Legislature(2013 - 2014)BUTROVICH 205

02/21/2014 08:00 AM RESOURCES

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08:02:37 AM Start
08:03:00 AM SB138
08:40:21 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
8:03:00 AM                                                                                                                    
CHAIR GIESSEL  announced SB 138  to be up for  consideration. She                                                               
said she had a blank  committee substitute (CS) that incorporates                                                               
concepts that  have been brought forward  by individual committee                                                               
members during their hearings.                                                                                                  
8:03:38 AM                                                                                                                    
SENATOR DYSON  moved to adopt  CSSB 138( ),  labeled 28-GS2806\N,                                                               
as the working document.                                                                                                        
CHAIR GIESSEL objected for discussion purposes.                                                                                 
8:04:07 AM                                                                                                                    
SENATOR MICCICHE joined the committee.                                                                                          
LINDSAY  WILLIAMS,  staff  to   Senator  Giessel,  explained  the                                                               
changes  in the  CS. The  first  change was  in the  title to  be                                                               
conforming and was recommended by legal drafters.                                                                               
A  new  section 1  was  added  on  page  3 that  involves  intent                                                               
language that broadly captures what  is in the Heads Of Agreement                                                               
(HOA). Briefly, oil and gas  development and commercialization of                                                               
gas is  of vital public interest  to the State of  the Alaska. It                                                               
recognizes that  much of  the infrastructure  will be  within the                                                               
bounds of local  governments. There will be many  benefits to the                                                               
state  including   employment  opportunities,  tax   and  royalty                                                               
payments, and natural gas to communities.                                                                                       
Item number (4)  (Article 9 of the HOA)  talks about negotiations                                                               
and that  those must be in  the interests of the  state and local                                                               
governments. Subsection (b)(Article  7 of the HOA)  speaks to the                                                               
DNR commissioner and that it's  necessary he be able to negotiate                                                               
contracts  and enter  into  agreements that  will  be subject  to                                                               
legislative approval.                                                                                                           
Item  number (b)(2)  (Article 6  of  the HOA  and Article  9.3.1)                                                               
talks about access and pro-expansion  principles, delivery of gas                                                               
to Alaskans, and payment in lieu of taxes.                                                                                      
8:06:13 AM                                                                                                                    
Item  number  (3)   (Article  8.3.1  of  the   HOA)  talks  about                                                               
negotiating  separately  with  the  producers  for  the  sale  or                                                               
disposition of  the state's natural  gas and number  (4) (Article                                                               
11 of the HOA) speaks of employment for Alaska residents.                                                                       
8:06:32 AM                                                                                                                    
SENATOR FAIRCLOUGH pointed  out a drafting error on  page 3, line                                                               
19, that should be 4 and line 23 should be 5.                                                                                   
SENATOR  DYSON wanted  some discussion  about  the project  labor                                                               
agreements mentioned in (b)(4).                                                                                                 
MS.  WILLIAMS  said  this   legislative  intent  language  almost                                                               
exactly matches the language in the HOA under Article 11.                                                                       
SENATOR FAIRCLOUGH asked if that  was consistent with language in                                                               
MS. WILLIAMS said no.                                                                                                           
8:08:00 AM                                                                                                                    
SENATOR FRENCH said while on the  subject of contracts on page 3,                                                               
(b)  references  short  term  commercial  agreements,  negotiated                                                               
contracts, and proposed  contracts and asked if  every single one                                                               
of  those  instruments  will  come  before  the  legislature  for                                                               
approval. It seems that there  will be many agreements in working                                                               
towards a big project.                                                                                                          
8:09:46 AM                                                                                                                    
MIKE  PAWLOWSKI,  Deputy   Commissioner,  Department  of  Revenue                                                               
(DOR), answered  that section 11 of  the bill (on page  13) has a                                                               
healthy  balance between  unnecessarily  binding the  flexibility                                                               
that needs to occur in  the negotiation of commercial agreements.                                                               
At  the  same time  there  is  a  complete recognition  that  for                                                               
