Legislature(2005 - 2006)SENATE FINANCE 532
08/01/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| SB3001|| SB3002 | |
| David Van Tuyl, Bp | |
| Wendy King, Conocophillips | |
| Bob Loeffler, Morrison & Foerster, Counsel to the Governor | |
| Joe Marushack, Conocophillips | |
| Mark Nelson, Exxonmobil | |
| Bradford G. Keithley, Jones Day, Counsel to Bp | |
| Amendments to Sb 3002 | |
| Joseph K. Donohue, Preston Gates & Ellis, Counsel to the Governor | |
| Greg O'claray, Commissioner, Department of Labor and Workforce Development (dolwd) | |
| Jim Clark, Chief Negotiator, Office of the Governor | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
| += | SB3002 | TELECONFERENCED | |
SB 3001-OIL/GAS PROD. TAX
SB 3002-STRANDED GAS AMENDMENTS
CHAIR SEEKINS opened the hearing on SB 3001 and SB 3002. The
version of SB 3002 before the committee was Version G, adopted
as a work draft and amended on 7/28/06. He invited testifiers
from BP, ConocoPhillips and ExxonMobil to address the committee.
9:51:21 AM
^David Van Tuyl, BP
DAVID VAN TUYL, Commercial Manager, Alaska Gas Group, BP, noted
he would give BP's perspective on issues raised yesterday. With
respect to concern heard from Mr. Shepler and Mr. Harper about
access to the pipeline, he clarified that no party - even a
pipeline owner like BP - is guaranteed access. It is open
access under the Federal Energy Regulatory Commission (FERC),
which governs provisions for accessing space on the line.
He emphasized the importance of not taking actions that
jeopardize building the pipeline in the first place. Only after
it is built are things like expansion possible. Mr. Van Tuyl
said BP wants to own the pipeline to manage costs; believes it
can take on the associated risks; has the necessary experience;
and wants a pipeline built to be able to monetize its gas
resource. He cautioned that providing certain stipulations and
limitations upfront with respect to terms relating to expansion
and access could endanger building the base line.
He highlighted the example of rolled-in pricing. Mr. Van Tuyl
explained that mandating rolled-in pricing for every expansion
could penalize those who build the project to start with, who
have a certain cost for their capacity, established in the open
season and approved by FERC. If an expansion results in an
increased rate and if rolled-in rates are mandated without a
rebuttable presumption, the base shipper's rates could rise, but
not because of anything that shipper had done.
He also cautioned against stipulating specific design issues in
the contract, which BP believes would circumvent the whole open
season process. Surmising BP has done more design work than the
others, having spent over $100 million, Mr. Van Tuyl predicted
spending perhaps $1 billion before even getting to the point of
project sanction. In preparing for the open season, BP will
spend at least another $100 million for engineering and so
forth.
MR. VAN TUYL emphasized the importance, with respect to the open
season, of ensuring the pipeline system is designed right. For
the FERC preapplication process, BP will do the engineering
beforehand; it will be involved in the process and will consult
with potential shippers - doing its best to get the design right
beforehand so the service it offers is response to potential
shippers.
He characterized the open season as the day of reckoning, when
folks actually sign up for the service. There could be
significantly more demand than designed for, or less. Only then
does the company actually get that design right. If the ability
to make changes has been preempted by a specific design, it
doesn't allow learning as this proceeds. It could well result
in a suboptimal system - a lesson Mr. Van Tuyl suggested may
have been learned from the Alaska Natural Gas Transportation
System (ANGTS) in the 1970s, when highly specific detail was
included in the legislation, down to the actual vendor required
for the turbine drivers. Mr. Van Tuyl remarked, "That's not the
approach that we would recommend for this project."
9:57:43 AM
MR. VAN TUYL recalled discussion of the nature of expansions,
how it seems logical that if the base amount is about
4.5 billion a day and it is expanded to 5.5 or 6, the rate for
everybody should come down because of economies of scale. He
said that's not necessarily the case. Rather, an efficient
expansion would result in an equivalent cost or perhaps a slight
increase for shippers, but hopefully wouldn't result in a big
difference from the base rate.
He highlighted a tool used by engineers to design pipeline
systems: a J-curve where one axis plots the cost per unit
volume and the other might plot the capacity of the system. The
ideal is as much capacity as possible for the least cost. There
is a range over which the cost doesn't vary much. Mr. Van Tuyl
said that is the goal with this project: a pretty good base
rate, 4.5 a day. It's fairly flat at the bottom of the J-curve,
and it might be expandable by a 1 or 1.5 a day without a
significant increase in the cost of service.
He referred to a question raised by Senator Dyson and alluded to
the proposed fiscal contract, noting it has a reference in
Article 8.7 to 100-mile increments. Mr. Van Tuyl said it seems
an arbitrary number, but explained that it envisions a situation
in which a compressor becomes bottlenecked and thus there might
be a need to loop around it. The compressor spacing for the
base design is about 100 miles or slightly more. It wouldn't
mandate looping of the entire system, Mr. Van Tuyl noted.
10:01:05 AM
SENATOR DYSON asked whether the existing language prevents an
expansion of more than 100 miles.
MR. VAN TUYL answered no. There are multiple avenues, some
unique, that any shipper seeking an expansion can use for this
project. The most prevalent is the voluntary process whereby a
would-be shipper approaches the pipeline and seeks an expansion.
In the Lower 58, the vast majority of pipelines are commercially
motivated to increase volumes and thus to expand. One unique
avenue is the Alaska Natural Gas Pipeline Act (ANGPA) of 2004:
If the pipeline refused to expand, a shipper could go to FERC
and, under Section 105 of ANGPA, to his recollection, could
assert its rights to have a mandatory expansion imposed. He
mentioned a further option, a mechanism in the contract.
SENATOR DYSON said he still didn't understand why the 100-mile
limit is needed, either from an engineering or business
perspective. He suggested there must be either something
regulatory or protecting someone's interests.
10:04:00 AM
^Wendy King, ConocoPhillips
WENDY KING, Director of External Strategies, ANS Gas Development
Team, ConocoPhillips Alaska, Inc., replied that the belief was
that if somebody found that much gas and wanted to do a full
line loop, the vehicle would be an economic voluntary expansion.
The person would go to the pipeline and wouldn't rely on
Article 8.7, the state-initiated expansion, for a full line loop
of the system.
SENATOR DYSON surmised the 100-mile limit only applies to state-
initiated expansions.
MR. VAN TUYL affirmed that.
SENATOR DYSON asked whether the state only has authority to work
around a bottleneck at a particular place in the line, not for
full line capacity.
MR. VAN TUYL explained that he'd mentioned the other two avenues
because they would be available to the expander regardless. As
Ms. King had pointed out, a full line loop would more likely be
covered by either of those. So it wouldn't foreclose full line
looping.
SENATOR DYSON agreed, but suggested it precludes a state-
initiated full line loop, a major expansion of capacity. If the
other options don't work, the state cannot initiate a large-
capacity expansion that requires looping or parallel lines.
MR. VAN TUYL replied that he cannot foresee a situation in which
those other processes wouldn't work, given FERC's ability to
impose an expansion - an unprecedented right that FERC wouldn't
have absent the provisions in ANGPA.
10:06:00 AM
SENATOR DYSON recalled testimony yesterday that a provision says
if FERC's decision isn't almost exactly what the unit operator
or pipeline operator wants, the pipeline operator must reject it
and not go along with FERC.
MR. VAN TUYL clarified that is only for a state-initiated
expansion under Article 8.7.
CHAIR SEEKINS asked: If full line looping is inevitable, why
retain, in the contract terms, that 100-mile restriction for
state-initiated expansion through looping?
MS. KING answered that for a full line loop, the thought was
that if somebody has found significant enough volume to have to
"twin" a huge pipeline, the first vehicle likely would be a
voluntary expansion: approaching the pipeline and asking
whether the pipeline is prepared to expand under terms
provided. If that potential shipper isn't satisfied, then
Section 105, the mandatory expansion, is seen by ConocoPhillips
as the primary vehicle at that point - with the FERC process -
to use for that type of project.
She recalled discussion of Article 8.7 with the state. Inviting
Mr. Loeffler to speak as well, Ms. King reported the predominant
focus was this: What if the state wants to do an expansion for
in-state needs? She emphasized concern about what happens if
someone tries to force an uneconomic expansion. She gave an
example in which someone had attempted a voluntary expansion,
but the pipeline didn't see it as an economic benefit; there was
dissatisfaction with the mandatory FERC expansion; and now there
is the option of state-initiated expansion. Ms. King suggested
the aforementioned could be an expansion in trouble, with
economic challenges.
She also recalled that the state had argued hard for an
additional dispute resolution process, going to a tribunal with
the question of whether the party had a full hearing. Noting
the predominant focus for Article 8.7 relates to smaller
expansions, Ms. King said the existing processes are there to
help facilitate larger-type expansions.
10:09:09 AM
^Bob Loeffler, Morrison & Foerster, Counsel to the Governor
BOB LOEFFLER, Morrison & Foerster LLP, Counsel to the Governor,
concurred with Ms. King's recollection. He said Article 8.7 was
an effort to create a fairly circumscribed tool to deal with
smaller expansions appropriate for in-state use. It received an
inordinate amount of attention, and is being looked at from all
directions. He reported there are two sets of comments in favor
of Article 8.7. Mr. Loeffler added that if it creates more
problems than it solves - despite its good intentions - that
will be taken into consideration.
SENATOR DYSON highlighted the term "noneconomic" and said nobody
wants to see a deal-killer. However, the legislature acts as a
board of directors for Alaskans, whose interests might not
coincide with the producers' economic interests. If in-state
use, including gas liquids and value-added applications,
requires expansion that causes a slight increase in the cost to
all shippers, the producers could argue it isn't economic. It
would cost more, and they'd lose a little from the bottom line.
He noted, however, the people's interests aren't just economic;
Senator Dyson cited the cost and security of energy. He said it
appears the state doesn't have the option of considering a
public good that costs the state and the producers a little.
Senator Dyson acknowledged the natural tension of such deals,
expressing concern that this has been blocked out.
10:12:27 AM
MR. VAN TUYL suggested the reason BP would refer to something as
a noneconomic or a suboptimal expansion is because a pipeline is
naturally motivated commercially to do anything that is optimal
or economically viable; those things will happen if nature is
allowed to run its course. A pipeline could say it didn't want
to do an expansion; that was recognized by FERC because of
efforts by the state and others to make the points Senator Dyson
was making about other potential needs that this particular
pipeline would have to serve.
He said that is why the provisions in Section 105 of ANGPA
exist. If the pipeline says no, the potential expander can
request that FERC mandate expansion. Mr. Van Tuyl added that if
the expander doesn't wish to use that process and has already
gone through the voluntary process, there is a third tool,
within the contract; as Ms. King and Mr. Loeffler said, it
focuses on smaller expansions, which might tend to be more
marginal. But it doesn't preclude the other avenues available
to an expander, either under the voluntary process or under
FERC-mandated expansion.
