Legislature(2013 - 2014)BUTROVICH 205

02/19/2014 03:30 PM RESOURCES


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03:30:58 PM Start
03:31:15 PM SB138
06:21:22 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 138 GAS PIPELINE; AGDC; OIL & GAS PROD. TAX TELECONFERENCED
Heard & Held
Consultants - Nikos Tsafos and Janak Mayer
Enalytica
Dept. of Natural Resources
Dept. of Revenue
+ 5:30 pm - Public Testimony on SB 138 TELECONFERENCED
-- Testimony Time Limit 2 Minutes --
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
                                                                                                                                
3:31:15 PM                                                                                                                    
CHAIR  GIESSEL  announced  that   Mr.  Pawlowski  would  continue                                                               
reviewing  the  sectional  analysis  of  SB  138.  She  was  also                                                               
interested in seeing a map of possible pipeline routes.                                                                         
                                                                                                                                
SENATOR DYSON said they are  interested in duplication and wanted                                                               
to know what work had been done.                                                                                                
                                                                                                                                
3:32:48 PM                                                                                                                    
MIKE  PAWLOWSKI,  Deputy   Commissioner,  Department  of  Revenue                                                               
(DOR), said  he would work  with the Gas Pipeline  Project Office                                                               
at the  Department of  Natural Resources (DNR)  to see  what they                                                               
have to  put out and  with the AKLNG  project sponsors to  see if                                                               
anything is upcoming in the studies.                                                                                            
                                                                                                                                
3:33:03 PM                                                                                                                    
SENATOR FRENCH joined the committee.                                                                                            
                                                                                                                                
SENATOR DYSON asked  to include the AGIA and  Denali projects and                                                               
he  wanted to  know of  any gaps  in geotechnical  data and  land                                                               
ownership/access issues.                                                                                                        
                                                                                                                                
CHAIR GIESSEL said she would convey that request to the DNR.                                                                    
                                                                                                                                
3:34:19 PM                                                                                                                    
MR. PAWLOWSKI  said today he intended  to go through some  of the                                                               
tax provisions  a little  bit slower and  call out  some critical                                                               
issues, and  then step  back a look  at the bill  as a  whole and                                                               
take questions from  the committee. He directed  members to slide                                                               
13  of   the  sectional  analysis  presentation   where  the  tax                                                               
provisions start. He actually started in  section 27 of SB 138 on                                                               
page 24, line 7.                                                                                                                
                                                                                                                                
3:35:45 PM                                                                                                                    
SENATOR BISHOP joined the committee.                                                                                            
                                                                                                                                
MR.  PAWLOWSKI  said  when  the   administration  looked  at  the                                                               
challenge  of setting  tax rates  for a  North Slope  natural gas                                                               
project they recognized  the dilemma the state faced  in that the                                                               
legislature and  the administration  had set  a specific  tax for                                                               
gas produced and used in-state  on the North Slope and throughout                                                               
the state  to mirror the  tax rates on  gas produced in  the Cook                                                               
Inlet to  equalize the tax treatment  of tax across the  state as                                                               
long as  it was used in-state  for heat or power.  That provision                                                               
just like  many of the  other tax ceilings  are set to  expire in                                                               
2022.                                                                                                                           
                                                                                                                                
When the administration  engaged in the Heads  Of Agreement (HOA)                                                               
discussions  and looked  forward to  a fixed  gross tax  rate for                                                               
gas,  they  also recognized  that  the  project  was not  in  any                                                               
reasonable  way likely  to  be  in effect  in  2020, because  in-                                                               
service date  went out to  the mid-2020s. Therefore there  was no                                                               
reason to upset anyone planning  around the tax treatment for gas                                                               
in the state  prior to 2022. One example of  that is the Interior                                                               
energy project which  is looking at procuring gas  from the North                                                               
Slope, running it  through the liquefaction project  on the North                                                               
Slope, and  trucking it to Fairbanks.  So, any change in  the tax                                                               
rate would have  affected the price of gas  shipped to consumers.                                                               
So, the legislature made January  1, 2022 the expiration of these                                                               
current ceilings  and the changes to  the gas tax proposed  in SB                                                               
138 are only effective for gas produced after that date.                                                                        
                                                                                                                                
3:37:57 PM                                                                                                                    
Section  27  starting  on  page 24,  line  7,  makes  substantive                                                               
changes on  lines 22-29,  which breaks out  the tax  treatment of                                                               
oil and gas. The tax on oil  produced on or after January 1, 2022                                                               
is 35 percent (in SB 21 last year). The subsequent section 25-                                                                  
29(b) puts  a general levy  on gas of  10.5 percent of  the gross                                                               
value at  the point  of production  of the  taxable gas  (not the                                                               
effective tax rate); offsets could occur.                                                                                       
                                                                                                                                
The  HOA introduced  the concept  that  instead of  paying a  tax                                                               
obligation  with money,  a producer  could pay  it with  gas (the                                                               
state would take a larger share  of the gas being produced). That                                                               
is  the change  made in  section  29 on  page 26,  line 17.  This                                                               
introduces at  the same  time (after January  1, 2022)  an option                                                               
for  a  producer  to  make  an  irrevocable  election  to  pay  a                                                               
production tax in kind - AS  43.55.014(a)(b) on page 26, line 18-                                                               
page 27, line 12. The key is this is the taxable gas.                                                                           
                                                                                                                                
3:40:54 PM                                                                                                                    
MR. PAWLOWSKI  said it  is important  to think of  the gas  as it                                                               
comes  out of  the  ground.  When it's  produced  two events  are                                                               
created  at that  moment: one  is  a royalty  event (the  state's                                                               
right under  the leases) and the  other is a taxable  event - but                                                               
royalty  gas is  not  taxable.  So, the  production  tax of  10.5                                                               
percent is applied on whatever  gas is produced after the royalty                                                               
share has already been deducted.                                                                                                
                                                                                                                                
CHAIR GIESSEL  asked if the tax  in kind set at  10.5 percent and                                                               
the state's  royalty at 12.5  percent - a  total of 23  percent -                                                               
equates to the 20-25 percent ownership.                                                                                         
                                                                                                                                
MR. PAWLOWSKI answered no; what  is different is the 10.5 percent                                                               
tax rate. Assume  royalty is 12.5 percent (actually  it's not; it                                                               
varies  by field),  the  royalty  is about  13  percent for  this                                                               
project (Pt.  Thomson and  Prudhoe Bay  blended). That  means the                                                               
10.5 percent tax rate  is applied to 87 percent of  the gas.  You                                                               
don't take  the 10.5 percent  plus the  13 percent; you  take the                                                               
10.5 percent of  87 percent plus the 13 percent,  and you come up                                                               
with something around 22 percent  (which the royalty study viewed                                                               
as base  cases and reasonable  ranges as crossover point  for the                                                               
state's share  of the  modified status quo  world versus  what it                                                               
would get  through the gross  tax rate). The 10.5  percent number                                                               
was  chosen by  the  administration, because  the state  couldn't                                                               
introduce a bill with  a range in a tax rate. They  had to pick a                                                               
number and picked what they thought was the crossover number.                                                                   
                                                                                                                                
3:43:35 PM                                                                                                                    
SENATOR FRENCH asked why 7-13 percent was the boundaries.                                                                       
                                                                                                                                
MR. PAWLOWSKI answered that that is  roughly what would lead to a                                                               
state  gas share  of 20-25  percent, assuming  a certain  royalty                                                               
rate.  This is  what the  administration  agreed to  in the  HOA,                                                               
which should in  no way be taken as anything  other than that was                                                               
what they were  able to agree on  (the power to levy  a tax being                                                               
reserved for the legislature).                                                                                                  
                                                                                                                                
SENATOR  FRENCH asked  if a  value between  7 and  13 percent  is                                                               
acceptable to the administration.                                                                                               
                                                                                                                                
MR.  PAWLOWSKI said  they  had  agreed in  the  HOA  that a  rate                                                               
between   7  and   13  percent   would  be   acceptable  to   the                                                               
administration  and the  other parties  have also  agreed to  it.                                                               
Deciding ultimately  where it should  be is  a key knob  that the                                                               
legislature  has  a large  role  to  play  in. He  also  reminded                                                               
members  that the  concept  in the  HOA is  that  the state  will                                                               
invest in the infrastructure at  a commensurate share of what its                                                               
state gas share is. So a 13  percent tax rate gets a larger share                                                               
of the infrastructure  in the near term and in  the medium term a                                                               
larger share  of the  costs. It's the  balancing act  they looked                                                               
at.                                                                                                                             
                                                                                                                                