contracts,  the binding  documents  that will  move this  project                                                               
forward do  need to  be subject to  legislative review.  Page 13,                                                               
line  13-14,  says   the  DNR  Commissioner  can   enter  into  a                                                               
commercial  agreement without  coming  back  to the  legislature.                                                               
However,  number (11)  (on page  13, lines  15-19) when  it is  a                                                               
contract  that is  going  to  be binding,  that  contract is  not                                                               
effective  unless  the  legislature authorizes  the  governor  to                                                               
execute it.                                                                                                                     
SENATOR  DYSON asked  if the  language  on page  4, lines  13-14,                                                               
(project  labor  language) has  the  effect  that no  contractor,                                                               
subcontractor, or  supplier can  be involved  in this  job unless                                                               
they are union.                                                                                                                 
MR.  PAWLOWSKI referenced  language in  the HOA  on page  16 that                                                               
says  "prior to  construction, the  AKLNG parties  (the companies                                                               
that  are  directly  engaged  in the  AKLNG  project)  commit  to                                                               
negotiate  in  good  faith project  labor  agreements  for  AKLNG                                                               
project." This recognizes  that there is a  process going forward                                                               
to work on  those projects and that in principal  the parties are                                                               
all agreed that  the process and good faith  will continue during                                                               
the development prior to construction of the project.                                                                           
8:12:38 AM                                                                                                                    
SENATOR DYSON  said he  still wanted  to know  if the  effect was                                                               
that no non-union contractors will be involved as suppliers.                                                                    
MR. PAWLOWSKI  said he didn't think  that was the intent,  but it                                                               
was impossible  to predict  the outcome until  in good  faith the                                                               
parties get into those negotiations.                                                                                            
SENATOR DYSON asked if that  means that non-union contractors and                                                               
suppliers can enter into the negotiation process.                                                                               
MR.  PAWLOWSKI  answered  that   the  key  contemplated  here  is                                                               
multiple agreements.  This project  is so  large that  all Alaska                                                               
businesses  will be  involved;  anything this  large will  demand                                                               
8:14:02 AM                                                                                                                    
SENATOR  DYSON asked  him to  answer  yes or  no: will  non-union                                                               
contractors and suppliers be able to work on this project.                                                                      
MR. PAWLOWSKI answered yes.                                                                                                     
8:14:20 AM                                                                                                                    
CHAIR  GIESSEL directed  Senator  Dyson to  the  totality of  the                                                               
words in  item 4 that  has broad statements like  "contracts with                                                               
Alaska businesses, employment of Alaska resident."                                                                              
SENATOR DYSON  said respectfully that  is great language,  but it                                                               
doesn't  address the  point.  He was  not  against project  labor                                                               
agreements; on  projects like this,  labor, rest,  and continuity                                                               
are  huge  factors  that  can easily  overwhelm  any  savings  or                                                               
whatever else can happen by  having a non-union contractor on the                                                               
job. But on the record  they have said that non-union contractors                                                               
can participate and nothing precludes them.                                                                                     
MR.  PAWLOWSKI   said  his  perception  was   that  nothing  here                                                               
precludes them, but he was not a labor lawyer.                                                                                  
SENATOR DYSON said if the  administration had any different view,                                                               
he would enjoy knowing about it.                                                                                                
8:15:48 AM                                                                                                                    
SENATOR MICCICHE said  in a project like this many  of the trades                                                               
happen to be  union, but in a  job of this scale there  is no way                                                               
you  could satisfy  the labor  requirements  with in-state  union                                                               
folks, period.  And many  of the trades  simply aren't  union. If                                                               
anyone was going to try to  drive that line, they would be giving                                                               
out-of-state workers priority ahead of in-state Alaskan workers.                                                                
8:16:59 AM                                                                                                                    
MS.  WILLIAMS went  to  section 11  on page  13  that dealt  with                                                               