10:14:22 AM
MS. KING noted she was reading from FERC Order 2005-A and said
the following:
In adopting the presumption for rolled-in rate
treatment, the commission balanced rate predictability
for initial shippers with the objective of reducing
barriers to future exploration, development and
production of Alaska natural gas.
Finally, to provide guidance to interested parties on
the important subject of expansion rate treatment, the
Final Rule establishes a presumption in favor of
rolled-in pricing for expansions up to the point that
it would cause there to be a subsidy of expansion
shippers by initial shippers. We will determine
whether a particular rate amounts to a subsidy when
the issue is presented to us.
She summarized that FERC, in its order, acknowledged it would
need to be addressed on a specific case when it was brought to
FERC at that point. Noting FERC policy has been evolving on
this issue, Ms. King asked that Mr. Keithley or Mr. Loeffler, as
FERC experts, correct her if necessary.
She then explained that in 1995, FERC policy for Lower 48
pipelines was that if the expansion cost resulted in less than a
5 percent increase, it would be rolled in. In 1999, FERC
changed that policy to say it would be incrementally priced.
Furthermore, Ms. King told members, FERC established unique
rules for the Alaska pipeline with the rebuttable presumption of
rolled-in rates.
She posed a scenario in which a Fairbanks utility company pays
$1.00 for shipping from the North Slope, with a total toll of
$3.00 to Alberta. Later someone wants an expansion. Suddenly,
the Fairbanks utility is told its rate will rise to $1.50. Ms.
King suggested the utility company would want to ask why, since
there was a firm shipping commitment and an agreement that it
would cost $1.00.
She surmised the pipeline and each shipper would want to look at
such examples and ask why their rates had risen; FERC has
already said it will look at these on a case-by-case basis and
adjudicate whether or not that is a subsidy. Ms. King pointed
out that this possibility of increased rates applies not only to
the big producers, but also to any shipper with a firm
transportation (FT) commitment. After giving another example,
she said the contract has provisions so a party can protest a
situation and initiate a proceeding with FERC. Ms. King
concluded by highlighting the challenges in trying to describe a
one-size-fits-all solution right now for this pipeline.
SENATOR DYSON indicated he didn't want to pursue this further,
but was unconvinced as to why the 100-mile limit is needed. He
remarked that nobody who wants to loop around a compressor
station is going to build a line around it that is any bigger
than necessary.
10:19:15 AM
SENATOR BUNDE requested confirmation that a rolled-in rate would
be passed along to the customer, whereas an incremental rate
would put one group at a competitive disadvantage because it
would sell its gas at a higher price.
MR. VAN TUYL emphasized that the customers are the shippers,
including the state. If the rolled-in basis resulted in a
higher rate and it was passed on, the customers paying the
additional cost would be BP, ExxonMobil, ConocoPhillips, the
State of Alaska and other shippers who'd signed up for service
on the line.
He added that the focus is on delivering the lowest-cost system
possible, entering into long-term commitments of perhaps 20 or
30 years. The duration of the initial FT commitments isn't
known, although the federal loan guarantees will be available
for 30 years from commencement of commercial operations. With
that size of an obligation for that length of time, a rate
increase could significantly color the economics. A company
makes choices based on an assumption of a certain price in year
one, Mr. Van Tuyl said, but a later change creates significant
risk relating to the project.
SENATOR BUNDE asked: Can't the producers pass on the cost of
that increase to a utility in Chicago, for example?
MR. VAN TUYL answered that the "back end of the line" is the
market. The companies cannot stipulate that costs for Alaska
gas will be higher. They'll get the market rate for the gas,
whether it is sold to a utility or another consumer. There is
the market on one end, and the transportation cost in the
middle, which is the cost they're trying to manage to ensure the
highest possible netback at the front end.
10:22:53 AM
SENATOR ELTON recalled characterization of Article 8.7 of the
contract as a sort of safety valve: if the other two expansion
methods don't work, there could be state-initiated expansion.
However, his interpretation of this morning's discussion is that
there is more discrete reason for Article 8.7 - potential
bottlenecks on part of the pipeline. He asked: If significant
gas is found at Minto Flats, for example, and the other two
expansion alternatives don't work, doesn't the 100-mile
restriction for state-initiated expansion preclude using this as
an alternative?
MS. KING replied for a future gas discovery at Minto Flats, for
example, the gas owners likely would go to the pipeline for
voluntary expansion from that point south. Before voluntary
expansion, however, FERC requires a "reverse auction":
the pipeline must ask its existing shippers whether there is
capacity that someone is willing to give up. If adequate
capacity is released, expansion isn't needed.
SENATOR ELTON posed a scenario in which someone doesn't want to
give up its capacity, even though it isn't needed.
MS. KING questioned the economics of sitting on expensive
capacity without a plan to fill it, a risky prospect. Returning
to a situation involving full capacity, with nothing coming of
the reverse auction, she opined that voluntary expansion would
be the pipeline's first course of action to pursue; if a
creditworthy party was willing to sign a shipping commitment,
there'd be a normal FERC process for it. If that didn't work
out, however, the federal Section 105 mandatory expansion could
be applied. As for state-initiated expansion, if it involved a
full line loop - which requires finding a significant quantify
of gas - there'd be a limitation from that point south. She
suggested that risk would have to be looked at from an
exploration perspective.
10:27:10 AM
MR. LOEFFLER offered clarification about the timing. He gave
his understanding that the first step is voluntary expansion;
the second is expansion under Article 8.7; and the third is
mandatory expansion. He indicated it would be logical, if
someone qualified, to try expansion under Article 8.7 after
voluntary expansion, because it is designed to be a little
quicker - although it may or may not work out that way.
SENATOR ELTON said he had some of the same reservations
expressed by Senator Dyson. Even though it takes significant
gas before line looping occurs, it is the whole issue of so-
called basin control that the committee spent time on. Nobody
anticipates that one find will suddenly fill the line for the
cheap capacity; it is assumed this will be incremental. If
North Slope gas is added incrementally, at some point explorers
in the Nenana Basin or Minto Flats cannot do it; Senator Elton
surmised Article 8.7 precludes alternatives with the 100-miles
restriction. Recalling Mr. Van Tuyl's testimony that he cannot
imagine getting to that point - given the other alternatives -
Senator Elton questioned why the 100-mile limit exists.
10:29:18 AM
MR. VAN TUYL mentioned the idea of a viable expansion
alternative in the commercial interest of a pipeline that is
turned down for some reason. He recalled that Mr. Harper and
Mr. Shepler had suggested yesterday that a pipeline might not
expand specifically because it didn't benefit its producer
affiliate; Mr. Van Tuyl said that smacks of violation of the
affiliate rules which FERC adjudicates or other enforcement
provisions under federal law. Entities will be commercially
motivated to do what is in their best interest; a commercially
viable expansion is something people will want to do, even if
they decide not to for some reason, such as determining it isn't
commercially viable. Even without Article 8.7, Mr. Van Tuyl
said, that shipper would have access through ANGPA to seek a
FERC mandatory expansion.
He recalled discussion a couple of weeks ago about challenges in
structuring Article 8.7. Mr. Van Tuyl reported that BP had been
concerned about not wanting to tell FERC how to do its business,
which provisions of Article 8.7 seem to approach. Noting it is
FERC's job to provide enforcement regulations for pipelines over
which it has jurisdiction, Mr. Van Tuyl added, "Frankly, we
think FERC does a good job. They don't always rule in our favor
when there's rate cases and whatnot. All of the provisions of
Order 2004 and 2005 weren't necessarily the ones we would have
preferred. But we think FERC works."
He highlighted a theme in testimony and documents from
Mr. Shepler and Mr. Harper, which he interpreted to assert FERC
cannot be trusted to do its job. Mr. Van Tuyl told members, "We
disagree with that. We think FERC needs to be trusted to do its
job." Agreeing with Ms. King that FERC policies have changed
through time and as they relate to this project, Mr. Van Tuyl
concluded by suggesting that process needs to be allowed to
continue; he surmised FERC policy may change again over the
duration of this contract.
10:32:06 AM
SENATOR WILKEN offered a different view: If the state and the
producers say in a joint letter that they prefer rolled-in
pricing for economic expansions, it isn't telling FERC what to
do. Rather, it suggests preferences, which might help FERC do
its job under this new provision in Section 105 for mandatory
expansion, since there is no history of cases or decisions.
MR. VAN TUYL replied that the specific example of stipulating a
preference for rolled-in pricing is a concern for BP because it
is case-dependent. If rolled-in pricing results in the example
given by Ms. King - with a long-term shipping contract made with
one understanding, and then a sudden increase in BP's rate by
50 percent - that might not be the best outcome. Thus it might
not be something BP wants to commit to at the outset. If the
FERC process is allowed to occur, there will be hearings and so
forth, and the process will result in an outcome; it might not
be the outcome BP prefers, but there is already an avenue in
place to allow people to be heard. "We know that the state's
voice is an influential voice before the FERC," he added, citing
recent legislation that was passed as a case in point.
SENATOR WILKEN responded that he was looking for the downside
for the four parties expressing interest in rolled-in pricing;
he called this a "class A problem with this contract." He
voiced concern that if the groundwork isn't laid today for
economic expansion of this pipeline, it will result in what
exists today with respect to oil; saying one reason there isn't
more exploration on the North Slope is because explorers cannot
get into the pipeline, Senator Wilken gave two examples.
He also expressed concern about the producers having control of
the pipeline, with the pipeline either inaccessible or too
expensive. One hurdle seems to be incremental versus rolled-in
pricing. Senator Wilken suggested for an explorer there'll be a
double gamble: 1) whether gas will be struck and 2) whether it
will get into the pipeline, even with the option of FERC-
mandated expansion, which is new, takes time and money and has
no track record.
10:37:38 AM
MR. LOEFFLER opined that the aforementioned Trans-Alaska
Pipeline System (TAPS) example doesn't comport with reality,
since TAPS is half empty, has plenty of capacity and takes bids
every month. If the explorers have a problem, it must relate to
something upstream. He suggested the need for more information
in this regard.
SENATOR WILKEN thanked Mr. Loeffler, acknowledging he might not
have all the details.
SENATOR DYSON announced he did have.
CHAIR SEEKINS first called upon Mr. Marushack.
10:38:36 AM
^Joe Marushack, ConocoPhillips
JOE MARUSHACK, VP Gas Development, ConocoPhillips, said he would
offer the perspective of an explorer drilling wells in Alaska.
Noting he could argue both sides but would explain why his
company lands where it does, Mr. Marushack said an explorer
needs access to the pipe; having ownership in the pipe doesn't
guarantee any more influence than anyone else, as a producer.
It is known that this pipe will be developed with expansion
capabilities.
He referred to the J-curve described by Mr. Van Tuyl, reminding
members that it shows the points at which theoretically it is
most economic. Mr. Marushack emphasized the size of this
project, with a base case of 4 billion cubic feet (Bcf) a day;
perhaps a 48-inch or 52-inch pipe; and expansion capability to
about 5.5 Bcf. The rate should be about the same for the extra
1.5 Bcf a day. However, 1 Bcf a day will require finding 8 to
10 trillion cubic feet (Tcf) of gas.