SENATOR FRENCH remarked the more you buy the more you pay for.                                                                  
                                                                                                                                
MR. PAWLOWSKI said that was correct.                                                                                            
                                                                                                                                
3:45:33 PM                                                                                                                    
SENATOR  BISHOP  said  the  money  in  this  project  is  in  the                                                               
midstream, so consequently  one would want a bigger  share of the                                                               
project.                                                                                                                        
                                                                                                                                
MR. PAWLOWSKI  responded that when  they look at the  numbers and                                                               
ran multiple cases and the  consultants are absolutely right in a                                                               
large range of  the cases: an ownership in  the infrastructure is                                                               
really where  the value is.  And there are  a lot of  other cases                                                               
where the cash flow from the  sale of the LNG provides meaningful                                                               
revenues,  as   well.  Looking  between  those   cases  is  where                                                               
opportunity can  be seen that  large scale gas sales  provide the                                                               
state from a  revenue perspective. In looking at  the upper limit                                                               
on what  the state's share  could be there  was a lot  of concern                                                               
for the  scale of  investment and commitment  the state  would be                                                               
making.                                                                                                                         
                                                                                                                                
3:47:41 PM                                                                                                                    
MR. PAWLOWSKI  said page 14 of  the HOA, 8.22, is  where that tax                                                               
as gas  provision 7-13  percent is  set. He said  one of  the key                                                               
points  of  this tax-as-gas  provision  is  the phrasing  of  the                                                               
payment in kind of tax for gas on  page 26, line 18, and it could                                                               
be closer aligned with the concept of  tax as gas in the HOA. But                                                               
why would  the Department  of Revenue (DOR)  allow a  producer to                                                               
make an irrevocable election for the payment of the tax as gas?                                                                 
                                                                                                                                
One  of the  things they  looked long  and hard  at was  that the                                                               
irrevocable nature  of the election  provides stability  for both                                                               
the state and the producers.  Just as the producers are concerned                                                               
about the  ability of the state  to switch in the  royalty shares                                                               
back and  forth from in  value or in  kind the DOR  was concerned                                                               
about  the  ability of  a  producer  to  do  that to  the  state.                                                               
Remember the concept  is that the state's gas  would be committed                                                               
through  long term  contracts to  the  marketplace through  Asian                                                               
buyers. The  concern was that  if the state made  commitments for                                                               
delivery of gas  through the LNG plant to the  market as LNG, and                                                               
a producer had the opportunity to  decide they didn't want to pay                                                               
their taxes  with gas anymore  the state would find  itself short                                                               
of molecules to  meet those contracts. That is why  they view the                                                               
irrevocable nature  of this commitment  being done  initially and                                                               
needs to be irrevocable to provide stability for the state.                                                                     
                                                                                                                                
3:50:39 PM                                                                                                                    
SENATOR FAIRCLOUGH  asked on page  26 to clarify  the irrevocable                                                               
election in section 43.55.014 is  for a defined piece of molecule                                                               
and not for all molecules.                                                                                                      
                                                                                                                                
MR.  PAWLOWSKI  said  that was  an  important  clarification.  As                                                               
members will  see on page 26,  beginning on line 19,  the payment                                                               
is  from oil  and gas  leases that  have been  modified under  AS                                                               
38.05.180(H)(h), the key being that  the DOR recognized the state                                                               
does not  have the relationship at  the civil level that  the DNR                                                               
does  in  the  lessee/lessor  relationship  where  they  have  an                                                               
ability to  work with the lessee  to manage, in oil,  the barrels                                                               
and,  in gas,  the molecules.  What  concerned the  DNR was  they                                                               
needed the  nexus of the  state's engagement on  those particular                                                               
leases  to  allow  this  opportunity.   So,  in  order  for  this                                                               
opportunity to even become available,  it has to be on production                                                               
from the  specific leases that  DNR has modified in  the previous                                                               
section  to commit  to this  project. So,  they are  very careful                                                               
about  when   this  possibility  is  available,   and  it's  only                                                               
available  in the  specific molecules  produced from  leases that                                                               
DNR  has  actively been  engaged  in  the  management of  in  the                                                               
state's interest.                                                                                                               
                                                                                                                                
SENATOR FAIRCLOUGH said  what that might mean  in more simplistic                                                               
terms is  that DNR will  decide which molecules may  be committed                                                               
and they may  be committed but the producers still  would have an                                                               
opportunity to  pay in cash  for other molecules that  they might                                                               
produce somewhere else.                                                                                                         
                                                                                                                                
MR. PAWLOWSKI said that was exactly correct.                                                                                    
                                                                                                                                
3:53:03 PM                                                                                                                    
SENATOR FRENCH asked  what the ability to switch  between in kind                                                               
and in value  on the oil side  and now on the gas  side is worth;                                                               
he understood the rationale.                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  couldn't answer  that because  it was  outside his                                                               
realm of his expertise.                                                                                                         
                                                                                                                                
SENATOR FRENCH asked  if there was any thought given  to making a                                                               
10-year  reopener. In  the  past they  have  had second  thoughts                                                               
about  bills they  passed and  things  they do  where they  later                                                               
wished they  had given themselves a  little more leeway -  just a                                                               
year  to  two  after  -   for  example,  treble  damages  on  the                                                               
TransCanada line  and the $500 million  constriction. They should                                                               
pause over the word "irrevocable" and ponder how long that is.                                                                  
                                                                                                                                
MR.  PAWLOWSKI  said when  DOR  paused  over "irrevocable,"  they                                                               
asked  themselves how  to provide  the maximum  stability to  the                                                               
state. This  is an election offered  to a producer and  the state                                                               
wants  the maximum  ability  to protect  its  interests, in  this                                                               
case, which in  the DOR may be different than  the DNR, which has                                                               
a  constant relationship  with  the  lessee. They  put  a lot  of                                                               
thought into making  sure that the provisions do  not apply until                                                               
after  January 1,  2022,  and if  anything,  that telegraphs  the                                                               
preliminary  nature  of  a  lot of  these  discussions.  The  HOA                                                               
describes the  work on these  future questions of  durability and                                                               
how to implement consistency in the  long term. So, the idea that                                                               
this exact provision  is forever locked and  unchangeable at this                                                               
stage is not  what is being put  on the table. This  is an option                                                               
that is  structured to  provide stability to  the state  that the                                                               
legislature will  have an opportunity  to revisit as  the project                                                               
continues along.                                                                                                                
                                                                                                                                
3:56:36 PM                                                                                                                    
SENATOR FAIRCLOUGH wanted  to confirm that line  20(e) said "may"                                                               
giving the  state the  flexibility to have  as much  knowledge as                                                               
possible at a particular point  in time before entering into that                                                               
type of agreement.                                                                                                              
                                                                                                                                
MR. PAWLOWSKI answered that the  "may" is required because of the                                                               
subjectivity  of whether  the  leases are  modified  or not.  The                                                               
"may" doesn't modify  the irrevocable election in a  way that she                                                               
was concerned.                                                                                                                  
                                                                                                                                
SENATOR FAIRCLOUGH said the department  "may" allow a producer to                                                               
do that. Is that correct?                                                                                                       
                                                                                                                                
MR. PAWLOWSKI said that was correct.                                                                                            
                                                                                                                                
SENATOR  FAIRCLOUGH   said  a   producer  could   have  different                                                               
molecules  moving  from  different  projects  and  asked  if  the                                                               
department "may" choose to allow that to  be in kind or not if it                                                               
benefits the state.                                                                                                             
                                                                                                                                
3:58:11 PM                                                                                                                    
MR. PAWLOWSKI  answered that  the state would  have an  option to                                                               
not modify  leases and, therefore,  they would get paid  in cash,                                                               
the traditional way taxes are paid.                                                                                             
                                                                                                                                
SENATOR FAIRCLOUGH  asked if  the administration  considered that                                                               
the  irrevocable  election is  made  on  a particular  number  of                                                               
molecules that  move. She was  wondering if one reason  the state                                                               
wants it to be irrevocable is  if you are entering into a 20-year                                                               
contract  the  person  who  is   receiving  the  gas  also  wants                                                               
stability  in the  price they  are  paying and  builds that  into                                                               
their contracts. Would the state  negotiate that particular lease                                                               
so  it could  be modified  in another  number of  years based  on                                                               
matching market  conditions or something different?  Could a time                                                               
period  or  a  volume  production  be  part  of  the  irrevocable                                                               
conversation?                                                                                                                   
                                                                                                                                
