Legislature(2005 - 2006)SENATE FINANCE 532
06/02/2006 11:15 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| SB2004 | |
| Dennis Bailey, Attorney, Legislative Legal Services | |
| Jim Baldwin, Counsel to the Office of the Attorney General | |
| Steve Thompson, Mayor, City of Fairbanks, and Chair, Municipal Advisory Group | |
| Joseph Donohue, Preston Gates & Ellis | |
| SB2003 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB2003 | TELECONFERENCED | |
| += | SB2004 | TELECONFERENCED | |
SB 2004-STRANDED GAS DEVELOPMENT ACT AMENDMENTS
11:07:02 AM
^Dennis Bailey, Attorney, Legislative Legal Services
DENNIS BAILEY, Legal and Research Services Division,
Legislative Affairs Agency, said he would answer questions.
SENATOR WAGONER said that he would like to know what authority
the legislature might be giving up if these amendments [SB
2004] to the Stranded Gas Development Act (SGDA) pass.
MR. BAILEY responded that there are essentially two areas in
the bill that might be considered as compromising or eroding
the power of the legislature.
The first is related to taxation. On page 3 of the bill,
beginning on line 3, there is a section that allows the
commissioner to negotiate terms related to modification of
taxes and another that allows him to negotiate credits.
The second is related to the waiver of sovereign immunity for
the entrance and enforcement of arbitration awards, which is
also on page 3, lines 29-31.
11:10:16 AM
SENATOR BEN STEVENS arrived.
11:10:49 AM
MR. BAILEY summarized by saying that the bill essentially
grants power to the commissioner to negotiate terms. It really
isn't a question of eroding legislative power.
11:11:46 AM
SENATOR BUNDE asked Mr. Bailey if these two areas of erosion
are policy calls that are allowable, or if there is a question
of constitutionality.
MR. BAILEY answered that, whether the administration could
negotiate the change in taxes essentially outside of the
legislative process is a question of constitutional magnitude.
The state has the power to grant the authority to waive
sovereign immunity. It has done so in the general waiver of
sovereign immunity statute for contracts and tortes, and in
the specific statute related to federal wetland questions.
That is a legislative rather than a constitutional issue.
11:13:30 AM
CHAIR SEEKINS asked if the general waiver for contracts and
tortes would cover this particular contract.
MR. BAILEY answered that the intent of the bill is to waive
sovereign immunity for the purpose of entering an arbitration
award as a judgment for enforcement in federal court, and that
would not be covered by the general waiver.
CHAIR SEEKINS said that, on page 3, lines 30-31, it reads
"consent to entrance and enforcement of an arbitration award
in any state court in the United States that has jurisdiction
over the state." He asked what state courts in the United
States have jurisdiction over Alaska.
MR. BAILEY replied that he thinks Chair Seekins has identified
a language problem in the bill, because he does not believe
there are any. It should read, "consent to entrance and
enforcement of an arbitration award in any state court" then
the waiver applies "in the United States, it has jurisdiction
over the state." It is a phrasing issue and really should be
clarified.
CHAIR SEEKINS asked if it should read "any state of Alaska
court".
MR. BAILEY replied that he would be reluctant to suggest a
modification without being really clear about what the intent
of the bill is.
CHAIR SEEKINS said that maybe he should ask that question of
the administration.
SENATOR DYSON wondered if the word "state" in line 31 really
means a state in which there is activity related to this
project.
CHAIR SEEKINS asked Jim Baldwin if he could answer the
question.
11:17:11 AM
^Jim Baldwin, Counsel to the Office of the Attorney General
JIM BALDWIN, Counsel to the Office of the Attorney General,
responded that the administration's purpose was to allow
enforcement of arbitration awards outside the state of Alaska.
This amendment is intended to obtain the proper legal
th
authority for that from the legislature, because the 11
amendment of the constitution and other common-law theories
hold that the state is immune from suit outside of its
borders.
11:20:08 AM
SENATOR DYSON said he was thinking of the matter in reverse.
He asked if this would apply if the state were trying to
enforce compliance with the terms of an arbitration agreement
with a company headquartered outside of Alaska.
MR. BALDWIN agreed that it might.
SENATOR DYSON said it appears to him that there are at least
three different instances in which the state might seek remedy
in another state's court, and that the committee really needs
to get clarification here.
CHAIR SEEKINS asked if the state would have to obtain the
concurrence of the attorney general in each instance, or if
this would provide for blanket approval.
MR. BALDWIN said that the Attorney General's signature on the
contract would provide blanket consent.
CHAIR SEEKINS asked if the attorney general, the governor, or
the commissioner would sign the contract.
MR. BALDWIN replied that there would be a special jurat on the
contract for the attorney general, on which he would express
his consent.
CHAIR SEEKINS asked Mr. Baldwin to verify that there would be
blanket consent to waive sovereign immunity or other immunity.
He asked what other immunity there is.
MR. BALDWIN replied that there could be a form of policy-
making immunity, but he isn't sure what is contemplated. He
thinks there is the potential for an immunity that would bar
this particular type of enforcement action.
