low interest  rates. He                                                            
stressed  the importance of  all issues combined.  He expressed  the                                                            
Authority's intent  to hire a consulting firm to review  and provide                                                            
advice as to how to provide the lowest cost of service.                                                                         
Mr. Heinze addressed the  issue of natural gas imported into the US.                                                            
He  asserted  "major  forces  at  work  around  world  working  very                                                            
dynamically, looking  at the United States as a place  to move their                                                            
gas  to."  He  stressed  the  importance   of  reaching  a  decision                                                            
regarding  Alaska natural  gas expediently.  He agreed with  Senator                                                            
Ogan that  if efforts  to develop  and transport  the resource  from                                                            
Alaska were delayed, Alaska would be "left out of the game."                                                                    
Mr.  Heinze summarized  that  the  Authority  operates  in the  best                                                            
interest of Alaska,  and would benefit from the ability  to consider                                                            
all options.                                                                                                                    
Co-Chair  Wilken again referenced  the report  " Alaska Natural  Gas                                                            
Development  Authority   Benefits  to  Alaskans"  and  restated  his                                                            
question about  comparison of this report to the report  required in                                                            
Section 4 of this bill.                                                                                                         
Mr.  Heinze  replied the  existing  report  is  a compilation  of  a                                                            
"fairly large  number " of Alaska  consulting firms and reflects  an                                                            
attempt to identify  actions relevant for advancing  the project. He                                                            
informed  that  since  the report  was  issued,  the  Authority  has                                                            
received only minimal funding  and the recommendations of the report                                                            
would require  approximately $2.5  million to implement.  Therefore,                                                            
he  informed,  most  of  the  recommended   efforts  have  not  been                                                            
undertaken.  He  noted  that  a benefit  analysis  that  provides  a                                                            
testing  model should  be  finalized by  the  end of  the month.  He                                                            
predicted that all other  aspects specified in the development plan,                                                            
including a revenue  sharing plan with municipal governments,  would                                                            
be addressed by the upcoming  summer. He assured the Authority has a                                                            
"fairly  good understanding"  of  possible  projects  and costs.  He                                                            
summarized  the report issued  in September  represents efforts  the                                                            
Authority would  have preferred be  done, although funding  and time                                                            
have been inadequate to undertaken them all.                                                                                    
Senator Olson  asked the impact of this legislation  on the existing                                                            
tax structures of the North  Slope Borough, the Fairbanks North Star                                                            
Borough and other local governments.                                                                                            
Senator Ogan responded  that if the Authority constructed a pipeline                                                            
were  constructed  from Prudhoe  Bay  to  the Canadian  border,  the                                                            
pipeline would be tax-free.  He noted the same status was envisioned                                                            
for a Prudhoe  Bay to Valdez route and would require  negotiation to                                                            
address local  government concerns. He listed examples  of increased                                                            
costs to local  governments with the  location of a pipeline  in the                                                            
community from:  school enrollment, wear and tear  on local roadways                                                            
and emergency services.                                                                                                         
Mr. Heinze remarked that  in recognition of the increased costs, the                                                            
Authority  is directed  by the provisions  of Ballot  Measure  3, as                                                            
shown in Section  4 of the bill, to  include a revenue sharing  plan                                                            
with municipal  governments  in the  development  plan. He spoke  of                                                            
intentions  to recognize that despite  exemption from taxation,  the                                                            
Authority would  be "morally obligated"  to identify ways  for local                                                            
governments to  address the increased expenses and  also to share in                                                            
the revenue generated.                                                                                                          
Senator Olson surmised  that this legislation has not been "accepted                                                            
with enthusiasm"  by the North Slope Borough or the  Fairbanks North                                                            
Star Borough.                                                                                                                   
Mr.  Heinze  replied that  this  bill  does nothing  to  change  the                                                            
Authority's  tax   status  established  in  Ballot   Measure  3.  He                                                            
qualified that  this bill "raises eyebrows" to this  realization. He                                                            
emphasized  that  he has  been  forthright  in expressing  to  local                                                            
government  a willingness to identify  ways to offset the  impacts a                                                            
pipeline would have on the communities.                                                                                         
Senator Ogan stressed that  the State has an "overwhelming" interest                                                            
in having an  independent entity constructing  the pipeline  because                                                            
both  producer   and  the  State  would  share  equal   interest  in                                                            
maintaining  low tariffs.  He remarked that  a natural gas  pipeline                                                            
would also benefit the  State because it would encourage development                                                            
in other areas of the North  Slope, such as the Foothills region. He                                                            
elaborated  on the  benefits  to the  State  and to  the North  Star                                                            
Borough  in   the  development  of   the  Foothills  resources.   He                                                            
understood  that Senator Olson has  concerns with this legislation,                                                             
but Senator  Ogan argued that revenues  from the development  of the                                                            
Foothills region  would outweigh the tax exemption  of the pipeline.                                                            
Senator Hoffman  surmised this legislation should  therefore include                                                            
a requirement  of the  Authority to  include a  plan for payment  in                                                            
lieu of taxes for local governments.                                                                                            
Co-Chair  Wilken asked if  subsection 5(a)(5)  of Ballot Measure  3,                                                            
contained  in Section  4 of the  bill would  suffice. This  language                                                            
stipulates  that  the Authority  must  include  a plan  for  revenue                                                            
sharing it its development plan.                                                                                                
Senator Hoffman opined  that this language is not specific enough to                                                            
assure that payment in lieu of taxes would be addressed.                                                                        
Senator  Ogan  was  unsure.  He stated  that  the  impact  on  local                                                            
governments  must be considered and  deferred to the Senate  Finance                                                            
Committee as the appropriate entity to address the matter.                                                                      
Mr. Heinze line  9, recalled that the ballot initiative  was drafted                                                            
to model the Alaska Gasline  Port Authority already in existence. He                                                            
defined the Alaska  Gasline Port Authority as a consortium  of three                                                            
local governments formed  with the intent to export natural gas from                                                            
the North  Slope, using a  tax-exempt method  and a revenue  sharing                                                            
Senator Bunde  pointed out the stipulation  that the Alaska  Natural                                                            
Gas Development  Authority  "must  include" a  revenue sharing  plan                                                            
with municipal  governments  in its  development  plan. He  surmised                                                            
this affords flexibility.                                                                                                       
Co-Chair Green  offered a motion to  report the bill from  Committee                                                            
with individual recommendations and previous fiscal note.                                                                       
There was  no objection and  SB 271 MOVED  from Committee with  zero                                                            
fiscal note #1 from the Department of Revenue.                                                                                  
Co-Chair  Wilken directed  attention to  information distributed  to                                                            
members  from the  Department  of Labor  and  Workforce Development                                                             
responding to  issues that were raised during hearings  the previous                                                            
Senator  Bunde  commented  that  the  largest  portion  of  Alaska's                                                            
population is between the  ages of 35 and 50, which he characterized                                                            
as  the "working  ages".  He  furthered  that  given no  changes  to                                                            
current trends the smallest  portion of Alaska's population would be                                                            
aged 30 to 50 by the year  2015. He opined this should be understood                                                            
when considering  efforts  to create  jobs and  implement an  income                                                            
tax. He pointed out that  the smallest population age group would be                                                            
required to contribute the most.                                                                                                

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