MR. PAWLOWSKI said  yes, that is part of  the ultimate discussion                                                               
the administration  is asking for  the ability to enter  into. He                                                               
mused that  no one can  predict which of  the two fields  will be                                                               
produced first  - Prudhoe Bay or  Pt. Thomson - how  much, how it                                                               
will  blend.  That  is  part   of  what  the  HOA  balances.  The                                                               
agreements  between  the state  and  producers  whose leases  are                                                               
being modified  to enable  this will have  to encapsulate  all of                                                               
those very  complicated issues before  those contracts  come back                                                               
to the legislature for consideration.                                                                                           
                                                                                                                                
4:00:19 PM                                                                                                                    
SENATOR MICCICHE  added that the  irrevocable elections  can vary                                                               
in duration and quantity dramatically.                                                                                          
                                                                                                                                
MR. PAWLOWSKI responded  that they had caveated  this with "under                                                               
regulations adopted by the department"  to protect the state. The                                                               
word "irrevocable" describes  a very high standard  that was used                                                               
for the state's stability.                                                                                                      
                                                                                                                                
SENATOR FRENCH  said he appreciated  the amount of  dialogue they                                                               
are having on  these issues, because for the  30-50 year duration                                                               
of this pipeline  the state's gas will be royalty  gas and gas as                                                               
tax.                                                                                                                            
                                                                                                                                
MR. PAWLOWSKI  disagreed saying  the concept of  tax as  gas goes                                                               
back  to specific  leases.  If the  gas in  Prudhoe  Bay and  Pt.                                                               
Thomson is exhausted,  the concept of state gas  filling the pipe                                                               
would depend  on whether it's  from state lands and  is available                                                               
for this  type of  election. There  may be  other gas  that comes                                                               
into  the project  to fill  that  capacity. Prudhoe  Bay and  Pt.                                                               
Thomson  will  fill  up  a   majority  of  the  project  for  the                                                               
foreseeable future, but the election  here and taking in kind and                                                               
value really comes back to  how many reserves there actually are.                                                               
It's well in excess of 20 years.                                                                                                
                                                                                                                                
4:03:06 PM                                                                                                                    
He said  the third bullet  recognizes language from the  HOA that                                                               
this election  like RIK  is subject to  the execution  of project                                                               
enabling  contracts   including  satisfactory   arrangements  for                                                               
disposition of the state's gas  share of LNG. That telegraphs the                                                               
administration's  recognition that  the full  commitment to  this                                                               
concept depends  on working out more  details before finalization                                                               
to guarantee how the state is going to get gas that is produced.                                                                
                                                                                                                                
Slide 14  reiterates to the  public that the  levy on the  tax as                                                               
gas   is  10.5   percent  of   the  taxable   gas  produced   (AS                                                               
43.55.014(b). As  the production happens then  the tax obligation                                                               
is created.                                                                                                                     
                                                                                                                                
4:04:30 PM                                                                                                                    
A couple of  other points are dealt with in  AS 43.55.014(b) that                                                               
are important  to attend to;  on page  27, lines 2-7,  talk about                                                               
what  happens if  there is  a deficiency  on the  tax as  gas. It                                                               
can't be made up in terms  of additional molecules if there isn't                                                               
the ability to  sell them. So, the department  said in subsection                                                               
(d) if  there is somehow a  fax deficiency the penalties  will be                                                               
calculated as if it were in value.                                                                                              
                                                                                                                                
4:05:28 PM                                                                                                                    
The filings will be on an annual  basis just as they are with the                                                               
regular production  tax and  section 25 on  page 23,  lines 12-16                                                               
says: in tax law  a person is the taxpayer and  the amount of gas                                                               
produced  subject to  the  gas  as tax  election  will be  public                                                               
information.                                                                                                                    
                                                                                                                                
SENATOR FAIRCLOUGH  asked for  clarity on  tax deficiency  in the                                                               
calculation (AS 43.55.011(e)) and if  that would calculated on an                                                               
annual basis.                                                                                                                   
                                                                                                                                
MR. PAWLOWSKI deferred to the online auditor.                                                                                   
                                                                                                                                
4:08:04 PM                                                                                                                    
LENNY DEES,  Audit Master, Department  of Revenue  (DOR), Juneau,                                                               
Alaska, explained  that although the  production tax is  a yearly                                                               
tax, there  is a  requirement for  monthly installments.  So, the                                                               
deficiency would be determined on a  monthly basis. If it were to                                                               
be handled  the same way  deficiencies are handled now,  that gas                                                               
would be valued  at the prevailing value of  like-kind product in                                                               
the  month that  deficiency occurred  and the  interest would  be                                                               
based on  from the point  of the  deficiency until the  point the                                                               
payment is made.                                                                                                                
                                                                                                                                
SENATOR FAIRCLOUGH said that sounds  like it is in regulation and                                                               
maybe it should be inserted for clarity.                                                                                        
                                                                                                                                
4:10:23 PM                                                                                                                    
SUSAN  POLLARD, Assistant  Attorney  General,  Department of  Law                                                               
(DOL),  Juneau, Alaska,  said her  answer was  probably partially                                                               
already in statute,  because the monthly gross value  at point of                                                               
production already  has to be  done. So, they made  amendments to                                                               
the bill  on page 34, line  26, where it says  10.5 percent gross                                                               
value  at the  point of  production for  the gas  that is  levied                                                               
under AS  43.55.011(a)(3). Mr. Dees  might want to point  out how                                                               
the regulations for prevailing value works.                                                                                     
                                                                                                                                
MR. PAWLOWSKI said the reference on  page 34 is to a section that                                                               
begins on page 28, lines 9-10,  which describes how tax gets paid                                                               
in a  calendar year  and that  is the  amendment for  the monthly                                                               
description of value.                                                                                                           
                                                                                                                                
4:12:03 PM                                                                                                                    
MR. PAWLOWSKI  said the other  provisions that are  important for                                                               
development of this tax as gas  provision are how the state takes                                                               
delivery of the tax  as gas, and that is found  on page 26, lines                                                               
27-29. Rather than  10.5 percent of the value,  it's 10.5 percent                                                               
of the taxable  gas produced, but that is delivered  to the state                                                               
at the entrance  of the transportation facility  specified by the                                                               
state.  The intent  behind that  language  was to  be very  clear                                                               
about  where the  point of  production is,  because of  how lease                                                               
expenditures  work  upstream  or  downstream from  the  point  of                                                               
production. He recommended that  the subjectivity of the facility                                                               
specified by the state may want  to be revised to be specifically                                                               
"at  the point  of  production." He  explained  that in  drafting                                                               
this, they  looked at all  of the ways  to protect the  state and                                                               
thought that  that level of  flexibility may  cut both ways  in a                                                               
way that doesn't  derive the necessary clarity and  the intent is                                                               
that the state designate the  point of production and that should                                                               
be specified.                                                                                                                   
                                                                                                                                
4:15:01 PM                                                                                                                    
He  explained  that  the state  would  receive  molecules;  those                                                               
molecules will be managed under  previous sections of the bill as                                                               
the DNR in the normal course  of its business is managing the RIK                                                               
gas;  the DOR  doesn't have  the  expertise or  people to  manage                                                               
those molecules and DNR does.  The bill contemplates that the DOR                                                               
would essentially piggyback  on the expertise of the  DNR and the                                                               
tax molecules would be managed  just as the royalty molecules are                                                               
with the  same rules  about how they  are valued,  handled, sold,                                                               
but that  the DOR  commissioner would  direct the  disposition of                                                               
revenues from the  tax as gas. DNR puts portions  of royalty into                                                               
the Permanent  Fund and tax is  directed to the General  Fund, he                                                               
explained.                                                                                                                      
                                                                                                                                
The state created  a fixed tax rate of 10.5  percent of the gross                                                               
value  on all  gas post-January  1,  2022. For  certain gas  from                                                               
specific leases  that the DNR  has modified, the election  to pay                                                               
tax with molecules (instead of  with revenues) will be an option.                                                               
After that  there is still the  dilemma of what to  do with lease                                                               
expenditures,  because  now  lease  expenditures  are  deductible                                                               
against the  company's production tax  value. He went  to section                                                               
42 on page 43, line 13,  that treats how lease expenditures would                                                               
be deducted. For  oil produced on and after January  1, 2022 this                                                               
is how  the production tax  value is calculated and  basically it                                                               
says that  gas produced  doesn't go into  the calculation  of the                                                               
production  tax value,  because the  tax is  being levied  on the                                                               
gross value.  While this looks  like a conforming change,  one of                                                               
the effects it has is when  a company is making an expenditure on                                                               
the North  Slope to  develop oil  or gas  the facilities  are co-                                                               
mingled.                                                                                                                        
                                                                                                                                