sharing confidential information with  the legislature. Version A                                                               
previously  read: confidential  information  obtained under  this                                                               
paragraph  "may"   be  shared  with   the  legislature   only  in                                                               
committees held  in executive session or  under a confidentiality                                                               
agreement. This change removes "may" and inserts "shall".                                                                       
SENATOR FRENCH asked where that language was in the A version.                                                                  
MS. WILLIAMS said the original language  was on page 12, line 12,                                                               
and the change is on page 13, line 29.                                                                                          
She said section 14 on page  16 deletes the errant "and". The DNR                                                               
commissioner   may  propose   three  modifications   relating  to                                                               
switching between  a royalty in  kind (RIK) and royalty  in value                                                               
(RIV)  establishing  a fair  market  value  for royalty  gas  and                                                               
establishing  a  fixed  royalty   rate.  On  line  29,  following                                                               
"market" there  used to  be an  "and" and  that has  been removed                                                               
because in reality the DNR commissioner  may only do two of these                                                               
items, not  all three.  Keeping with this  same change,  page 17,                                                               
line 18, following "market" the word "and" was also removed.                                                                    
8:19:20 AM                                                                                                                    
SENATOR MCGUIRE joined the committee.                                                                                           
MS. WILLIAMS said another change  was offered by two members that                                                               
establishes that the royalty rate may not go below 12.5 percent.                                                                
CHAIR GIESSEL  said Senator Micciche and  Senator French authored                                                               
SENATOR MICCICHE  explained that 12.5 percent  is what guarantees                                                               
our  Permanent  Fund Dividend  contributions,  an  item that  was                                                               
missed in the first version.                                                                                                    
SENATOR FRENCH  asked to  explain, now that  the state  is taking                                                               
RIK,  how a  quarter of  that gets  deposited into  the Permanent                                                               
8:21:02 AM                                                                                                                    
JOE   BALASH,   Commissioner-designee,  Department   of   Natural                                                               
Resources  (DNR), explained  that they  will still  have to  keep                                                               
track of  the state's  royalty interest. Even  though it  will be                                                               
taken  in  kind there  will  be  transportation and  liquefaction                                                               
charges that get  deducted from those royalty  interests. The net                                                               
of that  value gets evaluated  for the 25  percent Constitutional                                                               
deposit into the Permanent Fund.  What accounting procedures will                                                               
be employed  is going  to be  a function  of the  agreements that                                                               
come forward next year.                                                                                                         
SENATOR FAIRCLOUGH  stated that it  is not a  foregone conclusion                                                               
that we are taking our gas in kind; it's an option.                                                                             
COMMISSIONER BALASH  said that  was an  excellent point.  The HOA                                                               
contemplates that  the other  parties will be  able to  work with                                                               
the DOR to satisfy their  concerns on risks associated with going                                                               
in kind  and will help the  DOR with mitigation measures  to deal                                                               
with  those risks.  Supposing that  happens, the  statutes direct                                                               
them to  start with in kind.  So, whether they are  talking about                                                               
an in  kind sale or in  value accounting they will  still have to                                                               
keep track of  what portion of the revenue stream  is royalty and                                                               
25 percent  of that stream  will be deposited into  the Permanent                                                               
Fund annually.                                                                                                                  
SENATOR FRENCH said  while everyone is comfortable  with the 12.5                                                               
percent royalty from  Prudhoe Bay, the Pt.  Thomson royalties are                                                               
quite a  bit higher. He asked  him how much wiggle  room there is                                                               
still  left with  12.5 percent  bottom line  with respect  to the                                                               
negotiations  on the  Pt. Thomson  leases that  have much  higher                                                               
royalty rates.                                                                                                                  
COMMISSIONER BALASH  answered that  in no way  shape or  form are                                                               
they talking  about reducing those  base royalty rates;  they are                                                               
talking  about those  instances  where the  state  has a  sliding                                                               
scale  royalty  or a  net  profit  share  lease (NPSL)  that  has                                                               