He posed a scenario in which an explorer makes a major
discovery, 2 or 3 Tcf, and with its partners figures they can
afford a 300-million-a-day expansion. They approach the
pipeline, which says this is way off the J-curve and will
require doubling all compressors and so forth, as if it were a
1-Bcf-a-day expansion. It will cost a certain amount. Thus on
an incremental basis, instead of the $3 per million everybody
else might pay, it might cost $5 per million. Mr. Marushack
said the question is whether it is fair to go to the other
companies - those that made the base shipping requirement and
made this project happen - and roll in all those costs.
He suggested the following ought to happen for volumes so huge:
If the explorer is willing to pay $5 a million because gas
prices are $10, then it pays the incremental cost. If not, it
needs to work with others to find the 8 trillion required to get
that incremental expansion, although it takes a little longer.
While it would be great to have incremental costs rolled in and
another company pay for it, Mr. Marushack emphasized he doesn't
believe it's fair. Instead, the explorer should go to the
pipeline, which would do its work and declare the cost; FERC
would weigh in on whether it makes sense; and then the explorer
might have to wait for other exploration successes in order to
have an economic expansion.
10:42:22 AM
^Mark Nelson, ExxonMobil
MARK NELSON, Commercial Negotiator, ExxonMobil, added that part
of fiscal certainty is certainty about future rates. He told
members, "All we're asking you to do is not mandate rolled-in
rates in a contract, but allow FERC to do their job." He
indicated when FERC develops its mandatory procedures, it
recognizes the fairness issue: the rates don't require existing
shippers to subsidize expansion shippers, which can adversely
impact the economic viability of the project. Noting this is a
risky project, he said those who'll underpin the project just
want some certainty. Mr. Nelson closed by relating his belief
that there is a fair FERC process, with unprecedented procedures
built in, to allow that to happen.
SENATOR WILKEN responded, "We're not going to mandate anything."
Recalling that the FERC order stated a preference for rolled-in
pricing, he said it seems the four parties can align themselves
with FERC and say they also prefer that, buttressing the FERC
decision. Senator Wilken predicted FERC would probably say no
for a 50 percent increase; for a 5 percent increase, however,
FERC may look to the record, determine it aligns with its own
goals and approve rolled-in pricing. He emphasized the desire
to address it, to the fullest extent possible, in the proposed
fiscal contract. Senator Wilken specified that he remains
concerned about this particular contract provision.
10:44:31 AM
SENATOR DYSON referred to the oil-production bottleneck
mentioned earlier by Senator Wilken. He recalled that a new
producer had oil that needed to go through another producer's
gathering center, which had limited capacity to handle water.
MR. LOEFFLER said that would make more sense.
SENATOR DYSON elaborated, recalling that the second company was
unwilling to spend more money to produce more water for somebody
that hadn't put money into building the plant and so forth. He
surmised the new producer had been asked to pay for the cost of
handling the increase, as a fairness issue. He predicted
similar situations would arise with respect to gas when non-
owners want to put gas into the line.
CHAIR SEEKINS continued with the fairness issue, saying he
starts to have a problem with a requirement of subsidizing
someone else in getting gas to market.
SENATOR BUNDE pointed out that Chair Seekins works in a
subsidized business, since his transportation costs from Detroit
are no more than for someone who lives in Minneapolis.
CHAIR SEEKINS agreed, calling it is rolled-in pricing and saying
there is an economic reason related to Ford Motor Company, not
the dealers. Returning to the gas pipeline, he raised the
question of the length of time for which the ability to come
into the market is preserved, and on what basis. Chair Seekins
said it is a difficult issue and he doesn't know the answer.
10:47:54 AM
SENATOR WAGONER asked: What happens if 5 percent of the
capacity is left over after the open season? Do those that
bought capacity share the cost, or does the pipeline company
absorb the lost revenue?
10:48:58 AM
^Bradford G. Keithley, Jones Day, Counsel to BP
BRADFORD G. KEITHLEY, Jones Day, Counsel to BP, answered in that
situation FERC would consider whether that spare capacity had
been developed reasonably; was prudently incurred; and was used
and useful in the operation of the system. If FERC concluded it
met this test, it would include those costs in the rates to
existing shippers. If, however, FERC concluded the project was
overbuilt and those costs were incurred unreasonably or
imprudently, those would be excluded from the rate calculation.
With respect to costs but not capacity, Mr. Keithley recalled
that a similar issue arose a couple of times for TAPS; it was
flipped to FERC as to whether those costs were reasonably
incurred, and FERC excluded some and included others.
MR. LOEFFLER added that if it is overbuilt and excluded from
costs and rates, the pipeline pays for it and cannot pass it
through. "We toyed around with this hypothetical when we were
doing our open season comments," he recalled. Indicating the
question had been why this pipeline shouldn't be overbuilt,
since it is perhaps easier to add extra capacity to begin with,
Mr. Loeffler noted that runs smack into the FERC policy that if
the pipeline is overbuilt, the cost is paid out of the
pipeline's own pocket. Even there, it could get into the
subsidy question of whether it is in the public interest to
overbuild this particular pipeline. "We couldn't reach that
conclusion," Mr. Loeffler told members, saying it is another
face of the subsidy issue and the expansion issue.
10:51:34 AM
SENATOR WAGONER said he doesn't see where there is a penalty for
overbuilding the capacity of the line, to a certain extent,
because there will be only four owners of the pipeline and
probably only four that have the gas initially to buy capacity.
MR. LOEFFLER asked in response: How much overbuilding is
enough?
SENATOR WAGONER replied that he didn't know and that it was a
theoretical question.
MR. LOEFFLER made the point that this is the difficult question
when dealing with contract terms. He alluded to Senator
Wilken's earlier comments. He remarked that, assuming the
desire is to overbuild by 5, 10, 18 or 33 percent over the open
season amount, the aforementioned 5 percent and 50 percent
examples are easy. But an independent company might put
pressure on the pipeline to overbuild as much as possible; it
would depreciate, and when the company was ready to use it, it
would get an even better rate. Mr. Loeffler added that if he
begins with the premise that building in some extra capacity is
a good idea, he trips on the threshold of what is reasonable or
unreasonable.
MR. VAN TUYL, in response to Chair Seekins, indicated the base
design for the project was nominally 4.5 Bcf, with a delivered
volume of 4.3 Bcf, to his belief, into the mainline process,
through the gas treatment plant (GTP).
CHAIR SEEKINS asked whether there is approximately 40 percent
expansion capability.
MR. VAN TUYL affirmed that as a ballpark figure.
10:54:07 AM
SENATOR DYSON observed that TransCanada's proposal appears to
show a clear predisposition to rolled-in pricing for expansion.
Asking what different business interests resulted in that, he
surmised TransCanada might not have the same upstream interests
as the major producers.
MR. VAN TUYL cited a key difference: The shippers that will
likely participate in the first open season - BP,
ConocoPhillips, ExxonMobil and others such as Chevron and
Anadarko - have the motivation of signing those FT obligations,
committing to ship under a service offered at the open season.
When they see that the risk from terms they sign up for might
change through no action of their own, it causes concern.
Pipeline companies are on the opposite end of the spectrum,
since they don't sign long-term FT obligations, and so their
commercial motivation is different.
SENATOR DYSON highlighted a point from the producers today - the
right to expect that the terms of a FT commitment will continue
into the future. He said the threat that those will change is a
legitimate concern. But a competing concern regarding basin
control is the argument that the producers' upstream interests
will shade their view of how to operate the pipeline. Stating
appreciation for the producers' fiduciary responsibility to look
after their interests and shareholders, Senator Dyson added,
"What we don't want is the pipeline process to be distorted for
anything except the pipeline's business."
MR. VAN TUYL replied that he can appreciate that. Also weighing
heavily on his mind, as a producer who'll be a pipeline owner,
is the bright line drawn between those two responsibilities by
the affiliate rules and by the enforcement provisions. He
recalled FERC's testimony about the $1-million-a-day-per-
violation penalty if someone crosses that line, looking out for
an affiliate shipper, for instance. He deferred to Mr. Keithley
to expand on this, but said it is why FERC passed those
regulations, to ensure that sanctity is maintained.
10:58:32 AM
MR. KEITHLEY added that as former general counsel for a pipeline
operation, he could give one principal reason that TransCanada
would make that statement: A pipeline looks for deep pockets,
assurance of getting paid. Rolled-in rates spread the risk of
recovering that cost over a much broader base or, in the case of
this pipeline, over much deeper pockets. Incremental rates, by
contrast, focus incremental costs on a single shipper that may
or may not be solvent. It has nothing to do with expanding its
business or being in a better position to serve customers, he
opined. It has everything to do with cost recovery.
SENATOR DYSON indicated he hadn't thought of that, and expressed
appreciation.
11:00:08 AM
MR. LOEFFLER offered two points. First, he agreed with
Mr. Keithley, but indicated Canadian rate cases typically are
settled on a rolled-in basis for expansion, according to his
firm's Canadian counsel; thus TransCanada is used to it.
Second, a possibly controversial point, Mr. Loeffler reported
that he'd asked his firm's antitrust people to look at the
argument that an independent pipeline wouldn't favor its
affiliates, while a producer-owned pipeline might; an
interesting analysis had resulted that Mr. Loeffler offered to
provide in writing to the committee.
He relayed that the antitrust people said this doesn't make
sense for the following reasons. Mr. Loeffler explained that if
the owners of the pipeline had restricted access to keep the
value of others' leases down, those leases would be available
for bid because the lease owners wouldn't be able to get the
production on the pipeline. At that point, however, the
affiliates of the pipeline owners would be competitors in
bidding for those leases, which naturally would drive up the
lease prices to near market. They couldn't collude on the
bidding for the supposedly depressed leases because that would
be an agreement not to compete - violating the antitrust laws.
He observed that the other side is perhaps the desire to
restrict supply to improve the downstream price in the U.S.
However, the economic concept is market power. With respect to
the numbers which apply to that, including the shares of what
those companies will be in downstream markets in 2015, for
example, Mr. Loeffler indicated Lukens Energy Group had provided
estimates: BP's gas would be 7.3 percent, ExxonMobil's 7.9
percent and ConocoPhillips' 5.8 percent. Those are way under
the threshold that the antitrust people apply in deciding
whether someone has market power, namely, the ability to benefit
from withholding supply. Mr. Loeffler concluded that the
analysis doesn't measure up under a set of antitrust laws.
He highlighted the assumption that an independent pipeline is
only in the business of providing pipeline service.
Mr. Loeffler countered that by saying an independent pipeline
could have a marketing or production affiliate; some do and some
don't. If it wanted to raise the tariff for a similar purpose
of driving the value of leases down, it also could have or
create a marketing or production affiliate to buy those leases.
So the argument, from an antitrust viewpoint, falls apart on
both sides.