He explained  that the  wells are  producing oil  and gas  on the                                                               
North Slope and the department has  made a policy call not to try                                                               
and distinguish  and count the  expenditures separately.  So, the                                                               
lease  expenditures would  be deductible  against the  production                                                               
tax value  on oil and  a separate payment  on gas would  be made.                                                               
This is  not immediately recognizable  to people, but  the effect                                                               
is  that   lease  expenditures   can  be  deducted   against  the                                                               
production tax value on oil if and when gas is produced.                                                                        
                                                                                                                                
4:19:59 PM                                                                                                                    
MR. PAWLOWSKI said  the impact that has takes them  to section 39                                                               
on page 41, line 21.  When lease expenditures are deductible, the                                                               
state  has an  implicit  support for  whatever  that spending  is                                                               
based  on  what the  tax  rate  is  and  35 percent  provides  an                                                               
incentive   for  reinvesting   in  the   state  when   the  lease                                                               
expenditures happen.  The lease expenditures in  section 39 allow                                                               
the expenditures  of - say  - a  gas-only producer to  generate a                                                               
loss carry forward  credit - providing the same  benefit for that                                                               
producer who  may not have  other expenditures. Everyone  has the                                                               
same benefit and that includes a new gas producer.                                                                              
                                                                                                                                
4:20:36 PM                                                                                                                    
Section 26, on  page 23, line 17, is  another substantive section                                                               
that amends  the state's  corporate income  statutes. Now  when a                                                               
producer  pays  production  tax,  they have  still  produced  the                                                               
resource.  This  section  insures   that  the  business  activity                                                               
happening in Alaska - that  creation of production - whether it's                                                               
paid to  the state in molecules  or not is still  counted as part                                                               
of a company's  business activity in the state.  That matters for                                                               
the calculation  of corporate income  tax. So, they  are ensuring                                                               
that  the  payment of  molecules  is  counted in  the  extraction                                                               
factor for the purposes of  calculating the corporate income tax.                                                               
If  this were  not done,  it  would reduce  the corporate  income                                                               
taxes to the state.                                                                                                             
                                                                                                                                
4:22:26 PM                                                                                                                    
MR.  PAWLOWSKI said  the last  substantive provision  in the  tax                                                               
sections is in  section 45 on page 47, beginning  on line 28, the                                                               
definition  of "point  of production."  Earlier he  explained the                                                               
deduction   of  lease   expenditures  as   a  deduction   in  the                                                               
calculation  of a  production tax  value, and  lease expenditures                                                               
are  those upstream  of the  point of  production. So,  where the                                                               
point  of production  is  fixed  is very  important  for what  is                                                               
available to be deducted in the lease expenditures.                                                                             
                                                                                                                                
He explained  that previous  statute was not  as specific  as the                                                               
department thought was important  for this particular project and                                                               
in general when it came to gas  (because the state has not had to                                                               
deal with large-scale  gas before). This section  (page 48, lines                                                               
9-13) sets the point of  production "the furthest upstream of the                                                               
inlet of  any pipeline  transporting the gas  to a  gas treatment                                                               
plant or  the inlet of  any gas pipeline system  transporting gas                                                               
to a  market." According to the  HOA and the MOU,  that means the                                                               
inlet to  the Pt. Thomson transmission  line or the inlet  of the                                                               
transmission line from Prudhoe Bay  to the GTP. He explained that                                                               
presentations   by   the   AKLNG  project   indicate   that   the                                                               
transmission line from Prudhoe Bay  to the GTP may actually still                                                               
be within  the Prudhoe Bay  unit and this ensures  those millions                                                               
of dollars  in expenditures  are not  lease expenditures  and are                                                               
not  deductible.  That  capital  will be  recovered  through  the                                                               
tariffs, not through the deductions in the lease expenditures.                                                                  
                                                                                                                                
SENATOR FRENCH asked what section in the HOA buttresses that.                                                                   
                                                                                                                                
MR.  PAWLOWSKI  directed  him  to  page  5,  number  1.4  in  the                                                               
definition  of  the AKLNG  project.  It  means collectively:  the                                                               
project  components consisting  of the  LNG plant,  gas pipeline,                                                               
gas   treatment  plant,   the   PBU  (Prudhoe   Bay  Unit),   gas                                                               
transmission  line and  the PTU  (Pt. Thomson  Unit) transmission                                                               
line.                                                                                                                           
                                                                                                                                
SENATOR FRENCH remarked that there is  maybe a half billion or so                                                               
riding on that  transmission line and he wants to  make sure it's                                                               
as clear as can be.                                                                                                             
                                                                                                                                
4:25:42 PM                                                                                                                    
SENATOR MCGUIRE joined the committee.                                                                                           
                                                                                                                                
SENATOR MICCICHE clarified that he  was saying if the Pt. Thomson                                                               
pipeline  was completed  several years  before this  project even                                                               
kicks off  that those expenses could  be included as the  cost of                                                               
the project.                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI responded that in  designing the general law on the                                                               
point of  production, they  have made  it very  clear that  a Pt.                                                               
Thomson  pipeline whether  it goes  to  this project  or is  just                                                               
built on its  own is downstream from the point  of production, so                                                               
it would not be included in the lease expenditure.                                                                              
                                                                                                                                
4:27:06 PM                                                                                                                    
SENATOR DYSON  asked if the  Pt. Thomson gas gets  treated before                                                               
it  is  sent west  and  would  not  go  through the  central  gas                                                               
treatment plant.                                                                                                                
                                                                                                                                
MR. PAWLOWSKI answered  the exact mechanics of what  goes on with                                                               
the Pt. Thomson  gas was outside of his expertise  to answer. But                                                               
language  on  page  48,  lines  9-25,  set  even  more  stringent                                                               
examples of what  it has to be upstream of:  there's the inlet of                                                               
any  pipeline transporting  the gas  to the  GTP or  any pipeline                                                               
system transporting  gas to market  or the inlet of  the furthest                                                               
upstream of  the first  point where the  gas is  actually metered                                                               
downstream of.  They are trying to  fix a very specific  point of                                                               
production that  is as  far upstream as  possible in  the concept                                                               
around the projects.                                                                                                            
                                                                                                                                
SENATOR DYSON asked  him to repeat what he said  about where that                                                               
point is on the Pt. Thomson pipeline.                                                                                           
                                                                                                                                
MR. PAWLOWSKI said  it's the inlet of the point  where the gas is                                                               
leaving the  unit and going  to the  treatment plant. But  he was                                                               
not knowledgeable about what level,  if any treating, would go on                                                               
a Pt. Thomson.                                                                                                                  
                                                                                                                                
4:29:02 PM                                                                                                                    
SENATOR BISHOP wanted that question answered by an expert.                                                                      
                                                                                                                                
CHAIR GIESSEL  noted that Commissioner  Balash would  answer that                                                               
at a future meeting.                                                                                                            
                                                                                                                                
4:31:32 PM                                                                                                                    
MR. PAWLOWSKI  said those were  the broad substantive  changes in                                                               
the tax sections of the bill  and there are conforming changes. -                                                               
-Section 27 establishes the gross  tax rate on gas produced after                                                               
January 1, 2022,                                                                                                                
-Section 29 allows  the ability of certain gas tax  to be paid in                                                               
molecules for the  state to get a larger share  of gas as opposed                                                               
to tax payments,                                                                                                                
-Section  42,  which  provides   for  the  calculation  of  lease                                                               
expenditures,                                                                                                                   
-Section 39, which  allows for the creation of  the carry forward                                                               
loss credit,                                                                                                                    
-Section  26, which  is that  clarification  about the  corporate                                                               
income tax treatment of gas paid in molecules, and                                                                              
-Section 45 around the point of production                                                                                      
                                                                                                                                