SENATOR ELTON said he was uncomfortable with the blanket
consent and that it might be better to have the attorney
general make a decision in each instance. He thought it would
be wise to have a policy discussion on that point.
11:24:03 AM
CHAIR SEEKINS read parts of Section 3, page 2, regarding the
commissioner's authority to develop a contract that "may
include terms for modifications of taxes on oil and gas,
including terms providing for periodic payment in lieu of one
or more taxes" and terms related to credits for investment. He
asked if this encroaches on the legislature's power of
taxation.
MR. BAILEY replied that the question is whether the
legislature is giving up its constitutional taxing authority
by permitting the commissioner to negotiate modification of
taxes. This is an unresolved issue, but it appears that a
contractual modification of the state's taxing system would be
unconstitutional.
CHAIR SEEKINS asked if other legislatures would be prevented
from modifying the taxes if they are included in the contract.
MR. BAILEY answered that, in general terms, if the
constitution permits inclusion of tax modifications within the
contract, and those modifications exist, then a subsequent
legislature would have difficulty changing the tax structure
because it would interfere with an existing contract. The big
question is whether it is permissible to include that in the
contract in the first place.
11:27:42 AM
SENATOR BUNDE said the Supreme Court would decide whether the
administration could set taxes in the contract. He noted that,
if the commissioner negotiates a contract and the legislature
approves or disapproves, it is basically voting on the
taxation in the contract. The bigger issue is whether the
commissioner could modify those taxes at a later date when
there would be no way to bring the contract back to the
legislature.
MR. BAILEY replied that he believes Senator Bunde is correct.
SENATOR BUNDE said that Section 3 appears to have two
applications, and the legislature would have no authority over
changes made after its initial vote to approve or disapprove
the contract.
11:29:56 AM
SENATOR BEN STEVENS interpreted the SGDA to say that the
legislature gave the commissioner the authority not to modify
the taxes, but to negotiate a payment structure in lieu of
taxes. That was allowed if the negotiated payment in lieu
achieved the objectives of the SGDA, which were to bring the
resources to market and encourage development on the North
Slope. He does not agree with the concept of giving the
commissioner the authority to negotiate taxes and does not
think that is what the legislature has done.
He said it seems obvious that, in terms of Article 9, Sections
1 and 4, as well as the contractual clause of the U.S.
Constitution, the question of whether the legislature can give
that authority to the commissioner is one that will be
challenged and will have to be resolved in the courts. The
question now is whether the legislature wants to commit to get
that question to the Supreme Court.
11:32:16 AM
SENATOR HOFFMAN pointed out that, on page 3, lines 3-4, it
reads "terms concerning modifications of taxes on oil and
gas, including terms providing for periodic payment in lieu of
one or more taxes". So, if modification of taxes was not
intended, maybe the first part of that sentence should be
deleted.
11:33:20 AM
SENATOR DYSON concurred with Senator Hoffman.
11:34:13 AM
MR. BALDWIN said the intent is to make it clear that the
contract can provide for payments in lieu of oil and gas
taxes. The legislative history that was created in 1998 was
that the payment in lieu authority only applied to taxes on
gas, even though the wording in Section 210 of the SGDA [on
page 4 of SB 2004] describes the types of taxes to which it
applies. He took responsibility for the artless use of the
phrase "modifications of taxes", because that was not the
administration's intent.
11:35:56 AM
SENATOR STEDMAN said he did not see the language that would
allow the commissioner to go back in and modify taxes.
CHAIR SEEKINS responded that he did not see it in the bill
either, although there may be terms included in the contract
that would allow a renegotiation. He asked what Mr. Baldwin
thought.
MR. BALDWIN replied that he is not aware of any provision in
the contract that would allow that.
CHAIR SEEKINS asked Senators Bunde, Stevens, and Dyson to
provide clarification.
SENATOR BUNDE said he thought Mr. Bailey, of legislative legal
services, said it could occur. He asked Mr. Baldwin if it is
the administration's intent that the commissioner would be
able to renegotiate taxes after the contract has been
authorized by the legislature.
MR. BALDWIN said he is not aware of such intent.
SENATOR BUNDE said he understands that the language was aimed
at payment in lieu of taxes; but the phrasing about
modification may cause a broader interpretation than he could
support. He said he was glad to hear the administration's view
that the commissioner's power does not extend beyond
ratification of the contract, and wondered if the language
should be rephrased to clarify that.
11:39:40 AM
SENATOR KOOKESH joined the committee.
11:39:53 AM
SENATOR BEN STEVENS commented that, in the SGDA, Section
43.82.010 Purpose, paragraph (2) is to:
(2) allow the fiscal terms applicable to a qualified
sponsor or the members of a qualified sponsor group, with
respect to a qualified project, to be tailored to the
particular economic conditions of the project and to
establish those fiscal terms in advance with as much
certainty as the Constitution of the State of Alaska
allows,
He quoted from Section 210 Contract terms relating to payment
in lieu of one or more taxes:
"... for periodic payment in lieu of one or more of the
following taxes that otherwise would be imposed by the
state or municipality on the qualified sponsor or member
of a qualified sponsor group as a consequence of
participating in an approved qualified project."