11:04:35 AM
SENATOR DYSON voiced appreciation, but still expressed concern
that bidders on leases couldn't get their product into the
pipeline, and that those bidders with influence on access might
have a significant advantage over other bidders. As for
criticism in the media that nothing in the contract requires the
producers to sell for in-state use, Senator Dyson characterized
this as a cheap shot. He gave his understanding that the
state's royalty share is more than enough to take care of any
contemplated in-state use, except if it becomes economic to have
in-state processing of liquids or other value-added products.
He suggested having the contract include that the producers must
sell excess gas into the Alaska market as long as the price
received is the same as in the Midwest. Senator Dyson indicated
Article 9.4, on page 96 of the contract, says they aren't
required to sell. He asked: Is there a way to protect the
state's interests to have it for value-added needs and other in-
state needs without hurting the producers financially?
MR. VAN TUYL acknowledged this as an interesting question that
he wasn't specifically prepared to answer. He noted the
language in Article 9.4 also says any party may sell its gas for
in-state use. He averred that, all things being equal, BP would
love to be able to sell its gas closer to home, rather than
shipping it to Chicago. As for working out the details of
requirements, matching prices and so forth, Mr. Van Tuyl relayed
his initial reaction: being unsure how it would work without
getting into a complicated system that could even be viewed as a
restraint to free marketing. He suggested the need to look at
it carefully.
SENATOR DYSON agreed it could be complicated, but indicated the
legislature doesn't want the producers' other interests working
against those of Alaskans. He also indicated it would give him
more comfort if there were in-state use, but in such a way that
the producers didn't get hurt.
11:09:02 AM
SENATOR STEDMAN asked whether the GTP will be regulated by FERC.
He recalled earlier discussion of control and access to not only
TAPS, but also the gas line and feeder lines.
MS. KING specified that the language in Article 8.1 has all the
parties seeking and supporting FERC regulation of the gas
transmission lines. From the National Petroleum Reserve-Alaska
(NPR-A), that would be the line to take gas to the GTP, for
example. Ms. King said she didn't recall hearing any potential
shipper or the state disagree about seeking FERC jurisdiction
for that. She surmised there is unity about seeking FERC
jurisdiction over those facilities.
SENATOR STEDMAN pointed out that FERC's arm will reach further
than on TAPS, to his understanding.
AN UNIDENTIFIED SPEAKER agreed.
SENATOR DYSON interpreted the language to say the state will
have an interest in those gas transmission lines. He asked: Do
any of those exist now?
MS. KING drew attention to two transmission lines that don't
exist now: Point Thomson and NPR-A. With respect to state
ownership in those, she pointed out that it's commensurate with
how much throughput the state expects to ship. At Point
Thomson, for example, the royalty rate is different than at
Prudhoe Bay. At NPR-A, predominantly federal lands, the state's
gas will be its tax-gas share, and so the state likely would
prefer to own closer to the 6 percent net-after-royalty figure,
instead of 20 percent. For the remaining transmission lines
discussed in that section, Ms. King deferred to Mr. Van Tuyl.
MR. VAN TUYL noted one line that could theoretically exist is
the Northstar line. However, that line would need to be looked
at, and Mr. Van Tuyl said he wasn't familiar with the specifics
of its design and whether it would be appropriate for gas
transmission service in the advent of a sale. None of the other
lines exist.
SENATOR DYSON asked: If it does apply to the Northstar line and
because of the contract the state ends up owning a portion, does
the state have to pay, to whoever built the line, part of the
original cost or the depreciated cost of that line?
MR. VAN TUYL answered that the terms of ownership would be
detailed in the entity agreement formed around the ownership of
that piece, and would be detailed in the transmission-line
limited liability company (LLC). Thus he didn't know what those
specific terms of ownership would be.
11:13:13 AM
SENATOR WAGONER recalled recent discussion he'd had with
Ms. King about taxes. He suggested the need to have tax experts
address questions relating to how the state differs from the
producers with respect to taxes that will or won't be paid, and
the tax advantages and disadvantages of taking gas in kind or
for royalty purposes.
He also quoted testimony from Mr. Massey of ExxonMobil yesterday
as follows: "We are not going to own it forever, but we're
going to own it until it's built." Noting Mr. Massey wasn't
present today, Senator Wagoner expressed concern that the
companies are asking the state for a lot of concessions. Once
the pipe is built and costs are established for shipping gas,
the producers can sell their interest in the pipeline
corporation to TransCanada or others, and would have the best of
both worlds without ownership of a pipeline where the return is
controlled at about 14 percent or maybe higher. He requested a
response.
11:15:10 AM
MR. VAN TUYL replied that the state has the same freedom once
the pipeline is built.
SENATOR WAGONER said he understands that, but the state is kind
of a minority partner.
MR. VAN TUYL referred to yesterday's discussion. As it relates
to pipeline ownership, he said, the producers are uniquely
motivated to ensure delivery of the pipeline system at the
lowest cost. That enables transportation of the resource at the
lowest cost, so it maximizes the value of the resource. Thus
the producers, as resource owners, have a motivation that other
third parties might not have. In fact, other third parties
might have the opposite motivation. The only return a non-owner
of gas gets is through the actual cost of the pipe that is
installed. Hence such a party might be motivated to deliver the
highest-cost system.
He related the desire to own the pipeline initially to ensure it
is delivered at the lowest cost. This is the business BP is in,
and it does this around the world. Mr. Van Tuyl explained that
once the pipeline is up and running, as discussed yesterday, it
is a simple portfolio choice of whether to continue to be a
pipeline owner or to divest that interest to another party. At
that point, any party is free to buy or sell its assets as it
sees fit. For example, North America's most recent gas line,
the Alliance pipeline from central Alberta to the Chicago area,
was owned initially by a group of producers, but shortly after
first gas there was no producer ownership. Would that happen
for the Alaska pipeline? Mr. Van Tuyl said he didn't know.
11:17:52 AM
MR. MARUSHACK added that the business is changing.
Historically, ConocoPhillips found gas and wanted to sell it.
But the world is evolving such that now the business requires
taking ownership in the infrastructure and building it for all
these mega-projects. If there isn't complete alignment in
development of such a project and the resource pays for all the
costs anyway, there is a need to protect interests by building
that infrastructure.
He reported that ConocoPhillips has never said it would sell
this after construction; it is a decision at the time.
Mr. Marushack told members, "We pay for it anyway, so we prefer
to own what we pay for." He explained that ConocoPhillips
generally tries to match its ownership in the infrastructure
with its ownership in the resource, though it is never a perfect
fit. Mr. Marushack concluded, "It doesn't mean other folks
can't ship on it. It's just our internal philosophy, and it
keeps our balance sheet the cleanest."
11:19:27 AM
MR. NELSON noted ExxonMobil is in the same position. He
recalled this is what Mr. Massey was trying to answer yesterday
about why the company would want to build a pipeline, since it
is normally a lower-return-type asset. Mr. Nelson told members
ExxonMobil is getting more involved worldwide in construction of
pipelines for these mega-projects, though in North America the
only one he knows of is Mackenzie, with which his company's
affiliate, Imperial, is involved.
He explained that because of the massive size of the Alaska
project, there is a desire to be involved in the construction;
while the three producers are involved in mega-projects and know
how to do it, an independent company wouldn't necessarily be
able to handle a project of this size. Recognizing that
pipelines historically haven't been higher-performing returns,
Mr. Nelson said a decision will be made in the future about
whether to stay in the pipeline business. "We will be involved
in operations as long as we think it's in our best interest to
do that," he concluded.
11:21:05 AM
SENATOR WAGONER recalled hearing from the administration a
willingness to give a credit for 35 percent of the construction
- for example, the GTP and upstream gathering system - to
improve the companies' internal rates of return. Referring to
Mr. Massey's testimony yesterday, he asked: Why help improve
these companies' internal rates of return if they're going to
consider immediately turning around, once the gas pipeline is
completed, and selling their portion of the pipeline?
MS. KING raised the issue of shipping commitments. Observing
that the focus has been on the ownership decision, she pointed
out the following: When ConocoPhillips signs up for a shipping
commitment at the initial open season, it will be on the hook
for it and the pipeline must be paid. This cannot just be sold.
If somebody could be found to buy all the assets and
obligations, that is one thing. But the shipping commitment
will remain, and it is still the financial underpinning.
Whoever owns the pipeline can go to the bank with the assertion
of being paid day in and day out for it, regardless of whether
market prices drop. Ms. King suggested factoring this into the
equation.
SENATOR WAGONER reiterated concern that if the asset is sold
after a credit is received, the company stands to gain a good
profit at the expense of the state, and a credit wouldn't
necessarily transfer to the next owner.
MS. KING clarified that under Article 20.3, the commitment
allowance, the credit is actually applied to the holders of
FT commitments. It isn't associated with ownership in the
asset, but is directly tied to shipping commitments. It was set
up for a shipper that makes a FT commitment to the pipeline or
to the particular infrastructure. It isn't associated with the
main line, but with the GTP and the gas transmission lines. As
the language is drafted and under the upstream model contract,
it is whoever would show up to sign up for FT commitments on
that particular infrastructure. For example, if Chevron shows
up as a party, it would have a proportionate share if it chose
to participate through an upstream model contract.
11:25:01 AM
SENATOR WAGONER asked whether his understanding was correct that
it wouldn't matter who built the pipeline. If the state built
100 percent of it, the company would still show up during the
open season for shipping commitments in order to get its gas to
market.
MR. MARUSHACK highlighted this as a fundamental issue.
Recalling arguments that there is no firm commitment to build
the pipeline and so forth, he opined that the Alaska Stranded
Gas Development Act ("Stranded Gas Act") was always intended to
address resource issues; those relate to the tax, royalty and
terms, and must be determined in order to make a FT commitment.
He focused on whether the FT commitment would be made no matter
who built the pipeline. Mr. Marushack explained that this is a
complicated issue because ConocoPhillips could make a FT
commitment based on what it knows about its engineering and
project-management capability; if it owns 25-30 percent, for
example, it will fund perhaps $8-10 billion and have control so
the cost hopefully won't run away. But would he feel as
comfortable if somebody else built it? Mr. Marushack said no.
Others won't be as interested in ensuring the project costs the
least possible and is done efficiently, because they don't pay
for it. "The state and the producers pay for this project
through our shipping commitment," he added.
SENATOR WAGONER returned to his hypothetical scenario where the
state builds it. He suggested it would be in the state's best
interest to contract with someone who would keep costs low.
MR. MARUSHACK pointed out a huge difference in just turning it
over to someone and asking that it be built as low-cost as
possible, versus actually managing the project like a company
does all around the world on these mega-projects. He added that
the history of mega-projects is poor. Costs can escalate even
under the best of circumstances, and the only chance of managing
that is by controlling it, knowing at the end of the day "you're
going to pay for it yourself."
11:27:20 AM
SENATOR STEDMAN said it seems pretty obvious it's an independent
decision whether an entity would continue to own its interest in
the gas pipeline. The state would negotiate its position from
the point of view that the major leaseholders would divest
themselves of that lower-rate-of-return project sooner rather
than later after construction. Suggesting it might end up being
a red herring, Senator Stedman indicated he'd be surprised if
the administration didn't contemplate such divestiture. Turning
to the credit and recalling discussion with respect to the oil-
tax bill [SB 3001] and also the contract, Senator Stedman
indicated the state has the ability to include its opinion on
that in the contract if the desire is to modify it.