It's  also important  to  note  a couple  of  things that  aren't                                                               
happening  in SB  138,  Mr. Pawlowski  said.  They talked  before                                                               
about the  AGDC's core missions  (1-3) in AS 31.25.005  and those                                                               
are not amended. The oil  and gas exploration production pipeline                                                               
transportation property  taxes in  AS 43.56  are not  modified in                                                               
this  bill  either.  The  HOA  has a  broad  description  of  the                                                               
administration's  intent  subject   to  consultation  with  local                                                               
governments, to begin  working on the property  tax issues around                                                               
this project  but the power to  set tax rates is  the province of                                                               
the  legislature. The  administration  contemplates working  with                                                               
local governments  in the  HOA to  bring back  conceptual changes                                                               
that the  legislature will  consider in the  future. It  would be                                                               
done as a consensus work  with local governments. Nothing in this                                                               
bill changes the current state of  property taxes in the State of                                                               
Alaska;  it does  not change  the disposition  of royalty  or tax                                                               
revenues and  where they go. It  makes no changes to  deposits to                                                               
the Permanent  Fund and with  royalty revenues it leaves  all the                                                               
underlying architecture  about how  revenues are  distributed the                                                               
same.  It  doesn't   change  the  oil  and   gas  production  tax                                                               
limitations.                                                                                                                    
                                                                                                                                
4:33:22 PM                                                                                                                    
SENATOR  FRENCH asked  if  the  changes to  the  tax starting  in                                                               
section 27 affect the legal status  of the repeal effort of SB 21                                                               
effort.                                                                                                                         
                                                                                                                                
MR. PAWLOWSKI  said he would ask  the Department of Law  (DOL) to                                                               
answer that.                                                                                                                    
                                                                                                                                
4:33:57 PM                                                                                                                    
MS. POLLARD said the department  was not prepared to address that                                                               
broader question today,  but they had reviewed this  bill and did                                                               
not see anything in Alaska  law that would prohibit bringing this                                                               
bill forward now.                                                                                                               
                                                                                                                                
SENATOR FRENCH  asked if this bill  would knock the repeal  of SB                                                               
21 effort out.                                                                                                                  
                                                                                                                                
MS. POLLARD repeated that the  department was not ready to answer                                                               
that broader question today.                                                                                                    
                                                                                                                                
4:36:45 PM                                                                                                                    
SENATOR FRENCH  asked how  much the  state paid  for work  on the                                                               
AGIA project that will be obsolete if this bill goes forward.                                                                   
                                                                                                                                
MR.  PAWLOWSKI said  the  full AGIA  report  with the  geographic                                                               
breakdown had  been emailed to  members and they  were continuing                                                               
to work on the map format that Senator Dyson had requested.                                                                     
                                                                                                                                
SENATOR  FAIRCLOUGH said  she thought  TransCanada said  probably                                                               
30-50  percent of  the  material they  collected  would still  be                                                               
relevant to this new project.                                                                                                   
                                                                                                                                
CHAIR  GIESSEL  said  she  had   posed  Senator  Dyson's  earlier                                                               
question about  the data collected  for the stand  alone pipeline                                                               
and Denali pipeline.                                                                                                            
                                                                                                                                
SENATOR FRENCH  asked if  the legislature  decides to  go forward                                                               
with SB 138 and  gets to FID and decides not  to go forward, what                                                               
the state would owe TransCanada.                                                                                                
                                                                                                                                
MR. PAWLOWSKI answered  that was presented in  a previous hearing                                                               
and it  was in the $360-390  million range at FID  and it depends                                                               
also on who  terminates. TransCanada might terminate  in a number                                                               
of situations. There  are off ramps well ahead of  FID, but until                                                               
you go through the pre-FEED stage those are broad estimates.                                                                    
                                                                                                                                
4:40:55 PM                                                                                                                    
SENATOR  MICCICHE asked  how  much  it would  cost  if the  state                                                               
terminates the agreement before FID;  that number might not exist                                                               
at all.                                                                                                                         
                                                                                                                                
MR.  PAWLOWSKI said  the range  of the  number depends  a lot  of                                                               
whether or  not the  state has exercised  the equity  option with                                                               
TransCanada  to  re-assume  40  percent   of  the  costs  of  the                                                               
midstream.                                                                                                                      
                                                                                                                                
The  development cost  concept is  the underlying  agreement with                                                               
TransCanada that  they will  spend money on  behalf of  the state                                                               
and if they  terminate and walk away, the state  will not pay any                                                               
interest on  that money. So,  it's like  a zero interest  loan if                                                               
they walk  away. If  the state  terminates the  relationship with                                                               
TransCanada, which  can be done  for multiple reasons,  the state                                                               
would pay  the AFUDC, which is  significantly below TransCanada's                                                               
return on equity  in general. That is the business  trade off the                                                               
state made  in the MOU and  should be separated from  the state's                                                               
dollars  at risk,  because regardless  of  the relationship  with                                                               
TransCanada, the state is contemplating  a 20-25 percent share of                                                               
this project.                                                                                                                   
                                                                                                                                
4:42:57 PM                                                                                                                    
SENATOR  FRENCH asked  where in  the big  line process  they stop                                                               
working on the bullet line.                                                                                                     
                                                                                                                                
MR. PAWLOWSKI  said that  decision would  be made  at the  end of                                                               
pre-FEED around 2016. Look at HOA  on page 3, subsection (i) that                                                               
talks about  the relationship between  the AKLNG project  and the                                                               
ASAP project  during the pre-FEED phase.  Another important point                                                               
was in the  HOA on page 12, Article 6.5,  about the relationship.                                                               
Thinking about the  work the ASAP project is doing  over the next                                                               
year; they  are going  to hold  an open season.  The idea  is the                                                               
AKLNG  will be  pushing towards  the FEED  decision in  the later                                                               
part  of 2015,  so  there  is a  nice  synergy  between the  two.                                                               
Article 6.5 recognizes  that the off take points will  be done as                                                               
determined  by  the  administration in  consultation  with  AGDC,                                                               
which   will  have   gone  through   the  process   of  gathering                                                               
information, and bids about demand  for gas in-state. At FEED the                                                               
decision  to   maintain  both   projects  will   be  up   to  the                                                               
legislature, and that is seen as natural.                                                                                       
                                                                                                                                
4:45:53 PM                                                                                                                    
CHAIR  GIESSEL asked  why  they  chose the  approach  of an  AGDC                                                               
subsidiary, because  it seems so  complex in  that AGDC is  not a                                                               
state  entity, has  a  separate  board, and  they  are not  state                                                               
employees. Yet, under  them, they are creating  a subsidiary that                                                               
is a state entity and consists of state employees.                                                                              
                                                                                                                                
MR. PAWLOWSKI  said they were trying  to build on the  concept of                                                               
the Alaska  Industrial Development  and Export  Authority (AIDEA)                                                               
and the Alaska Energy Authority  (AEA), which are co-located with                                                               
each other. The  intent of the administration is  to preserve the                                                               
ace  in the  hole: keep  that ASAP  project with  momentum moving                                                               
forward at  the same  time they are  pursuing this  AKLNG option.                                                               
The  bright lines  in the  division between  the accounts  of the                                                               
subsidiary and  the parent corporation  were done  recognizing at                                                               
this stage those  are two horses. But what happens  in the future                                                               
is an open question.                                                                                                            
                                                                                                                                
SENATOR MCGUIRE asked if there was another way to do it.                                                                        
                                                                                                                                
MR.  PAWLOWSKI said  potentially;  at this  stage  part of  their                                                               
initial concern  is nexus  to the  state in that  there is  a big                                                               
difference  between the  projects as  they are  now contemplated.                                                               
One is a  large scale energy export project and  one is primarily                                                               
geared  for in-state  use. They  explore  continually for  better                                                               
ways to maximize the efficiency and are still wrestling with it.                                                                
                                                                                                                                
SENATOR   MCGUIRE  wanted   to  hear   more  conversation   about                                                               
preserving our ace in the hole.                                                                                                 
                                                                                                                                
4:52:53 PM                                                                                                                    
MR. PAWLOWSKI replied the work AGDC  is doing on the Alaska Stand                                                               
Alone  Project (ASAP)  is critical  in continuing  progression of                                                               
options  available  for  Alaskans  no matter  what.  One  of  the                                                               
benefits TransCanada  brings to this  project is it's  working on                                                               
the pipe just as  AGDC is working on the pipe  aspect of the ASAP                                                               
project.  At the  same  time  the state  doesn't  have an  agency                                                               
working  on  the  liquefaction   side;  just  as  TransCanada  is                                                               
valuable in  the momentum,  trying to stand  up and  entirely new                                                               
corporation to  stand in the  state's shoes in  that liquefaction                                                               
plant for  four or five  months. We're on an  aggressive timeline                                                               
and AGDC has the  expertise and a lot of the  power, and they saw                                                               
it  as expanding  their powers  and mission  while providing  the                                                               
degree  of insulation  to  protect  ASAP. "It  is  all about  the                                                               
momentum," he said,  and having people in place  to execute these                                                               
agreements and get  the projects going forward  on those parallel                                                               
paths for the near term as fast as possible.                                                                                    
                                                                                                                                