And noted that the first types of taxes listed were "oil and
gas production taxes and oil surcharges under AS 43.55". The
second types were "oil and gas exploration, production, and
pipeline transportation property taxes under AS 43.56", which
are the transportation and tariff charges. He said that a
literal interpretation of the law shows that these taxes are
subject to negotiation in the payment in lieu of taxes (PILT).
11:43:31 AM
CHAIR SEEKINS agreed that 210 appears to be a restatement of
43.82.200 and asked Mr. Baldwin if that is correct.
MR. BALDWIN agreed that there is some redundancy between
various sections, but explained that the problem presented to
lawyers who read this is that lines 8-10 on page 4 of SB 2004,
refer to a gas project. Then there is a string of taxes listed
that are identified as oil and gas taxes. There was also quite
a colloquy in the 1998 House Special Committee on Oil and Gas
about this. It is based on that history that legal was asked
to amend 43.82.200 and 210.
11:45:22 AM
BEN STEVENS agreed that the adjustments in the oil taxes under
43.55 that are applied to the PILT apply only to the qualified
sponsor group. So, his interpretation is that this is tied to
the gas taxes, because only those who have signed the sponsor
agreement are subject to PILT.
MR. BALDWIN said the administration intends these amendments
to counter the legislative history that was created in 1998.
11:46:19 AM
SENATOR DYSON said that, if the modifications to Section 3 are
only intended to give the commissioner authority to develop a
contract that will substitute PILT for oil tax payments, there
is no reason not to clarify the language on lines 3-4 and
perhaps line 5. He suggested that it be made clear that it
does not authorize him to change the underlying tax structure.
11:47:47 AM
SENATOR ELTON shared Senator Dyson's concerns and suggested
that the original language on lines 3 and 4 does what is
intended and that the new language is not needed.
11:49:09 AM
SENATOR HOFFMAN asked why, if the language in the SGDA Section
43.82.210 already includes provisions for both oil and gas
taxes and surcharges, does the administration need to amend
the language in 200.
MR. BALDWIN said that the administration's purpose was to make
the provisions parallel to the extent it is possible.
CHAIR SEEKINS said that the way he reads it, Section 200 says
"Contract development" and lists the terms that may be
included in the contract development. Section 210, contract
terms related to payment in lieu of one or more taxes,
basically relates back to 200, paragraph (1).
MR. BALDWIN agreed.
CHAIR SEEKINS asked Mr. Baldwin if he is correct that this
section allows the commissioner to modify "taxes on oil and
gas, including terms provided for periodic payment of one or
more taxes" according to the terms contained in 210, and
"terms related to credits for investment, that is the subsidy
of the contract developed under this chapter," which doesn't
have a statutory reference under the SGDA.
MR. BALDWIN answered yes.
11:53:12 AM
SENATOR ELTON asked legislative counsel if there is still a
constitutional issue if they do not insert new language on
page 3, lines 3-4, and they delete the language on page 4,
lines 8-10 that ties the section to gas taxes.
MR. BAILEY asked if Senator Elton could clarify what he is
suggesting for the language on page 4, lines 4-10.
SENATOR ELTON responded that he is not suggesting new
language. He is referring to the amendment that strikes the
language on lines 8-10. He asked whether striking that
eliminates the constitutional question that Mr. Bailey
testified to earlier.
MR. BALDWIN replied that it does.
SENATOR ELTON recommended that they keep the original language
on page 3 and strike the language on page 4, lines 8-10.
11:57:19 AM
CHAIR SEEKINS said that they would start working on amendments
at 2:00 pm on Sunday, and asked Mr. Bailey to put together a
written summary of the issues surrounding sovereign immunity.
SENATOR OLSON asked if Mr. Bailey is as confident of the
Supreme Court ruling as administrative counsel seems to be.
MR. BAILEY said he preferred not to speculate.
11:58:24 AM
SENATOR BEN STEVENS said he wants to give the Supreme Court
the opportunity to make that decision.
SENATOR DYSON stressed that he really wants to get
clarification on the sovereignty issue and what the
administration intended.
12:01:44 PM
SENATOR HOFFMAN asked if there have been other instances in
which the state has given up its sovereign rights.
12:02:03 PM
SENATOR BEN STEVENS jumped back to the discussion of the
language inserted in 43.82.200 on page 3, lines 3-5 of the
bill. He interprets those lines as relating to Exhibit P.3 on
page 360 of the contract, which is a method to determine the
Petroleum Production Tax (PPT) PILT payment. That exhibit
reads: "P.3 Net Production Value of PPT Oil and PPT Gas
(replaces AS 43.55.160)." So, there is a modification of the
tax code incorporated into Exhibit P.
Recessed 12:05:12 PM to 2:42:49 PM
CHAIR SEEKINS brought the committee back to order.