CHAIR SEEKINS asked: If a company decided to sell its portion
of the asset, what options would the other members have to
purchase it? Would they have first right of refusal?
MS. KING specified that the LLC, still being worked on, will
dictate how individual members will relate to each other.
SENATOR STEDMAN asked whether there was previous testimony that
if one of the initial four wanted out, the other three would
have the first option to purchase that interest before it was
put out for public bid.
SENATOR WAGONER recalled such discussion of a first right of
refusal.
MR. VAN TUYL and MS. KING said they didn't recall it.
11:30:36 AM
MS. KING returned to Senator Wilken's question about rolled-in
rates. Addressing whether "one size fits all" will work, she
related a hypothetical example: The initial toll is $3.00 to
get gas to market, with a market price of $5.00. Subtracting
$3.00 from $5.00, the state's netback value for its royalty gas
and tax gas is $2.00. If there is an expansion and suddenly
that toll rises to $3.50, the netback for state gas declines
from $2.00 to $1.50.
She asked: What if the source of that expansion was gas from
Outer Continental Shelf federal lands, where there is no state
gas? The state, as a shipper, would receive $0.50 less as a
netback for its royalty gas and tax gas. Ms. King explained
that the pipeline would recover its costs and thus the ownership
in the pipeline would recover its costs. The state, however, as
a shipper, might not view that particular application of rolled-
in rates as being in its best interests, since it would receive
$0.50 less.
11:32:53 AM
SENATOR DYSON lauded this discussion, noting he'd been persuaded
on some items. Recalling at least two epistles from federal
folks noting a threat that the federal government would take
over this project, he asked whether anyone had experience or
knowledge about such a situation for other projects. He
highlighted what might happen to the interests of Alaskans if
the federal government took over this project and, for example,
pushed the "over-the-top" route, which the state has determined
not to be in its best interest.
MR. MARUSHACK answered that he had no idea what would happen if
the federal government took over this project; there'd be
questions about how to get shipping commitments and what project
they were pursuing, for instance. With respect to the timeline,
Mr. Marushack reported hearing his company's chairman say it is
a concern; moving forward now makes sense because of a huge
worldwide expansion in major energy projects, including those
related to liquefied natural gas (LNG), pipelines and oil sands.
He cautioned that if all the engineering, open season work and
permitting isn't done as quickly as possible, more projects can
get ahead in line. Mr. Marushack said it makes no sense to
specify what the project might look like. If steel prices go
up, for instance, smaller pipe and more compression might
result, and there has been a 50-80 percent price increase for
steel, with huge projects committed for. Speaking against
having delays simply because of inability to get the necessary
materials, Mr. Marushack added, "We need more materials for this
project than anybody else needs."
SENATOR DYSON again asked whether anyone knew of a project where
the federal government took over, or how such a takeover might
work to the detriment of Alaskans.
SENATOR BEN STEVENS suggested asking the following: Is there
any other project where the federal government provided a loan
guarantee to initiate it? Noting this is a unique project with
respect to size and expense, he elaborated. As for the over-
the-top route, he noted if the federal government took over the
project under that scenario, it is written in [ANGPA, Sec. 103]
that the pipeline won't enter Canada above a certain latitude.
SENATOR DYSON surmised the federal government realizes how
important this project is to the national interest and, he'd
argue, to national security.
11:38:30 AM
MR. KEITHLEY cited a precedent - although not a project - where
the federal government had stepped in. In the 1970s, when the
Lower 48 was having massive natural gas curtailments, the
federal government - under Natural Gas Act powers that nobody
thought existed before - took control of a large portion of
natural gas supplies previously dedicated to intrastate markets
in Texas, Louisiana, Arkansas and Mississippi. This was to get
more gas to consumers in the Northeast. The Federal Power
Commission (FPC), FERC's predecessor, took its powers to the
limits, adopting regulations and orders that essentially
nationalized a significant amount of the gas supplies. Thus
there is precedent for the federal government to step in if the
nation's natural gas supplies are believed to be at issue.
SENATOR DYSON asked how the interests of the producer states had
fared under that federal takeover.
MR. KEITHLEY answered that the commission was balanced in the
sense that it allocated supplies among the states, according to
a set of criteria it established. For example, in Texas large
amounts of gas had gone to power plants in the 1950s and 1960s,
and the FPC's regulations gave power plants the lowest priority.
Thus the gas formerly used for that purpose went to higher-value
purposes, according to the FPC's rankings, in other states.
He further responded that the prices charged in the intrastate
markets had been essentially unregulated. When the federal
government took over regulation of those gas supplies, it
subjected them to lower prices, consistent with what the FPC had
established for gas supplies that previously were in the
interstate market. As a result, Mr. Keithley said, there was a
financial loss by the producers and producing states in terms of
their tax and royalty interests.
MR. LOEFFLER recalled the aforementioned was in 1977 or 1978,
during a cold winter when special federal legislation was passed
to effectuate that.
SENATOR STEDMAN proposed getting some issues like the over-the-
top route off the table, which could be answered by having staff
find language that say where the line would enter Canada. He
pointed out that the over-the-top route isn't an issue unless
Congress changes its opinion.
11:44:01 AM
^Amendments to SB 3002
CHAIR SEEKINS thanked participants and turned to amendments to
SB 3002. He requested a motion to table Amendment 2 - moved and
discussed 7/28/06 - until after the committee addressed shorter
amendments.
11:44:27 AM
SENATOR BEN STEVENS moved to table Amendment 2 until a later
date. There being no objection, it was so ordered.
11:44:39 AM
CHAIR SEEKINS brought before the committee Amendment 3:
A M E N D M E N T 3
OFFERED IN THE SENATE BY SENATOR STEDMAN
TO: CSSB 3002(NGD), Draft Version "G"
Page 4, lines 2 - 6:
Delete "and consent to entrance and enforcement
of an arbitration award in any state court in the
United States that has jurisdiction over the State of
Alaska. The authority granted in this subsection is
effective only after the arbitration award is entered
and enforcement is sought in the superior court of the
state"
SENATOR STEDMAN explained that Amendment 3 deals with giving up
sovereignty. If a settlement takes away a longstanding practice
that the legislature pays for a settlement demanded by the court
if the state loses a particular disagreement, the bill as it
stands allows another state to have jurisdiction over
expenditures, basically forcing the legislature to make an
expenditure.
He said there never has been a problem with the state paying its
obligations. Rather, Senator Stedman suggested, payment
practices most likely show the state to be more timely in
payments than the producers with respect to past disagreements.
Referring to previous testimony that no other state in the Union
has given up this particular sovereignty, Senator Stedman closed
by saying he doesn't believe Alaska should be the first.
11:46:32 AM
^Joseph K. Donohue, Preston Gates & Ellis, Counsel to the
Governor
JOSEPH K. DONOHUE, Preston Gates & Ellis, Counsel to the
Governor, pointed out that Amendment 3 would require
renegotiation of Article 26 of the proposed fiscal contract.
SENATOR BUNDE surmised that would be the impact of many things
the legislature would do in the next few days, including passage
of a petroleum production tax (PPT) bill.
11:47:47 AM
CHAIR SEEKINS asked whether there was an objection to adopting
Amendment 3. There being no objection, it was so ordered.
11:48:12 AM
CHAIR SEEKINS moved to adopt Amendment 4, which read:
A M E N D M E N T 4
OFFERED IN THE SENATE BY SENATOR RALPH SEEKINS
TO: SB 3002 24-GS2095\G
AS 43.82.230(a) is amended to read:
Sec. 43.82.230. Contract terms relating to hiring of
Alaska residents and contracting with Alaska
businesses. (a) The commissioner shall include in a
contract under AS 43.82.020 a term requiring the
qualified sponsor, [OR] qualified sponsor group, or a
related party, and contractors of the qualified
sponsor, [OR] qualified sponsor group, or a related
party, to comply with all valid federal, state, and
municipal laws relating to hiring Alaska residents and
contracting with Alaska businesses to work in the
state on the approved qualified project and not to
discriminate against Alaska residents or Alaska
businesses. Within the constraints of law:
(1)[,] the commissioner shall also include in a
contract under AS 43.82.020 a term that requires the
qualified sponsor, [OR] qualified sponsor group, or a
related party, and contractors of the qualified
sponsor, [OR] qualified sponsor group, or a related
party, to employ Alaska residents and to contract with
Alaska businesses to work in the state on the approved
qualified project to the extent the residents and
businesses are available, competitively priced, and
qualified;[.] and (2) should the state acquire an
ownership interest in the qualified projects as part
of a contract developed under this chapter, the
parties shall agree to enter into negotiations for
project labor agreements to facilitate the
construction of the qualified project. To the extent
lawful, the parties shall include provisions in any
project labor agreement that would promote hiring of
Alaska residents and the establishment of hiring halls
in both rural and urban communities of the state.
SENATOR DYSON and SENATOR WAGONER objected for discussion
purposes.
CHAIR SEEKINS opined that Amendment 4 is straightforward, making
a couple of minor changes in talking about adding "a related
party" and bringing in new text at the bottom, which he read to
members. He requested that Commissioner O'Claray testify.
11:49:25 AM
^Greg O'Claray, Commissioner, Department of Labor and Workforce
Development (DOLWD)
GREG O'CLARAY, Commissioner, Department of Labor and Workforce
Development (DOLWD), explained that because of the federal
constitutional question regarding "Alaska hire," a preference
for hiring Alaskans over residents of other states must not be
the primary purpose for this particular amendment. However, the
benefits of a project labor agreement (PLA) are many. He
suggested this is a proper way to approach looking for
identifiable costs and scheduling matters for a project of this
magnitude - ensuring there is a qualified and trained workforce
and that a unified labor policy covers all contractors and
subcontractors. Commissioner O'Claray concluded by offering his
belief that "to the extent lawful" in Amendment 4 is a good
enough caveat to avoid a constitutional problem.
SENATOR DYSON requested time to think about Amendment 4 over the
lunch break.
CHAIR SEEKINS concurred.
COMMISSIONER O'CLARAY, in response to Senator Elton, clarified
that there is no problem with the PLA portion. Rather, his
concern is that, if it is the primary purpose of a statute, a
preferential Alaska-hire law will undoubtedly be challenged and
possibly struck down in the courts. He related his
understanding that attorneys for the producers, the state and
the labor movement have looked at this issue.
CHAIR SEEKINS noted Amendment 4 doesn't say "require" but says
"promote" with respect to hiring within Alaska. While urban
residents can usually find a job, some rural areas have
extremely high unemployment. Mentioning finding a way to inform
rural residents that jobs and training are available, he
requested confirmation that training is available through the
state's efforts.
COMMISSIONER O'CLARAY affirmed that. He specified that through
a joint effort, one grantee - Alaska Works Partnership -
primarily focuses on recruiting rural Alaskans for training
within the construction field.