SENATOR  MCGUIRE  asked what  would  be  involved in  creating  a                                                               
subsidiary that was not derived  from AGDC statutes, but involved                                                               
the AGDC board chairman.                                                                                                        
                                                                                                                                
4:55:44 PM                                                                                                                    
MR. PAWLOWSKI answered  it was fairly close to what  is in SB 138                                                               
now on page 7, line 7.                                                                                                          
                                                                                                                                
SENATOR  MCGUIRE said  one fear  is  potential cross  pollination                                                               
between missions and she might  want to keep AGDC completely pure                                                               
and asked what she would lose by doing that.                                                                                    
                                                                                                                                
MR. PAWLOWSKI  said that  was a difficult  question and  when you                                                               
start to reinvent  wheels you start to lose  things. She probably                                                               
recognized that  AGDC isn't  just about  the ASAP  project. Their                                                               
mission on  page 3 gets some  of the language from  HB 4, because                                                               
they are amending it by  expanding AGDC's powers. Subsections (2)                                                               
and (3)  are broader missions to  get gas to Alaskans.  It's long                                                               
term  strategically in  the interest  of the  state to  have that                                                               
sort of combination of effort so  that if the ASAP project stops,                                                               
there  are people  who are  aware of  what is  going on  with the                                                               
AKLNG  project to  start working  on  all of  the questions  that                                                               
really matter to the state at that point.                                                                                       
                                                                                                                                
4:59:17 PM                                                                                                                    
SENATOR BISHOP asked who's to say  AGDC's mission is still to get                                                               
gas  to Alaskans  as cheap  as  possible and  their core  mission                                                               
revolves  down from  a  lateral  to a  community  getting gas  to                                                               
Alaskans as cheap as possible.                                                                                                  
                                                                                                                                
MR. PAWLOWSKI said his reading  of existing AGDC statutes is that                                                               
language on page  3, lines 10-14, talks  about developing natural                                                               
gas  pipelines and  other  transportation  mechanisms to  deliver                                                               
natural  gas, propane,  and hydrocarbons  to  public utility  and                                                               
industrial customers in  areas of the state, may  be delivered at                                                               
commercially  reasonable rates,  and providing  access for  other                                                               
shippers  for that  gas. That  mission  is baked  into AGDC  long                                                               
term.                                                                                                                           
                                                                                                                                
SENATOR  BISHOP  said  his  point  was that  they  still  have  a                                                               
mission.                                                                                                                        
                                                                                                                                
5:00:41 PM                                                                                                                    
At ease from 5:00 to 5:30 p.m.                                                                                                  
                                                                                                                                
5:30:20 PM                                                                                                                    
CHAIR GIESSEL opened public testimony on SB 138.                                                                                
                                                                                                                                
5:30:54 PM                                                                                                                    
BILL WARREN,  representing himself,  Nikiski, Alaska,  opposed SB                                                               
138. Fire TransCanada and move AGDC  forward, he said - must have                                                               
in-state gas.  Bring a  small service line  to Fairbanks  and use                                                               
hi-tech plastic to  Wasilla and down the Parks  Highway. The cost                                                               
is cheap compared to what has  been spent and what will be spent.                                                               
This  smaller system  could be  tied  into a  larger export  line                                                               
later. "Remember, Alaskans first!"                                                                                              
                                                                                                                                
5:33:04 PM                                                                                                                    
JEREMY HOLAN,  Teamsters Local 959, Fairbanks,  Alaska, supported                                                               
SB 138.  He based his  support on: 1.  gas for Alaskans;  2. jobs                                                               
for Alaskans;  and 3. more revenue  for the state. He  added that                                                               
they as  elected officials are  assure that the bill  meets those                                                               
points and in the end is cost effective for the state.                                                                          
                                                                                                                                
5:34:17 PM                                                                                                                    
LISA WEISSLER,  representing herself, Juneau, Alaska,  opposed SB                                                               
138. She said she was staff  council to the House Democrats while                                                               
the  Stranded Gas  Development contract  was being  discussed and                                                               
rejected  and  she  was  astounded   to  see  that  the  HOA  had                                                               
essentially the same terms. She  did a side-by-side comparison of                                                               
the two  for the  committee and noted  that the  2006 Legislature                                                               
was smart enough to reject those  terms because they were bad for                                                               
Alaska. They  are still bad for  Alaska and she hoped  they would                                                               
also reject  them. It  offers no guidelines  or criteria  for the                                                               
DNR commissioner's negotiations and the  starting place is at the                                                               
rejected terms from eight years ago.                                                                                            
                                                                                                                                
SENATOR  FRENCH  said  he  would like  to  see  the  side-by-side                                                               
comparison.                                                                                                                     
                                                                                                                                
CHAIR  GIESSEL  said  she  would  attach it  to  the  bill  as  a                                                               
submitted document.                                                                                                             
                                                                                                                                
5:36:07 PM                                                                                                                    
RACHAEL  PETRO, President  and CEO,  Alaska Chamber  of Commerce,                                                               
supported the  principals in the HOA  and SB 138, but  were still                                                               
evaluating SB 138. They chiefly  like: the state participation in                                                               
an Alaska  gas project, the  state taking a percentage  gas share                                                               
and  participating  in   an  Alaska  gas  project   at  the  same                                                               
percentage of  gas share, and  establishing a very  clear process                                                               
to move  the project  forward, which  must include  the necessary                                                               
tools  for confidentiality  to  be able  to  develop the  various                                                               
project enabling arrangements that any  business needs to do, and                                                               
having  a  clear public  process  and  steps  along the  way  for                                                               
legislative oversight, review, and approval.                                                                                    
                                                                                                                                
5:38:18 PM                                                                                                                    
SENATOR  MICCICHE asked  why  this project  is  important to  the                                                               
Alaska Chamber.                                                                                                                 
                                                                                                                                
MS.  PETRO   answered  that  access  to   Alaska's  resources  is                                                               
important to all  Alaska businesses and Alaskans.  They very much                                                               
support sustainable and sound development of them.                                                                              
                                                                                                                                
SENATOR MICCICHE asked  if it's safe to say  that businesses just                                                               
don't exist because reasonably priced energy is not available.                                                                  
                                                                                                                                
MS.  PETRO   replied  absolutely;   economies  of  scale   are  a                                                               
challenge.                                                                                                                      
                                                                                                                                
CHAIR GIESSEL commented then maybe  we could compete with Iceland                                                               
that has cheap power and refines aluminum.                                                                                      
                                                                                                                                
5:40:04 PM                                                                                                                    
PAUL GROSSI, Alaska Pipe Trades  and Ironworkers, Juneau, Alaska,                                                               
supported SB 138.  They support the building of a  pipeline for a                                                               
number of reasons, the main one  being the direct jobs building a                                                               
pipeline  would bring.  Another one  is that  their members  live                                                               
here  and  in-state gas  is  important  to them.  It's  important                                                               
because it will allow for  future development and having the kind                                                               
of capital  budgets that promote  jobs that is important  for the                                                               
building trades.                                                                                                                
                                                                                                                                
5:41:58 PM                                                                                                                    
MIKE  NAVARRE, Mayor,  Kenai  Peninsula  Borough, Kenai,  Alaska,                                                               
supported  the  project  and  said  there was  a  great  deal  of                                                               
potential in  it, but consulting  with communities is  not really                                                               
adequate  in  terms  of  negotiations. They  would  like  to  the                                                               
opportunity  to  negotiate on  their  own  behalf  be a  part  of                                                               
determining what  the local tax  structure will  be, particularly                                                               
if the  state is going to  own an equity interest,  which creates                                                               
somewhat  of a  conflict with  the state  and local  governments.                                                               
They will live be living with  the impacts long after the project                                                               
is finished.                                                                                                                    
                                                                                                                                
SENATOR DYSON  asked if he  was talking about more  than property                                                               
taxes.                                                                                                                          
                                                                                                                                
MR. NAVARRE  no; property taxes  is what they are  interested in,                                                               
because that is their tax base.                                                                                                 
                                                                                                                                
SENATOR  FAIRCLOUGH  asked  if  he  had  suggested  language  for                                                               
putting in the bill.                                                                                                            
                                                                                                                                