2:43:12 PM
CHAIR SEEKINS reminded the committee that the bill up for
consideration is SB 2004, and began the afternoon session with
discussion of the provisions for economically and revenue-
affected municipalities along the pipeline route.
2:44:03 PM
^Steve Thompson, Mayor, City of Fairbanks, and Chair,
Municipal Advisory Group
STEVE THOMPSON, Mayor, City of Fairbanks, and Chair, Municipal
Advisory Group (MAG), said that 13 different communities could
be affected during the construction and ramp-up of the gas
pipeline.
2:44:43 PM
SENATOR WILKEN referred Mayor Thompson to pages 7-8 of version
A concerning economically-affected and revenue-affected
municipalities. He said that he has some concern about the
definitions of these terms and the differences in how the
municipalities might be treated, and asked if MAG has had
discussions about it.
MR. THOMPSON replied yes, economic impacts are during ramp-up
and construction of the pipeline. Revenue-affected refers to
how the revenues would be handled in place of property tax
once the gas is flowing. MAG's main concern has been with the
economic impacts during construction, for which $125 million
has been set aside. It has passed resolution 2006-01 to change
its term to continue until all impact dollars have been
distributed, or until construction is complete. He noted that
there is no direction in legislation regarding how the funds
should be distributed. MAG would like to act as an advisor to
the Commissioner of Commerce, Community and Economic
Development in order to ensure that funds are distributed most
effectively.
2:47:35 PM
SENATOR WILKEN said that his concern is the construction
period, and asked if the $125 million is dedicated only to
economic impacts.
MAYOR THOMPSON replied that it is. MAG has been meeting for
two years and has passed numerous resolutions to address their
concerns.
SENATOR WILKEN asked Mayor Thompson if he was aware that,
under principal number one in the SGDA 43.82.510, revenue-
affected municipalities are given a priority over
economically-affected municipalities.
MR. THOMPSON said that the advisory group's understanding is
that the impact funds are for the construction period and
ramp-up to construction only.
2:49:25 PM
SENATOR WILKEN said that he would research it further. His
understanding is that the economically-affected municipalities
fall away after first gas; then the revenue-affected
municipalities are addressed. He said he would ask someone in
the administration to look at the affected municipalities and
show the committee first-gas impact and 10 years after. He is
concerned that this might set up an imbalance on the North
Slope with regard to realizing the benefit of those assets. He
asked Mr. Thompson how much work they've done on this issue.
2:51:11 PM
MR. THOMPSON replied that resolution 2006-01 was submitted on
Friday, requesting that the municipal advisory group be
extended and that MAG be allowed to advise the commissioner of
commerce when he reviews grants to communities affected by
construction. MAG also passed four resolutions regarding
additional concerns including education funding, which will be
negatively impacted if property values are not excluded from
the annual true and full value determination of the local
education funding.
2:52:23 PM
SENATOR WILKEN said the committee received Mr. Thompson's
email and that his office will work on the educational issue.
He noted that Valdez and North Slope boroughs, those that
benefit by the 45 percent rule, are the ones most impacted by
the throughput calculation rather than a true and full value.
2:53:17 PM
MR. THOMPSON said that he hoped the committee would take the
2006-01 resolution into consideration.
CHAIR SEEKINS asked Mr. Thompson if he had a copy of the bill
on hand.
MR. THOMPSON replied no.
CHAIR SEEKINS read from SB 2004 version A, page 9, subsection
(e):
The commissioner of commerce, community, and economic
development, in consultation with the relevant municipal
advisory group established under AS 43.82.510, shall use
money appropriated to the Alaska Natural Gas Pipeline
Construction Impact Fund to make grants to municipalities,
and to nonprofit organizations serving the unorganized
borough, for impacts on transportation, infrastructure, law
enforcement, emergency services, health and human services,
education, labor force, population, wages, and subsistence,
and for socio-cultural impacts, brought about by the
construction of the gas pipeline.
2:54:26 PM
MR. THOMPSON said that is the exact language submitted by the
advisory board and he appreciates the fact that it was
included so promptly. He reminded Chair Seekins that MAG also
submitted language to extend the existence of the advisory
group and allow them to advise the commissioner on grant
applications.
2:55:14 PM
CHAIR SEEKINS said that the next sentence may address that,
and continued reading from page 9 subparagraph (e):
In determining whether an expenditure or proposed
expenditure by a municipality or non-profit organization
is eligible for a grant under this subsection, and in
allocating available money among grant proposals, the
commissioner shall consider the recommendations of the
relevant municipal advisory group established under AS
43.82.510 and whether the proposed expenditure meets the
purposes of this section.
He asked if this sentence gave Mr. Thompson some confidence in
the total picture.
MR. THOMPSON replied yes. He noted that the nonprofit
referenced would be the Tanana Chiefs' Conference that is
representing the unincorporated areas from the North Slope to
the Canadian border.
CHAIR SEEKINS thanked Mr. Thompson for that identification.