CHAIR SEEKINS recalled TAPS construction, suggesting if people
can fly in from Oklahoma, they should be able to fly in from
some rural Alaska communities. He proposed encouraging, to the
extent lawful, promotion of these jobs and related training; for
example, hiring halls could be located in Alaska. Chair Seekins
added that care was taken in crafting Amendment 4 to ensure the
constitutional line wasn't crossed in terms of an actual
requirement for Alaska hire.
11:54:26 AM
SENATOR DYSON asked: Does the proposed contract call for
promotion of the PLA?
COMMISSIONER O'CLARAY answered it doesn't exist now, although
including some language has been discussed.
SENATOR DYSON recalled testimony from Jim Clark that some court
case said nonunion workers couldn't be precluded from being
hired. He asked what that decision means in practical terms.
He also asked whether, in Amendment 4 or another, there should
be language precluding a union's internal rules from superseding
an intention that qualified Alaskans get the first shot.
Senator Dyson related his understanding that at least one major
construction union in Alaska has internal rules that say it
cannot hire any Alaskans as long as there is somebody available
on its books in the Northwest; he indicated someone from DOLWD
at the Eagle River presentation last Friday had said there were
efforts to address this.
11:56:38 AM
COMMISSIONER O'CLARAY specified that the decision with respect
to a union-membership requirement to work under a PLA and others
is the Beck decision, which he offered to obtain. It doesn't
mandate compulsory union membership.
He turned to the second question, noting he wasn't aware which
union Senator Dyson was referring to. Commissioner O'Claray
reported that all the union hiring procedures he has viewed in
the building trades do show an Alaska residential preference of
one year of residency for dispatch. He stated the desire to
make certain, within the discussions of the PLA, that this is
the case in terms of dispatch.
He cautioned against intruding too far into the purview of the
federal government and federal law with respect to the National
Labor Relations Act, which regulates how unions operate.
Commissioner O'Claray said he believes Amendment 4 is covered by
its wording with respect to the caveat, since it doesn't mandate
hiring hall location - which isn't within the purview of states
to dictate, under the aforementioned Act.
CHAIR SEEKINS agreed it doesn't mandate location, but says "we
want to establish some of those."
COMMISSIONER O'CLARAY said he believes that is a clear statement
of the desire that it not be a requirement.
CHAIR SEEKINS added that he just doesn't want it located so far
away that Alaskans can't get there.
11:58:41 AM
SENATOR DYSON informed listeners that if a craftsman in Alaska
is qualified by any standard but isn't a union member, it is his
desire to have the local union extend membership to that person
before hiring someone outside Alaska. He asked whether the
National Labor Relations Act allows such a preference to be
included in the contract.
COMMISSIONER O'CLARAY answered, "Yes, but very carefully
worded." He explained that an attempt to mandate rules that are
beyond the purview of the state's involvement would be in peril
in terms of a court challenge with respect to constitutionality.
He reported that Governor Murkowski has made it clear that he
supports the PLA for this project, and is encouraging both labor
and the producers to begin substantive discussions to get to
that point so this project can be built.
SENATOR DYSON asked: Does Amendment 4 preclude a qualified
nonunion contractor from being involved in this project?
COMMISSIONER O'CLARAY replied no. Mentioning that there are
many cases under PLAs, he indicated he doesn't know of anyplace
where unorganized employees are barred from participating.
12:00:37 PM
SENATOR BUNDE offered his assessment that a laborer who wanted
to get hired would have to go through a union hall. He asked
whether there would be a fee for the service of being hired.
COMMISSIONER O'CLARAY affirmed that likelihood.
SENATOR BUNDE characterized this as an agency shop, pointing out
that for teachers the equivalent fee is substantial, almost what
a union member would pay. Returning to Amendment 4, he
suggested the last sentence provides intent without teeth
because a hiring hall is created by a private agency, a union.
The state cannot tell that union how to spend its money.
Senator Bunde said he would be concerned if hiring halls were
defined as state agencies, however, because of cost issues.
CHAIR SEEKINS agreed, noting the remainder of this Act talks
about advertising through job services and so forth. That's why
there is a caveat that the parties shall include provisions to
the extent that is lawful. He concurred that the state cannot
mandate it, but said as part of the PLA he believes there can be
a request for hiring halls, facilities or some type of process
in rural communities to be able to hit areas of high
unemployment and promote hiring there. He cautioned against
overlooking this in the rush to accomplish something.
12:04:40 PM
CHAIR SEEKINS called attention to a handout entitled "An Act of
Congress, H.R. 4837-36" that contained the provisions of ANGPA.
He read from Section 103(d), skipping over paragraph (1). It
stated in its entirety:
(d) PROHIBITION OF CERTAIN PIPELINE ROUTE - No
license, permit, lease, right-of-way, authorization,
or other approval required under Federal law for the
construction of any pipeline to transport natural gas
from land within the Prudhoe Bay oil and gas lease
area may be granted for any pipeline that follows a
route that--
(1) traverses land beneath navigable waters (as
defined in section 2 of the Submerged Lands Act
(43 U.S.C. 1301)) beneath, or the adjacent
shoreline of, the Beaufort Sea; and
(2) enters Canada at any point north of 68
degrees north latitude.
CHAIR SEEKINS highlighted that this is the intent of Congress.
He surmised there would be a big row within Alaska if someone
tried to do otherwise.
SENATOR WILKEN pointed out that what Congress can do, it can
undo. Saying he can envision a scenario in which this pipeline
runs down the Mackenzie Valley, Senator Wilken suggested that
might even benefit Alaskans. While taking some comfort in what
is before the committee, he said it isn't cast in concrete.
12:06:25 PM
SENATOR BEN STEVENS advocated the position that Congress would
only act to change this if Alaska failed to act under the
criteria in ANGPA. He suggested the way to prevent an over-the-
top route is to act on the route proposed now, the so-called
highway route.
CHAIR SEEKINS announced he would offer an amendment on this
question that might help to clear it up "in state as well."
The committee took an at-ease from 12:07:09 PM to 1:57:44 PM.
CHAIR SEEKINS returned attention to Amendment 4.
SENATOR DYSON noted he was having copies made of an article
relating to a presentation made to the governor by the major
bargaining units. He said, however, that the commissioner had
answered most of his questions.
The committee took an at-ease from 2:00:14 PM to 2:01:50 PM.
SENATOR DYSON requested that members read the handout, an
article from the Alaska Journal of Commerce entitled "Unions say
labor agreement needed for gas line" by Melissa Campbell, dated
7/30/06. He then paraphrased a portion on page 2 that read:
Depending on how it's written, a PLA could preclude
nonunion workers from the project. That could mean
that Alaskans would have to join a union.
He surmised nonunion contractors also could be precluded.
Senator Dyson indicated he'd had discussion with the chair and
the commissioner that there could be a PLA which doesn't say
whether it has to be union or nonunion contractors or workers.
If the intention is that Amendment 4 not be construed to make
this an all-union contract or job, Senator Dyson encouraged
stating it on the record.
CHAIR SEEKINS clarified that Amendment 4 doesn't specify there
are union PLAs, but says to negotiate PLAs. He added, "I don't
see how you could build the project without involvement of the
union community, quite frankly. But it does not particularly
specify that they must be union." He opined that this
adequately protects the interests of Alaskans in this regard.
SENATOR DYSON specified that his request for clarification
shouldn't be construed as anti-union in any way.
CHAIR SEEKINS observed that the union system has much to offer
in providing labor and training, as well as trained and safe
workers. However, he didn't want to specify that this has to be
any particular "local" either. Rather, it has to be a PLA, and
it should be carefully laid out ahead of time.
2:05:20 PM
SENATOR DYSON alluded to the Davis-Bacon Act with respect to
wages. He asked whether all the work will be Davis-Bacon.
^Jim Clark, Chief Negotiator, Office of the Governor
JIM CLARK, Chief Negotiator, Office of the Governor, asked
whether Senator Dyson was referring to the federal Act. He
indicated the administration had looked at the state Act, the
"little Davis-Bacon," and it wasn't clear from the supreme
court's five-part test whether it would be or not.
SENATOR DYSON surmised federal participation, including loan
guarantees, wouldn't force it to be federal Davis-Bacon.
MR. CLARK indicated the administration didn't know.
SENATOR STEDMAN recalled for TAPS it was equivalent to Davis-
Bacon.
CHAIR SEEKINS added those were union contracts, union PLAs.
SENATOR STEDMAN asked how the state would benefit if it weren't
Davis-Bacon.
SENATOR BUNDE noted if there was "x" amount of money, it could
be spread over twice as many jobs. He encouraged looking at the
roots of Davis-Bacon, characterizing it as a racist law and
questioning whether anything should be done to continue what he
called race-based activities.
SENATOR STEDMAN said he didn't know how accurate or inaccurate
Senator Bunde's comments were, but the communities he himself
represents have been better off when operating under Davis-Bacon
for capital projects. Even though it costs more, it provides
livable-wage jobs in Alaska. If the effort is to employ as many
Alaskans as possible, Senator Stedman said he'd like workers to
have good wages and training so when construction ends they can
continue working. Speaking against having contractors hire
folks who'll work for the least money for this project, he
opined that the state is better off if Davis-Bacon covers these
types of projects.
CHAIR SEEKINS noted Canada is looking at immigration to get
manpower for the Mackenzie pipeline, but also is negotiating
with local unions on how that will work. He related his
intention that immigration and "starvation wages" won't be used
to put people to work on the Alaska natural gas pipeline.
Rather, PLAs will stabilize those and set it out in clear terms
before the project starts.
SENATOR ELTON agreed with Chair Seekins. He began discussion of
Amendment 1 to Amendment 4. He highlighted the following
language: "the parties shall agree to enter into negotiations
for project labor agreements". He suggested this is no
guarantee of a PLA because it only commits to talk about it. He
asked why that limitation is included.
2:11:23 PM
CHAIR SEEKINS answered that there should be a clear intent, and
he fully expects there will be PLAs. Chair Seekins said he
doesn't have a problem with doing that, but wants to ensure they
are negotiated PLAs, not necessarily mandated. He acknowledged
the drafting might not have captured the intent clearly. If the
owners must be put up against a wall and have PLAs regardless of
how they are negotiated, Chair Seekins said he'd have a little
problem with it. Recalling testimony in Fairbanks that TAPS
wages were negotiated way too high, he specified the desire to
have the terms negotiated, but to have PLAs.
2:12:42 PM
SENATOR ELTON moved to adopt Amendment 1 to Amendment 4, to
change the aforementioned language to read: "the parties shall
negotiate and agree to project labor agreements". He explained
that unless he'd misunderstood what Chair Seekins just said, it
provides that there will be a negotiation process of give-and-
take, but also provides that it will lead to PLAs.
SENATOR DYSON objected. He voiced concern that if a non-owner
organization was being outrageous in a demand for its terms on a
PLA, the cost might be too high if it must come to an agreement,
and it might destroy the negotiation process. He stated
preference for the original language in Amendment 4.
SENATOR BUNDE agreed, suggesting it provides some serious veto
power.