MR. NAVARRE said yes.                                                                                                           
                                                                                                                                
SENATOR  FAIRCLOUGH asked  if he  heard  earlier testimony  today                                                               
that indicated  that particular issue  had not been  resolved nor                                                               
does the language in SB 138 limit that opportunity.                                                                             
                                                                                                                                
MR. NAVARRE  said that  it does  not, but  the HOA  suggests that                                                               
they will consult  with local governments. But when  the state is                                                               
negotiating the local governments will  likely not be in the room                                                               
with them. So, it doesn't give  them a comfort level that when it                                                               
comes back  to the legislature for  consideration particularly if                                                               
it's  late and  it could  be a  close call.   He  spoke with  the                                                               
governor who  said it's  too early for  that type  of discussion.                                                               
But Mr. Navarre said he had  been in the legislature for a number                                                               
of  years  and  knew  that  it's  never  too  early  to  start  a                                                               
conversation.                                                                                                                   
                                                                                                                                
SENATOR FAIRCLOUGH said she wanted to hear his proposal.                                                                        
                                                                                                                                
5:45:30 PM                                                                                                                    
MR. NAVARRE said it would amend section 10 to read:                                                                             
                                                                                                                                
     ...in  consultation with  the  commissioner of  Revenue                                                                    
     participate   in  the   negotiation  of   contract  and                                                                    
     development   of  terms   for   including  a   proposed                                                                    
     contracts  associated  with  North  Slope  natural  gas                                                                    
     project  provided  the  contract shall  not  alter  the                                                                    
     taxation  of  property taxable  under  AS  29.45 or  AS                                                                    
     43.56  including the  taxability, rate  of taxation  or                                                                    
     full and true value  of property. A contract negotiated                                                                    
     under this paragraph  to which the state is  a party is                                                                    
     not  effective unless  the  legislature authorizes  the                                                                    
     Governor to execute the contract.                                                                                          
                                                                                                                                
He said they  don't want to stand  in the way of  a gas pipeline,                                                               
but at the same time they  want to protect the interests of local                                                               
governments' ability to tax.                                                                                                    
                                                                                                                                
SENATOR MICCICHE  commented that  he spoke  to the  mayor earlier                                                               
who made it  clear that the municipalities he  represents are not                                                               
wolves  waiting to  hop on  the taxation  bandwagon and  even had                                                               
talked  about a  holiday  during construction  and  that sort  of                                                               
thing. Just the long term impacts would be taxed.                                                                               
                                                                                                                                
MR. NAVARRE added  that the HOA provides for  impact money, which                                                               
makes sense, and  he recalled how they  double-shifted at schools                                                               
for a while  when Cook Inlet was being developed  because so many                                                               
people came in.                                                                                                                 
                                                                                                                                
SENATOR   FAIRCLOUGH  said   she  appreciated   protecting  local                                                               
determination, but  what happens if communities  set up different                                                               
criteria. One of  the challenges in establishing  a tariff charge                                                               
on  TAPS has  been continued  property value  changes which  have                                                               
resulted in litigation.                                                                                                         
                                                                                                                                
5:48:46 PM                                                                                                                    
MR.  NAVARRE   said  conflicts  are   there  not   because  local                                                               
governments  are  setting  different   types  of  criteria;  it's                                                               
because of  how the value  is determined. It's always  struck him                                                               
with TAPS that the state at  least has a neutral position on that                                                               
if not  an incentive to reduce  the tariff, because it  nets back                                                               
to  a wellhead,  whereas  local governments  would  rather see  a                                                               
higher value on the pipeline even  if that means a higher tariff,                                                               
because that is where their tax base comes from.                                                                                
                                                                                                                                
5:49:32 PM                                                                                                                    
SENATOR FAIRCLOUGH said  his language seemed to  define the issue                                                               
in each community and letting them  come up with their own way to                                                               
resolve the  valuation and  asked if  he would  have the  time to                                                               
work with  Alaska Municipal  League (AML) folks  to come  up with                                                               
how value should be determined.  People are looking for certainty                                                               
in  the way  it is  done  and to  have it  consistent across  the                                                               
state.                                                                                                                          
                                                                                                                                
MR. NAVARRE said yes  and he thought there was a way  to get to a                                                               
value determination to apply different  mil levies against and to                                                               
have the ability to go beyond the 20 mil cap for bonding.                                                                       
                                                                                                                                
SENATOR  MICCICHE asked  which  entities he  worked  with on  the                                                               
letter he presented them.                                                                                                       
                                                                                                                                
MR. NAVARRE replied  the Fairbanks North Star  Borough, the Kenai                                                               
Peninsula Borough  and Valdez. Valdez  and Fairbanks  are worried                                                               
that  some fiscal  agreement would  roll into  including existing                                                               
oil and gas infrastructure, which  would undermine their existing                                                               
tax bases and bonding that is already in place.                                                                                 
                                                                                                                                
5:52:39 PM                                                                                                                    
MERRICK  PEIRCE,  CFO,  Alaska  Gasline  Port  Authority  (AGPA),                                                               
Fairbanks,  Alaska, opposed  SB 138.  He said  they have  a voter                                                               
mandate to  see a  large-diameter gas line  built from  the North                                                               
Slope  to Valdez  and this  legislation nearly  guarantees a  gas                                                               
pipeline will not be built reasoning that:                                                                                      
                                                                                                                                
     The  same  consultants  who have  failed  to  make  any                                                                    
     progress  on the  gas line  after  wasting hundreds  of                                                                    
     millions of dollars  and half a decade of  time are now                                                                    
     asking  for cart  blanche.  One  critical problem  this                                                                    
     administration  has is  its failure  to understand  its                                                                    
     alignment  with a  transnational  corporation that  has                                                                    
     LNG projects  that compete with Alaska  ensures that no                                                                    
     pipeline  is  built   unless  these  outside  interests                                                                    
     provide approval.  Why would  we want  Alaska to  be in                                                                    
     such a foolish subordinate position?                                                                                       
                                                                                                                                
He  related a  story about  Governor Parnell  and ExxonMobil  had                                                               
"effectively  sabotaged"  a  project  under  the  Alaska  Gasline                                                               
Inducement Act (AGIA).                                                                                                          
                                                                                                                                
SENATOR FRENCH  asked Mr.  Pierce his  background for  working on                                                               
matters relating to oil and gas and pipelines.                                                                                  
                                                                                                                                
MR. PEIRCE said  he worked with Governor Palin  on her transition                                                               
for the  Department of  Revenue and  then on  this issue  for the                                                               
last  seven years  on  behalf  of the  voters.  Their mandate  is                                                               
straight-forward:   large  diameter   gasline   North  Slope   to                                                               
tidewater. He was doing this  because the voters were right; they                                                               
picked a project that was economic and makes a lot of sense.                                                                    
                                                                                                                                
5:56:40 PM                                                                                                                    
JASON RUTMAN, Director of  Operational Projects, Nana Development                                                               
Corporation, Anchorage,  Alaska, supported  SB 138. He  said Nana                                                               
has over 35  years of expertise on Alaska's North  Slope and more                                                               
than a dozen  companies aligned to meet the needs  of the oil and                                                               
gas sector.  Many of these  companies provide direct  services to                                                               
the  Alaska oil  and  gas industry  that is  one  of the  largest                                                               
employers in the  state with over 4,000 Alaskans  (1,000 of which                                                               
are  Nana  shareholders) working  with  a  payroll of  over  $180                                                               
million.                                                                                                                        
                                                                                                                                
They  recognize that  passage  of  SB 138  will  allow the  AKLNG                                                               
project  to move  through the  next phase,  which is  the initial                                                               
step in  identifying challenges and evaluating  feasibility. They                                                               
understand that the  results from this phase  including detail on                                                               
state  participation  in  the  project   would  come  before  the                                                               
legislature in  the next session  to determine whether  the state                                                               
would  proceed  to  the  next  stage.  They  also  recognize  the                                                               
opportunity presented  by recent  announcements. As  the Governor                                                               
stated,  for  the  first  time all  the  necessary  parties  have                                                               
aligned to make an Alaska  gasline project go: three producers, a                                                               
preeminent  pipeline builder,  the AGDC,  and the  state agencies                                                               
responsible for  the people's  royalties and  taxes. Capitalizing                                                               
on this necessary  alignment they support the  effort to maximize                                                               
the benefit  of Alaska's  gas for  Alaskans and  growing Alaska's                                                               
economy.                                                                                                                        
                                                                                                                                