2:56:17 PM
SENATOR ELTON questioned the definition of non-profit in this
context. He said that the wording seemed to be broad enough to
allow unintended entities to qualify for impact funds.
MR. THOMPSON said that Steve Porter is the person to talk to
about that.
2:56:57 PM
CHAIR SEEKINS added that he had some questions on the
"unincorporated borough" language with regard to the list of
impacts on page 9, lines 6-8. He questioned whether it would
always be Tanana Chiefs that would handle transportation
infrastructure, for example.
MR. THOMPSON agreed that the language is pretty broad, which
is one of the reasons he would like MAG to be involved with
the Department of Commerce in the selection process before
requests go to the legislature.
2:58:10 PM
MR. THOMPSON reiterated that MAG has sent a number of
resolutions to the legislators and asked that the committee
consider them. He thanked the legislators for their efforts to
protect the communities and citizens of Alaska.
2:58:59 PM
SENATOR WILKEN asked for Mr. Thompson's understanding of the
process by which impact requests would be made, considered,
certified, and awarded. For example, if a new pipe-coating
yard in Fairbanks made it necessary to add a new fire station,
how would it get the impact money to build that.
MR. THOMPSON said that no process has been established yet.
3:00:02 PM
SENATOR OLSON asked Mr. Thompson whether the Tanana Chiefs
would represent the North Slope Borough communities.
3:00:25 PM
MR. THOMPSON said no. Tanana Chiefs only represents
unincorporated entities.
3:00:57 PM
SENATOR ELTON asked whether this would be limited to Alaskan
communities, or would extend into Canada.
MR. THOMPSON said impact funds would only be granted to
Alaskan communities.
3:01:38 PM
CHAIR SEEKINS thanked Mr. Thompson for his input and asked the
committee if they had questions for Kevin Ritchie from Alaska
Municipal League (AML).
SENATOR WILKEN directed Mr. Baldwin's attention to page 9,
subsection (e), which addresses the awarding of grants. He
said he would like this process to be conducted in a public
forum. He also asked if the bill might include who makes the
decisions and by what criteria they determine which
communities are considered impacted.
3:04:00 PM
MR. BALDWIN answered that the administration's approach is to
do this in regulation. If the legislature desires to make it
more specific, they could try to do it in statute; but it is a
matter of time and effort.
SENATOR WILKEN speculated that, if Fairbanks puts in a request
for impact funds to build a new fire station, it will go to
someone who will qualify it, to someone else who will certify
it, and to someone else for funding. All of those things must
be done in a public forum.
MR. BALDWIN responded that Senator Wilken is really talking
more in terms of process than in defining what an impact is.
SENATOR WILKEN said that is his next question; but he wants to
be sure that, whatever is done, it is done in public.
SENATOR WILKEN directed Mr. Baldwin's attention to page 8,
line 24, regarding direct and severe impacts. He said he has a
definition of impact that he would like included in the bill
and asked who he should work with on that amendment.
MR. BALDWIN said to give it to him and his office would help
Senator Wilken to draft it.
SENATOR WILKEN moved to page 7 beginning on line 31, through
page 9. He said he understands that the economically-impacted
communities have $125 million available that goes away at
first gas; then the revenue-impacted communities are
addressed. He said it appears that 11 entities would be
affected by the definition and asked if anyone has run the
pro-formas, given the throughputs on which the PILT will now
be based.
MR. BALDWIN said he would have to check.
3:07:47 PM
SENATOR WILKEN asked whether he should be concerned about the
language in 43.82.510 in the stranded gas amendment, principal
(1), with regard to the revenue-affected municipalities
trumping the economically-affected municipalities.
3:08:05 PM
MR. BALDWIN responded that a memo was just delivered to
Senator Wilken that addresses that issue. The criteria that
are listed in 020(b) are directory, not mandatory and, when
referring to economically-affected municipalities, this
doesn't seem to be in the proper context, so the priority
would not apply.
3:09:00 PM
SENATOR WILKEN said he is not concerned about economic impacts
here, but about the revenue-impacted communities. He wants to
know who defines them and how the money flows all the way from
the North Slope to the Canadian border. He wants to be sure
the state takes the time to develop an infrastructure that
will provide benefits statewide and not just in certain areas.
3:10:15 PM
SENATOR GREEN asked if aid to revenue-affected municipalities
would also be shut down when the $125 million in impact funds
is gone.
MR. BALDWIN answered that there will be a continuing PILT that
will be paid under the agreement.
SENATOR GREEN asked if they are separate.
MR. BALDWIN confirmed that they are.
SENATOR WAGONER said that is part of the contract, and
payments continue in lieu of taxes at the municipal level.
MR. BALDWIN confirmed that Senator Wagoner is correct.
3:10:58 PM
SENATOR WILKEN asked if, when the $125 million is gone, the
economically-impacted definition is moot.
MR. BALDWIN answered that he understands that to be true.
3:11:20 PM
SENATOR STEDMAN said he assumes that when they talk about
spreading the impact benefits across Alaska, that means along
the gas pipeline and not broadly across the state. He asked if
that is correct.