SENATOR ELTON referred to testimony in Fairbanks, Anchorage and
Juneau, as well as comments outside of the committee process.
He recalled that everybody had voiced commitment to a PLA as the
best way to accomplish what needs to be done. He suggested it
falls a bit short if all that is mandated is a commitment to
talk about it, rather than a commitment to actually accomplish a
PLA. He encouraged a "yes" vote.
SENATOR DYSON asked to hear from those who'll be at the table if
this says they must come to an agreement - those representing
the producers and the administration.
MR. CLARK opined that Senator Dyson was right, in part because
of the context in which negotiations will take place. This is a
fiscal contract, and negotiations will be done by contractors to
be hired by the LLC that will manage affairs relating to
pipeline construction. What is being directed with respect to
the contract is that those discussions take place, but it will
take place at the contractor level, and those terms will be
worked out then. This gives legislative direction, and there
will be constant communication with the legislature on this
through appropriations and other matters, Mr. Clark asserted,
noting legislators will be asking the administration about this
as the event draws closer. He concluded that mandating it in
this contract is the wrong place to do it.
2:17:34 PM
MR. MARUSHACK reminded members that ConocoPhillips has said it
doesn't know where it will get all the people needed for this
huge project. The company clearly is committed to Alaska hire,
he said, just as it is for its current operations. Offering his
personal belief that union labor will be needed on this project,
Mr. Marushack predicted there also will be PLAs entered into.
He agreed with Senator Dyson, however. If the result must be a
PLA, Mr. Marushack questioned how that is in Alaska's best
interest. No matter what terms a party wanted to put forward,
it would know the project wouldn't proceed unless those terms
were met. Since ConocoPhillips is reasonably good at
negotiating, the company likely would want a PLA that works for
its side as well. Mr. Marushack said he understands the intent
of entering into good-faith negotiations, and he fully expects
PLAs will result. However, mandating a PLA as the end result
could cause completely unnecessary delays.
A roll call vote of 3 yeas and 6 nays proved Amendment 1 to
Amendment 4 to SB 3002 failed, with Senators Olson, Elton and
Hoffman voting yea, and Senators Ben Stevens, Stedman, Bunde,
Dyson, Wilken and Seekins voting nay.
2:20:32 PM
CHAIR SEEKINS returned to the original Amendment 4. In response
to a committee secretary, he opined that Senator Bunde and
Senator Wagoner had objected previously. He noted Senator
Wagoner wasn't present to remove his objection.
SENATOR BUNDE said he was removing his objection.
SENATOR BEN STEVENS announced he would vote no.
A roll call vote of 8 yeas and 1 nay proved Amendment 4 to
SB 3002 passed, with Senators Stedman, Bunde, Olson, Dyson,
Wilken, Elton, Hoffman and Seekins voting yea, and Senator Ben
Stevens voting nay.
2:21:28 PM
CHAIR SEEKINS moved to adopt Amendment 5, which read:
A M E N D M E N T 5
OFFERED IN THE SENATE BY SENATOR RALPH SEEKINS
TO: SB 3002 24-GS2095\G
Sec. 43.82.100. Qualified project.
Based on information available to the commissioner,
the commissioner may determine that a proposal for new
investment is a qualified project under this chapter
if the project
(1) principally involves
(A) the transportation of natural gas by pipeline to
one or more markets, together with any associated
processing or treatment;
(B) the export of liquefied natural gas from the state
to one or more other states or countries; or
(C) any other technology that commercializes the
shipment of natural gas within the state or from the
state to one or more other states or countries;
(2) would produce at least 500,000,000,000 cubic feet
of stranded gas within 20 years from the commencement
of commercial operations; [AND]
(3) is capable, subject to applicable commercial
regulation and technical and economic considerations,
of making gas available to meet the reasonably
foreseeable demand in this state for gas within the
economic proximity of the project; and
(4) no project may be considered a qualified project
under this chapter if the project enters Canada at any
point north of 68 degrees latitude.
SENATOR BUNDE objected for discussion purposes. He related his
understanding that Chair Seekins wanted a friendly amendment to
change "68" to "64".
CHAIR SEEKINS asked whether there was any objection to
Amendment 1 to Amendment 5, changing "68" to "64". He
acknowledged there was no objection.
SENATOR OLSON moved to adopt Amendment 2 to Amendment 5. He
alluded to Section 103(d)(1) of ANGPA, indicating his amendment
would insert the following:
traverses land beneath navigable waters (as defined in
section 2 of the Submerged Lands Act (43 U.S.C. 1301))
beneath, or the adjacent shoreline of, the Beaufort
Sea; and
He read the above language. Noting he represents the people of
the aforementioned area, Senator Olson said they are involved
with marine mammal harvesting - whales in particular - and
aren't interested in seeing development in that area.
CHAIR SEEKINS clarified that Amendment 5, with both the previous
amendment to it and this one, if adopted, would have the
following new language beginning with paragraph (4):
(4) no project may be considered a qualified project
under this chapter if the project enters Canada at any
point north of 64 degrees latitude if: the project
traverses land beneath navigable waters (as defined in
section 2 of the Submerged Lands Act (43 U.S.C. 1301))
beneath, or the adjacent shoreline of, the Beaufort
Sea; and if the project enters Canada at any point
north of 64 degrees latitude.
SENATOR OLSON affirmed that.
SENATOR DYSON said he appreciated the effort, but thought it was
redundant, since he didn't believe any part of the Beaufort Sea
was south of 64 degrees.
CHAIR SEEKINS agreed Senator Dyson was probably correct, noting
it just mirrors the federal language.
SENATOR BUNDE asked if this would impact any offshore
exploration that requires a small feeder pipeline to connect to
the Prudhoe Bay area.
CHAIR SEEKINS opined that it is only if it relates to a
qualified project. He added, "If the project enters."
SENATOR BUNDE raised a concern about what precedent it would set
for objections to other projects.
CHAIR SEEKINS clarified that it isn't the intent to affect any
future feeder lines. It is specifically the qualified project,
which to his belief would begin at the GTP. He asked whether
that was correct and how far backwards it would go.
MS. KING replied that the defined project in the contract and
the qualified project includes the gas transmission lines.
CHAIR SEEKINS asked whether it is anticipated that the gas
transmission lines will be underneath the navigable waters.
MS. KING said it is possible over the course of time that some
exploration could have gas transmission lines coming in.
MR. VAN TUYL added that he'd need to look at the specific
language proposed for addition, but one concern BP might have -
harkening back to an earlier discussion - is the Northstar line.
CHAIR SEEKINS indicated he was trying to resolve this. He noted
it said "and ... Canada at any point" - not "or".
SENATOR BUNDE objected to Amendment 2 to Amendment 5, citing an
abundance of caution.
SENATOR ELTON spoke in favor of it. He said he doesn't know
what the possibility is that this will occur, but if the
restriction just says the entry point into Canada is 68 degrees
or further south, it doesn't preclude a pipeline starting along
the Beaufort Sea and then entering Canada at some point less
than 68 degrees latitude. Acknowledging that may or not be the
case, Senator Elton also recalled concern raised about the
upstream, and whether or not that would preclude feeder lines,
for example. He suggested this is already a problem, given the
federal language.
CHAIR SEEKINS said he wasn't so worried about it paralleling the
Canadian line because there are no roads over there. He
suggested someone trying to build a pipeline would certainly
want a road and access. He further suggested it wouldn't save
that much distance if it had to go down the line and then go
across somewhere north of Dawson City.
SENATOR STEDMAN proposed it might be easier to rely on the
federal language; if that were to be changed, there'd be ample
warning to deal with it. While recognizing the attempt by
Senator Olson, he agreed it seems redundant, since it is already
prohibited by the federal Act.
CHAIR SEEKINS concurred with that possibility, suggesting it
could read: "no project may be considered a qualified project
under this chapter" - with a transition - "for any project that
follows a route that transverses land beneath the navigable
waters" and so forth.
SENATOR OLSON maintained that his amendment was appropriate.
While acknowledging the aforementioned could allay some concerns
at the outset, he highlighted the need for clear support from
the people in that area, and therefore having specific language
clarifying that lands traversing beneath the navigable waters
will be excluded.
CHAIR SEEKINS asked Mr. Van Tuyl whether this is this talking
about the midstream portion of the project.
2:29:46 PM
MR. VAN TUYL replied yes.
CHAIR SEEKINS asked whether it would be clearly defined by
specifying it is the midstream portion of the project.
MR. VAN TUYL expressed concern because of the way the project is
defined in the contract: it includes the main line, the GTP and
the gas transmission pipelines. A portion of the project might
traverse land beneath navigable waters, beneath or adjacent to
the shoreline of the Beaufort Sea. It might already exist, and
it might be the Northstar line, if indeed BP uses that for gas
export. In that case, it would be excluded under this language,
and it would cause a problem. Referring to the federal language
quoted earlier, he noted subsection (d) says "of any pipeline to
transport natural gas from land within the Prudhoe Bay oil and
gas lease area". Mr. Van Tuyl said if this relates to the
pipeline to transport gas away from the Prudhoe Bay oil and gas
lease area, then he believes that context is clearer.
CHAIR SEEKINS asked whether the following would work: "No
project may be considered a qualified project under this chapter
if any pipeline to transport natural gas from land within the
Prudhoe Bay oil and gas lease area may be granted that follows a
route that" - followed by paragraphs (1) and (2).
SENATOR BEN STEVENS alluded to AS 43.82.100, Qualified project,
noting it talks about a qualified project under this chapter.
He indicated this chapter is designed to move gas from the North
Slope to the market outside and inside Alaska. He mentioned
including provisions (1) and (2), suggesting it takes away from
the fact that the pipeline won't traverse the area and enter
Canada. He opined there could potentially be submerged lines in
the future if they don't enter Canada.
SENATOR WILKEN spoke against Amendment 2 to Amendment 5, opining
that subsection (4) as originally proposed satisfies the intent
and the statement of the people of Alaska. He reported having
found out in the last 10 minutes that altering it opens
different avenues that don't need to be pursued at this time.
2:33:23 PM
A roll call vote of 5 yeas and 4 nays proved Amendment 2 to
Amendment 5 to SB 3002 passed, with Senators Olson, Elton,
Hoffman, Ben Stevens and Seekins voting yea, and Senators
Stedman, Bunde, Dyson and Wilken voting nay.
The committee took an at-ease from 2:36:10 PM to 2:40:09 PM.
SENATOR BUNDE moved to reconsider his vote on Amendment 2 to
Amendment 5.
SENATOR ELTON objected in order to wait for the return of the
amendment's sponsor, Senator Olson.
SENATOR BUNDE renewed his motion.
SENATOR OLSON objected, saying the vote had been taken and the
committee should move on.
CHAIR SEEKINS requested a roll call vote on rescinding the
previous action.
A roll call vote of 2 yeas and 7 nays proved the committee
failed to rescind its action in adopting Amendment 2 to
Amendment 5, with Senators Bunde and Wilken voting yea, and
Senators Olson, Elton, Hoffman, Ben Stevens, Stedman, Wagoner
and Seekins voting nay.