5:58:54 PM                                                                                                                    
GEORGE PIERCE,  representing himself, Kasilof,  Alaska, commented                                                               
on SB 138  that the state should own 52  percent of the pipeline.                                                               
But  public  process is  missing.  The  state  signed off  on  an                                                               
agreement before discussing  any of the details  with the public.                                                               
The same thing happened with the Pt. Thomson settlement.                                                                        
                                                                                                                                
6:02:00 PM                                                                                                                    
KRISTA  GONDER,   Alaska  Support  Industry   Alliance,  Wasilla,                                                               
Alaska,  supported SB  138. She  said their  members know  Alaska                                                               
needs a gas  pipeline whether it is a large  diameter natural gas                                                               
pipeline or  the Alaska Stand-Alone Pipeline  (ASAP) that focuses                                                               
on  in-state   gas  delivery.  The   members  do  not   want  the                                                               
legislature to  spend years  studying the  issue; they  need real                                                               
progress now.  The Alliance supports  many of the  basic concepts                                                               
in SB 138:  an opportunity for state ownership,  a simplified tax                                                               
structure, the ability  for AGDC to continue to  pursue the ASAP.                                                               
They  appreciate  that this  legislation  requires  the state  to                                                               
return to the legislature for  review and approval as the project                                                               
moves forward.                                                                                                                  
                                                                                                                                
6:03:45 PM                                                                                                                    
LUKE  HOPKINS,  Mayor,  Fairbanks Northstar  Borough,  Fairbanks,                                                               
Alaska, supported  SB 138. One  of his  concerns was the  same as                                                               
Mr.  Navarre's,  specifically  with   how  the  HOA  has  already                                                               
negotiated that a  (Payments in Lieu of Taxes) PILT  would be put                                                               
forth  for  the  municipalities  without  consulting  with  them.                                                               
Property  taxes  under  AS  29.45   and  AS  43.56  are  how  his                                                               
municipalities have  worked - both  on the  TAPS line and  now as                                                               
they hear about the large diameter  gas line. They are asking for                                                               
an  opportunity  to  be  at  the table  to  actually  be  in  the                                                               
negotiations and be  a part of the decision making,  as they have                                                               
in the past,  not just sitting on  the side. They do  not want to                                                               
renegotiate   property   taxes   on    existing   oil   and   gas                                                               
infrastructure.                                                                                                                 
                                                                                                                                
SENATOR FAIRCLOUGH said that Fairbanks  is requesting hundreds of                                                               
millions of dollars to meet its  energy needs, and asked if there                                                               
was a  way to  come up  with a standard  valuation so  that those                                                               
costs  are incorporated  into  the structure  and  still make  it                                                               
economical to actually sell gas in a foreign market.                                                                            
                                                                                                                                
MR.  HOPKINS  said  the  issue  in  AS  43.56  for  oil  and  gas                                                               
properties says: "for the determination  of full and true value."                                                               
They think there is  a way to go forward, but they  want to be at                                                               
the table in the discussions and  seek a way to acquire a revenue                                                               
stream for  the impacts that  will happen to their  community and                                                               
property values that others will have to pay.                                                                                   
                                                                                                                                
6:09:42 PM                                                                                                                    
RICK  RODGERS, Executive  Director, Resource  Development Council                                                               
(RDC),  Anchorage,  Alaska,  supported   SB  138.  Alignment  and                                                               
durability are  important to this  discussion and the  HOA brings                                                               
alignment  that  is unprecedented.  It  has  made him  much  more                                                               
optimistic about this  process "getting to where we  want to be."                                                               
In terms  of durability  LNG, unlike oil,  is sold  in long-term,                                                               
multi-decade  contracts requiring  durable fiscal  terms. SB  138                                                               
has a  lot of  the elements  in place to  hold this  together. It                                                               
will require  a lot of  work and he  added that he  was impressed                                                               
with the  deliberate due-diligence this committee  is undertaking                                                               
in weighing  the risks and  rewards with  a realistic eye  on the                                                               
need to compete  globally with dozens of  other jurisdictions and                                                               
projects in hoping to secure project backing.                                                                                   
                                                                                                                                
The most beneficial gas line in  his view for Alaskans is a large                                                               
capacity   line,  if   it's  sanctioned   by  the   producers  in                                                               
partnership with the state, has  a much better chance of success,                                                               
but most  of the  project economics  that will  determine whether                                                               
this project goes forward are largely out of our control.                                                                       
                                                                                                                                
MR.  RODGERS summarized  that we  need to  maintain a  robust oil                                                               
industry on the North Slope; oil  pays the bills and supports the                                                               
vast  complex infrastructure.  He  encouraged  due diligence  and                                                               
passing  SB 138  this  session recognizing  that  there are  more                                                               
legislative gates and off ramps to take.                                                                                        
                                                                                                                                
6:12:57 PM                                                                                                                    
LAKE  WILLIAMS,  President,   International  Union  of  Operating                                                               
Engineers Local  302, Fairbanks,  Alaska, supported SB  138. They                                                               
are  looking forward  to the  construction  jobs associated  with                                                               
this project  as well as  the jobs afterwards, energy  relief for                                                               
Alaska,  and  value-added  jobs that  could  come  with  industry                                                               
coming in.                                                                                                                      
                                                                                                                                
He thought  the larger  diameter pipeline would  be the  best for                                                               
the  state and  a small  diameter just  wouldn't provide  the tax                                                               
revenue needed.  He urged  anything they  could do  to strengthen                                                               
local hire  provisions and state  ownership. TAPS has  proven you                                                               
have to  be at the table.  It's a big  bill, but their job  is to                                                               
"trust but verify."                                                                                                             
                                                                                                                                
6:15:27 PM                                                                                                                    
DOUG  TANSY,  President,  Fairbanks Central  Labor  Council,  and                                                               
Business  Representative,  International Brotherhood  of  Workers                                                               
(IBEW) Local 1547,  Fairbanks, Alaska, supported SB  138. He said                                                               
Mr. Lake had already made a lot  of his points. He was happy with                                                               
the  process, so  far,  and supported  this  project, and  giving                                                               
Alaskans priority.                                                                                                              
                                                                                                                                
6:16:36 PM                                                                                                                    
JOHN  HOZEY,  City  Manager,  City  of  Valdez,  Valdez,  Alaska,                                                               
supported SB 138,  but had concern that  such momentum undermines                                                               
the  ability  of  local governments  to  adequately  provide  for                                                               
municipal services  that residents  depend upon, their  tax base.                                                               
They   were  concerned   that   under   previous  agreements   to                                                               
commercialize  natural gas  both the  oil and  gas infrastructure                                                               
were  offered up  as tax  incentives to  the producers  to pursue                                                               
development of  the gas line.  So, it's reasonable to  think that                                                               
what was once  negotiated could be negotiated  again. He implored                                                               
them  to not  change property  tax structures  without consulting                                                               
the municipalities.  He supported  the comments of  Mayor Navarre                                                               
and Mayor Hopkins,  and the language Mayor Navarre  read into the                                                               
record.                                                                                                                         
                                                                                                                                
He said  the City of  Valdez would be  willing to be  involved in                                                               
any discussions  to determine certainty.  So, to the  extent they                                                               
could help get  there they welcome that effort, but  they have to                                                               
be part of the discussion now and going forward.                                                                                
                                                                                                                                
6:19:12 PM                                                                                                                    
LISA VONBARGEN,  representing herself, Valdez,  Alaska, supported                                                               
previous comments and SB 138  if municipalities are at the table.                                                               
Her prepared  remarks echoed almost  exactly what  Mayor Navarre,                                                               
Mayor Hopkins  and Mr.  Hozey already  said, so  she relinquished                                                               
the floor.                                                                                                                      
                                                                                                                                
CHAIR GIESSEL thanked everyone,  and finding no further comments,                                                               
closed public testimony. [SB 138 was held in committee.]                                                                        

Document Name Date/Time Subjects
SRES SB 138 Sectional Analysis Presentation.pdf SRES 2/19/2014 3:30:00 PM
SB 138
SB 138 LisaWeissler Comments 20140219.pdf SRES 2/19/2014 3:30:00 PM
SB 138
SB 138 Supp Letter JerryDewhurst 20140219.pdf SRES 2/19/2014 3:30:00 PM
SB 138
SB 138 Supp Letter UnionofOperatingEngineers 20140219.pdf SRES 2/19/2014 3:30:00 PM
SB 138
SB 138 Supp Testimony RickRogers 20140219.pdf SRES 2/19/2014 3:30:00 PM
SB 138