CHAIR SEEKINS said that is his understanding, but it would
help to have a clear definition of "impact".
3:12:59 PM
SENATOR WILKEN said that a profit stream would flow out of the
gas pipeline into a "bucket"; but before it gets there, areas
across the state will be making claims on it. The state has to
be sure the claims are valid, because they reduce the amount
available to benefit the state as a whole.
3:14:37 PM
MR. THOMPSON interjected that the revenue-affected communities
are only those with a property-taxing authority. Once the line
is complete and gas is flowing, they will not be able to
collect a property tax, so it has to be paid with a PILT from
the state.
CHAIR SEEKINS asked for confirmation that it is not intended
to go to unincorporated communities that do not levy taxes
under state law.
MR. THOMPSON said that is correct.
3:15:53 PM
SENATOR HOFFMAN said this might also be interpreted to mean
that the unorganized areas along the corridor would remain
unorganized for 45 years and could not collect PILT during
that time.
CHAIR SEEKINS said that is not his understanding. If a
community falls into the definition of a revenue-affected
municipality in the future, it could apply for PILT through
the commissioner. For example, if the Delta Borough comes into
existence after this is executed, it would qualify.
3:16:58 PM
SENATOR HOFFMAN said he thinks it was addressed during the
hearings at Centennial Hall, and that a new borough would not
be able to assess property taxes or be eligible for PILT
because of the lockdown; so there would be no reason to form.
He said he would like to get clarification on this issue.
3:17:21 PM
SENATOR WILKEN asked for confirmation that the revenue-
impacted definition exists from first gas to last gas.
MR. BALDWIN answered that the PILT is payable immediately from
the effective date.
SENATOR WILKEN asked if revenue-impacted communities stop at
first gas or last gas.
MR. BALDWIN replied that they stop at last gas.
SENATOR WILKEN said that, in that case, the state is peeling
off .001 and putting it into a bucket for the unorganized
areas. If a new borough forms, it can take part of that money
and attach itself to the revenue stream, so there is an
incentive to become a borough, to tap into the funding that
comes out of the throughput.
3:18:28 PM
MR. BALDWIN said that there are additional factors built into
the allocation formulas to allow for the creation of new
municipalities.
3:19:20 PM
CHAIR SEEKINS asked for confirmation that they would not be
locked out forever.
MR. BALDWIN replied that is correct.
SENATOR HOFFMAN asked if that is in the contract.
MR. BALDWIN answered yes.
SENATOR HOFFMAN asked if Mr. Baldwin would point that out to
him.
MR. BALDWIN said he would do so after the meeting.
CHAIR SEEKINS thanked Senator Hoffman for bringing the
question up.
3:19:45 PM
SENATOR ELTON referred back to section 3 on page 3, and asked
for the rationale behind the change on line 25 from the "best
interest of the state", to the "long-term fiscal interest of
the state".
3:21:04 PM
MR. BALDWIN answered that the administration provided a memo,
addressed to the chair of the committee, explaining the
rationale behind that change.
SENATOR ELTON said he would wait for the memo.
At ease from 3:21:52 PM to 3:29:12 PM
CHAIR SEEKINS noted that copies of the memo had been
distributed. He then referred to page 3, paragraph 5 of the
bill.
^Joseph Donohue, Preston Gates & Ellis
JOSEPH DONOHUE, Preston Gates & Ellis, explained that the
reasoning behind the change to 7(b) on page 3, line 25, was to
ensure that the court considers the commissioner's proposed
contract terms and preliminary and final findings under the
same standard.
3:32:03 PM
MR. DONOHUE went on to say that the term "best interests" has
been litigated in the context of the Department of Natural
Resource findings. There is a body of law that says it refers
back to Article 8 of the constitution and means that the
decision of the commissioner of natural resources has to be
made to the maximum benefit of the people and the best public
interest. So, there is little difference between the two
standards. This change is designed to minimize potential
litigation issues and is, in short, a consistency edit within
the SGDA.
3:33:28 PM
SENATOR ELTON said it seems that, if the goal is to minimize
potential litigation, moving from a standard that has been
litigated and has some basis in case law, to one that has not,
might increase the potential for lengthy litigation.
3:34:12 PM
MR. DONOHUE said that there is a body of law regarding the
best interests standard that tells the Supreme Court the
constitutional provisions to look at, but it is a very
amorphous test. The commissioner has already gone through
elaborate effort to put forward the preliminary fiscal
interest findings using the standard that pervades the SGDA,
which is whether the contract is in the long-term fiscal
interest of the state.
3:35:15 PM
CHAIR SEEKINS said the findings of long-term fiscal interest
already occur in the SGDA and are the same as those that could
be challenged under 602 of the Appellate Procedures. So, it is
a matter of consistency as to what the commissioner must
provide in his findings.
MR. DONOHUE agreed.