CHAIR SEEKINS opined that Amendment 5 as amended would read:
; and
(4) no project may be considered a qualified project
under this chapter if the pipeline to transport
natural gas from land within the Prudhoe Bay oil and
gas lease area follows a route that (1) enters Canada
at any point north of 68 degrees latitude and
traverses land beneath navigable waters (as defined in
section 2 of the Submerged Lands Act (43 U.S.C. 1301))
beneath, or the adjacent shoreline of, the Beaufort
Sea
He said it is only if the pipeline transverses from land within
the Prudhoe Bay oil and gas lease area, and would not now affect
feeder lines or transmission lines. Chair Seekins said this was
the intent of the original amendment. He asked whether everyone
understood the amendment to read that way.
SENATOR OLSON concurred.
CHAIR SEEKINS noted there'd been no objection stated.
The committee took an at-ease from 2:43:54 PM to 2:56:53 PM.
CHAIR SEEKINS began discussion of Amendment 3 to Amendment 5.
He called attention to the federal legislation, pointing out
that it says "north of 68 degrees", whereas the committee had
made it "north of 64 degrees". He noted it should also say
"north latitude" following that.
CHAIR SEEKINS moved to adopt Amendment 3 to Amendment 5, to
insert "north" following "degrees" and before "latitude" in
paragraph (1) as previously adopted.
SENATOR BEN STEVENS, following a procedural discussion, renewed
the motion. There being no objection, it was so ordered.
CHAIR SEEKINS, in response to Senator Dyson, clarified that
Amendment 5 as amended would read:
; and
(4) no project may be considered a qualified project
under this chapter if the pipeline to transport
natural gas from land within the Prudhoe Bay oil and
gas lease area follows a route that (1) enters Canada
at any point north of 64 degrees north latitude and
(2) traverses land beneath navigable waters (as
defined in section 2 of the Submerged Lands Act (43
U.S.C. 1301)) beneath, or the adjacent shoreline of,
the Beaufort Sea
SENATOR DYSON offered his understanding that this relates to
what carries gas from the unit.
CHAIR SEEKINS replied that it is from land within the Prudhoe
Bay oil and gas lease area.
SENATOR DYSON suggested "land" is redundant.
CHAIR SEEKINS said it is from the land within that unit. This
duplicates the federal legislation.
SENATOR WILKEN expressed support for Amendment 5 as amended, but
said it has been made unnecessarily complicated. He spoke in
favor of having the people's voice, since there is another bite
of the apple through the Qualified Project Plan to be published
every year. As it is today, the state would have a 20 percent
voice with respect to the route for the project.
He expressed hope that the people's voice would become the one
that decides, in the future, whether this route takes a
different direction from the highway route. The people could
posit a scenario that keeps this project on the highway, and
unfortunately could also set forth a scenario that makes a
different route the only possibility. If and when it comes to
that juncture, however, Senator Wilken said the people should
decide whether there will be in-state gas or whether the value
will just be taken as the gas is shipped out of Alaska.
SENATOR BUNDE objected to Amendment 5 as amended, emphasizing he
doesn't want to be a party to anything that "clever lawyering"
could construe as opposition to having access to offshore gas.
A roll call vote of 8 yeas and 2 nays proved Amendment 5 as
amended passed, with Senators Olson, Dyson, Wilken, Elton,
Hoffman, Ben Stevens, Stedman and Seekins voting yea, and
Senators Bunde and Wagoner voting nay.
3:04:43 PM
SENATOR WILKEN offered some issues relating to the presentation
of SB 3002 last Friday, 7/28/06. He turned to page 2, line 11,
of Version G. The language surrounding that line read:
(2) allow the fiscal terms applicable to a
qualified sponsor or the members of a qualified
sponsor group, or a related party, 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; and
He noted "related party" is defined on page 11 as follows:
(14) "related party" means an entity,
including a limited liability company or similar
incorporated or unincorporated entity, that
(A) is affiliated with a qualified
sponsor or qualified sponsor group;
(B) owns or operates a qualified
project or any segment of a qualified project;
and
(C) is an intended beneficiary of the
fiscal terms included in a contract developed
under this chapter.
SENATOR WILKEN recalled discussion relating to subparagraphs
(A), (B) and (C). He asked whether everyone was comfortable
with the "related party" inclusion and the definition on
page 11. He requested a response from the administration.
CHAIR SEEKINS asked Mr. Donohue for an example of such an
entity.
MR. DONOHUE replied that the reason for including "related
party" in .010, the purpose section, and several other places in
the chapter is to clarify that some fiscal-stability terms
relate to entities that aren't the qualified sponsors or the
immediate parties to this proposed contract. It clarifies that
project-owner entities such as the mainline LLC are eligible for
the fiscal-stability terms set out in the contract, such as the
payments in lieu of various property tax provisions.
SENATOR WILKEN recalled concern that "related party" could
trickle down to a gas station or refinery, for instance. He
alluded to the definition on page 11, asking whether the
inclusion of "and" [following subparagraph (B)] on line 27
excludes that possibility.
MR. DONOHUE replied yes, in his view. He explained that the
intended beneficiaries of the fiscal terms of the contract are
the LLC entities that will own different segments.
SENATOR WILKEN turned to page 2 of Version G, lines 28-31, which
read:
(2) certain adjustments regarding oil and
gas lease agreements, unit agreements, and other
agreements [ROYALTY] under AS 43.82.220; in this
paragraph, "oil and gas lease agreements" includes
royalty provisions of those agreements; and
He noted this applies to what the commissioner may do. Senator
Wilken recalled that when Pioneer wanted royalty relief, it
negotiated with the commissioner for a deal brought to the
Legislative Budget and Audit Committee for public review. He
asked how this differs from current law, and whether this
language eliminates public review of what amounts to a
unilateral agreement between the commissioner and someone
petitioning for royalty relief under paragraph (2).
3:10:55 PM
MR. DONOHUE replied that this is designed to conform this
subsection to the more extensive changes to AS 43.82.220 in
Sections 7-9 and so forth. Under current law, AS 43.82.220 only
allows the administration to deal with various timing and notice
provisions relating to royalty in kind (RIK) sales or royalty in
value (RIV), meaning the administration could agree to take only
RIV for the first 20 years under the purchase and sale
agreements, or could take RIK or some allocation of both. In
.220 there also are provisions for modification, establishing
and making more certain the RIV methodologies. That particular
subsection isn't addressed in this "conforming amendments bill"
because the state has agreed to take its royalty in kind. Thus
there is no RIV methodology at issue.
He continued with paragraph (2). Mr. Donohue characterized the
language "'oil and gas least agreements' includes royalty
provision" as a drafting loop to clarify that the deletion of
"royalty" doesn't exclude royalty provisions from that. Those
are included in more comprehensive language in Sections 7-9.
SENATOR WILKEN asked: If the sponsor group or part of the
sponsor group petitioned the commissioner for royalty relief
somewhere, in some period of time, could the commissioner be
able to do that, given the negotiations? And where is the
public disclosure of that negotiation and result?
MR. DONOHUE answered as follows: To the extent that the leases
are affected or included in this fiscal contract, the ability of
the lessee to seek separate relief under separate statutes would
be superseded. The remedies for those leases would be within
the fiscal contract, and they would have to seek an amendment.
If there are leases outside of this contract, then the statutory
rights to seek review would remain in place.
CHAIR SEEKINS offered his understanding that none of those
leases would be affected one way or the other.
MR. DONOHUE affirmed that.
3:12:52 PM
SENATOR WILKEN remarked that he would spend more time on that.
He then turned to page 6, Section 11, new language beginning on
line 28 in subsection (c) that read:
However, the commissioner may develop a contract term
that, in the event of a material change in the taxes
enacted after the effective date of the contract,
establishes a procedure for restoring the parties to
substantially the same economic position they had as
of the end of the period described in (b) of this
section immediately before the change.
He alluded to discussion of SB 2004 at the end of the last
special session. Senator Wilken recalled a suggestion that the
commissioner in the above paragraph means the one in place
today, whereas he and others believed the timeline implied it
would be the commissioner at the time when the issue of
equilibrium came before the state for consideration. He asked:
Are we clear that the commissioner on line 28 is the
commissioner at the time of the need for equilibrium?
MR. DONOHUE gave his reading that it could be either. He said
his initial reading is that the commissioner today could be
developing terms relating to this fiscal-balancing test that
would be put in place after the 14-year period.
SENATOR WILKEN suggested the need to revisit this.
SENATOR ELTON asked: If a future commissioner decided to change
what the existing commissioner had done, would that action be
challengeable through the dispute resolution process?
MR. DONOHUE indicated if there was a dispute about whether there
was a material change under subsection (c), it would be in
accordance with subsection (d) on the next page, the result
under the dispute resolution process. Subsection (d) read:
(d) Implementation of a contract provision
authorized in (c) of this section may be made subject
to the dispute resolution procedures of the contract.
SENATOR ELTON made the following point: Whether or not a future
commissioner has the ability to change it, that action by a
future commissioner could be taken through the dispute
resolution process, and may or may not limit the latitude that a
future commissioner has in making such a change.
MR. DONOHUE noted he was thinking through subsection (c). He
said to the extent they are talking about contract terms, it
relates to the fiscal contract everyone is working on now. He
suggested a future change by a commissioner would have to be
implemented by "amendment authorities" in the contract itself.
He opined that subsection (c) is ambiguous on that point and
would benefit from clarification.
SENATOR WILKEN alluded to previous discussion of time periods,
saying he'd been thinking something would trigger it when the
11-year period started, and the commissioner at that time would
deal with the question of equilibrium; he reiterated the need to
revisit this issue. He turned to the retroactivity provisions
on page 12:
RETROACTIVITY. (a) Sections 2 - 14 and 17 - 20 of
this Act are retroactive to January 1, 2004.
(b) Section 1 of this Act is retroactive to
January 1, 2005.
SENATOR WILKEN asked why Section 1, relating to arbitration, is
retroactive to January 1, 2005.
MR. DONOHUE replied that Section 1 of the bill refers to the
scope and application of the revised Uniform Arbitration Act,
adopted and made effective as of January 1, 2005. It wasn't in
effect as of January 1, 2004.
3:18:20 PM
SENATOR WILKEN noted the committee has worked on payments in
lieu of taxes (PILTs) relating to municipalities. Recalling
from the presentations that the PILTs would be essentially equal
to the status quo, he asked if they are equal, since there
appear to be differences, relating to gas and oil transmission
lines and facilities. Senator Wilken indicated he was working
with others, including Mr. Hoffbeck [petroleum property assessor
with the Department of Revenue], on related data. Informing
members that this may or may not lead to amendments, Senator
Wilken suggested the need for further data and work with respect
to balancing the benefits all across Alaska and ensuring that
the PILTs equal the status quo. He added that these concerns
stemmed from Friday's discussion.
CHAIR SEEKINS announced Amendment 2 to SB 3002 would be dealt
with Thursday, 8/3/06; he acknowledged members might have other
amendments as well. He held SB 3001 and SB 3002 over.
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