3:36:24 PM
SENATOR ELTON referred to an earlier discussion of Section 4,
subsection (b), page 3, line 27, and noted that this seems to
provide a producer the opportunity to "shop around" for
another court of jurisdiction that will enforce an arbitration
award. He asked if the state of Alaska also has that
opportunity.
3:37:39 PM
MR. DONOHUE replied that, under Article 26, the rights to
enforce arbitration awards are reciprocal.
SENATOR ELTON asked if he means that any party could do it.
MR. DONOHUE answered yes; any party can proceed to another
state that has jurisdiction over the state or over the
producing entity involved in the dispute.
3:38:12 PM
SENATOR DYSON referred to page 3, line 31, and asked if it
would be possible to clarify what is meant by "the state".
3:40:15 PM
MR. DONOHUE answered that, given the substantial assets the
producing entities have in Alaska, it is unlikely that the
state would shop in other jurisdictions to enforce an
arbitration award, although the state could do that under the
contract. If it could not confirm its award within its
jurisdiction, it could seek to have the arbitration award
entered in other states where the entity that owes the award
has assets.
3:41:26 PM
SENATOR DYSON said that he was not thinking of the remedy in
terms of money, but enforcement of an arbitrator's decision to
press for action.
MR. DONOHUE responded that what the waiver of sovereign
immunity is intended to achieve, is to put the state on equal
footing with the producers in the context of solving
litigation problems and enforcing judgments.
CHAIR SEEKINS asked Mr. Donohue if the state would have to
waive sovereign immunity to collect against the producers.
MR. DONOHUE said no. He explained that the reason the contract
includes a waiver of sovereign immunity is that the state's
commercial partners fear, if they are left with only state
remedies to enforce an arbitration award, the remedies for
collection on a judgment against the state are limited. The
state and public corporation assets are exempt from execution
and attachment, and the only way a private party can collect
against the state in Alaska is to take the case to the
legislature and ask for the money. Basically, the companies
feel on an unequal footing for litigation within the state.
3:44:20 PM
SENATOR DYSON asked why they would feel the need to go after
us in another state's court.
MR. DONOHUE said the primary reason would be if the judgment
were too large to be recouped under the waterfall provisions
of Article 22, and the legislature refused to appropriate
funds to cover it. At that point, the companies could seek
enforcement against state assets in other parts of the
country.
3:45:06 PM
SENATOR DYSON asked Mr. Donohue to explain the waterfall
provisions of Article 22.
MR. DONOHUE said that all of the reciprocal obligations under
the contract are described in Article 22. These are calculated
on a monthly basis and then netted out. Hopefully, most of the
time the companies will owe the state significant amounts of
money at the end of the waterfall. The companies are allowed
to recoup arbitration awards through this process, so it would
be an unusual circumstance that could not be covered by the
recoupment provisions. It would also be very unusual for the
legislature not to appropriate the funds to cover a judgment.
If that happened however, they would be entitled to pursue
remedy in another state.
3:46:53 PM
SENATOR DYSON said they could come to our state court.
MR. DONOHUE explained that the dispute would be settled
through private arbitration and the companies would be granted
an award. If the state continued to object and did not pay
through the accounting process, they would seek to have the
judgment entered in our state court first. The remedy to
enforce a judgment against the state of Alaska inside the
state is to come to the state legislature and ask for an
appropriation. So, if the companies are not treated fairly at
the time they present an appropriation request to the state
legislature, they can go after the state's assets in other
jurisdictions.
3:48:21 PM
SENATOR DYSON asked if, on line 31, "the state" means the
state of Alaska.
MR. DONOHUE said yes, that is common wording and refers to the
state of Alaska.
SENATOR DYSON asked if there are any states that do not have
jurisdiction over Alaska.
MR. DONOHUE answered that it is based on whether Alaska has
any assets in the state.
SENATOR DYSON restated that having assets in another state is
what would give that state's court jurisdiction over Alaska.
MR. DONOHUE said, in a general sense, yes.
3:49:30 PM
CHAIR SEEKINS asked what recourse the state would have against
a company that refuses to pay an award.
3:50:11 PM
MR. DONOHUE answered that the contract is ambiguous on that.
One reading is that the state would enter the award in state
court and seek enforcement against the company. Another
reading is that the state could pursue direct action to
collect it. He suggested that the committee speak to Bob
Loeffler and the negotiating team to get a clearer answer.
CHAIR SEEKINS said that, if the producers can net out their
awards and the state has to go through normal collection
procedures, they are not on equal footing.
MR. DONOHUE said that, under waterfall, the state could net
out its obligations too. The ultimate issue is, what if
waterfall isn't sufficient to satisfy the obligation.
3:51:48 PM
SENATOR OLSON asked whether other states have given up their
sovereign immunity in similar circumstances.
MR. DONOHUE said he is unaware of any other states that have
consciously waived sovereign immunity when doing business in
another state, but there is a U.S. Supreme Court precedent on
th
the question that goes back to the 19 century, when the state
of Georgia ran a railroad through Georgia and Tennessee and
had a railroad asset in Tallahassee. The city wanted to
condemn it, but Georgia said that the asset was protected by
its sovereign immunity. The Supreme Court ruled that the state
has no sovereign immunity when doing business in another
state; it is just another entity.
3:53:08 PM
SENATOR OLSON asked if there were any sovereignty issues
surrounding TAPS.
MR. DONOHUE could not recall any.
SENATOR OLSON said that his concern about trying to collect
from the companies is illustrated by what has happened with
the Exxon Valdez issue. There has been a judgment languishing
for years without being paid.
3:53:44 PM
SENATOR BUNDE said that, as he understands it, the LLC is
contemplating incorporation in Delaware. He asked if this
discussion has anything to do with the fact that it would be
incorporated in a state other than Alaska.
MR. DONOHUE answered that the rules for the fiscal contract
and disputes under the fiscal contract would be resolved in
accordance with Alaska law. The LLC agreement that is being
negotiated will be incorporated under Delaware Law and will
include provisions for alternative dispute resolution. He
believed that Delaware law would apply. The reason for using
Delaware rather than Alaska law is that Delaware has decades
of case law interpreting its corporate and LLC codes, so many
states use Delaware law to govern commercial agreements. In
the context of a dispute, one is more likely to be able to
predict outcomes and resolve them readily.
3:55:26 PM
CHAIR SEEKINS said that, according to the 2006 State Liability
Systems Ranking Study conducted for the U.S. Chamber institute
for legal reform, Delaware is the number one state for having
and enforcing venue requirements, overall treatment of torte
and contract litigation, treatment of class action suits,
treatment of punitive damages, timeliness of summary
judgments, and so on. It appears that if a corporation wants
speedy treatment, it goes to Delaware.
3:56:17 PM
SENATOR ELTON said that he recalls being told during the
hearings at Centennial hall, that the arbitrator is precluded
from awarding punitive damages for losses. If that is correct,
he wonders under what circumstances there would be a huge
award that would prompt a party to seek remedy in another
state.
MR. DONOHUE replied that Senator Elton is correct. The fiscal
contract has provisions limiting the types of damages that the
parties can pursue against each other. He admitted that he is
less familiar with the LLC agreement under negotiation, but he
believes it has similar, fairly standard limitations. He could
not think of any example of a huge award against the state.
3:57:40 PM
CHAIR SEEKINS asked Mr. Donohue if there is a situs agreement
as to where disputes will be tried.
MR. DONOHUE answered that Exhibit (C) discusses where the
tribunal would sit. He believes it is by mutual agreement of
parties first, and then there is a default situs.
CHAIR SEEKINS preferred that it be sited in Alaska.
3:58:41 PM
SENATOR ELTON asked that the administration provide an example
to demonstrate the need for this provision.
MR. DONOHUE said that he would try to provide an example.
3:59:49 PM
SENATOR WILKEN asked Mr. Donohue to look at page 5, lines 18-
20. This section of the legislation expands the powers of the
Department of Natural Resources (DNR) and, with agreement of
the Department of Revenue (DOR), expands the commissioner's
power to enter into shipping commitments and long-term gas
marketing agreements. But on lines 18-20, the sentence really
seems to be divided into two. The first section that stops
with "and" on line 19, has to do with changing lease and unit
expenses "for separation, cleaning, dehydration, gathering,
and saltwater disposal", which means a gas treatment plant. He
asked if the second part, "and preparation for transportation
on or off the lease", speaks to the gas processing facility.
MR. DONOHUE answered yes; it deals with upstream field costs
that the state is agreeing to assume and whatever processes
are used to deal with impurities and make the gas pipeline
quality. He referred the committee to question number three in
the letter from Kevin Jardell to The Honorable Jay Ramras,
dated June 2, 2006.
4:02:45 PM
SENATOR WILKEN said that the next time the legislature
confirms a commissioner of DNR or DOR, it had better be
awfully sure it knows what kind of person it is confirming,
because those are going to be very important people in state
government.
4:03:21 PM
CHAIR SEEKINS asked if these expenses would be deducted from
what the state receives if it takes its gas in cash rather
than in kind.
MR. DONOHUE answered no. The state has taken these expenses on
as part of the process of becoming a full commercial partner
in the project, and they would not otherwise be authorized
under the leases and existing agreements.
CHAIR SEEKINS asked if they reduce the value of the gas versus
taking it in cash.
4:04:13 PM
MR. DONOHUE said that sounds like a question for Pedro [Van
Meurs]. He thinks that the state, by taking its gas in kind,
is likely to make as much or more than it would by taking it
in cash.
4:04:55 PM
CHAIR SEEKINS said that public hearings are scheduled for
Saturday and the committee will start with amendments to the
bill on Sunday.
SENATOR BUNDE noted that he gave Chair Seekins' staff a couple
of amendments and asked whether they should be incorporated
into a CS, or be introduced as amendments.
CHAIR SEEKINS said he would like to look at each amendment to
see what could be incorporated into a CS, then work with the
amendments and perhaps come up with a second CS.
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