something in addition  to a base royalty rate.  Often those types                                                               
of leases  have a base  royalty rate  of 12.5 percent.  What they                                                               
will be  seeking here  is a way  to come up  with a  fixed number                                                               
that  is fair  to the  state as  well as  the landowner  for that                                                               
particular  provision, be  it  an  NPSL or  a  sliding scale.  An                                                               
example  would  be  a  lease  that starts  at  12.5  percent  and                                                               
depending upon the triggers in the  lease slides up to as high as                                                               
20 percent. In  that particular situation, they  would be seeking                                                               
a number  between 12.5 and  20 percent and  he would argue  for a                                                               
number closer to 20.                                                                                                            
With regard to  the leases that are in place  at Pt. Thomson that                                                               
don't have an  NPSL or a sliding scale, they  will be unaffected.                                                               
So,  it will  retain  that higher  royalty  interest relative  to                                                               
Prudhoe Bay.                                                                                                                    
8:26:44 AM                                                                                                                    
COMMISSIONER  BALASH said  that  would create  an issue,  because                                                               
with royalty  rates of a  different percentage between  those two                                                               
fields, which  field comes on first  and in what volume  is going                                                               
to affect  the state's overall share  of the gas. It  might be in                                                               
the  beginning  days/years of  production  and  operation of  the                                                               
project that the state might be  a little long or short depending                                                               
on which field  is coming on first. In the  long run, he expected                                                               
a 75/25  mix of  those two fields'  production, and  that's where                                                               
they get to a blended number something like 13 percent.                                                                         
In order to  make sure the state doesn't get  stuck with too much                                                               
or  too little  gas, a  balancing agreement  will be  needed that                                                               
makes sure that in the event  one field or the other is producing                                                               
more than  that 75/25 ratio that  there is an accounting  for the                                                               
gas  and  a  makeup  right  and an  opportunity,  which  will  be                                                               
important for all  parties to this agreement. No one  wants to be                                                               
stuck with either too much capacity or too little in the pipe.                                                                  
8:27:21 AM                                                                                                                    
MS. WILLIAMS moved on to section 30  on page 28, line 4 where the                                                               
title  previously read:  "Payment in  kind of  tax for  gas;" the                                                               
title now reads: "Payment in gas  of tax for gas." So, in keeping                                                               
with consistency  the HOA uses the  term "tax as gas"  or TAG. In                                                               
the HOA  TAG is  defined in  Article 1  under definitions  and in                                                               
Article 8.2.  There were several  instances under (a) and  (b) in                                                               
section 30 where "in kind" was removed and replaced with "gas".                                                                 
8:29:13 AM                                                                                                                    
CHAIR GIESSEL  summarized that they  removed the  expression "tax                                                               
in kind."                                                                                                                       
8:29:27 AM                                                                                                                    
MS. WILLIAMS said on line  14, the last sentence previously read:                                                               
"The producer  shall pay the  tax in  kind by delivering  that 10                                                               
percent  of  the  gas  to  the  state  at  the  entrance  of  the                                                               
transportation  facility specified  by the  state." "Entrance  of                                                               
the transportation  facility specified by the  state" was removed                                                               
and replaced with  "point of production" (POP),  which is defined                                                               
in section 46 on  pages 49 and 50 of the  bill. This change would                                                               
provide clarity to  the producers as well as the  state. She said                                                               
the last  change was  on page  50 where a  new section  was added                                                               
under section 49 amending uncodified law.                                                                                       
CHAIR GIESSEL said that Senator McGuire requested this.                                                                         
SENATOR  MCGUIRE said  that  this is  the  best opportunity  that                                                               
Alaskans have  had for  a gasline because  of the  alignment that                                                               
exists and  the point behind  this provision is that  she thought                                                               
an element  was missing.  And that  is the  instinctive alignment                                                               
life-long Alaskans have had with  the industry, because "we" were                                                               
here  before the  TAPS, and  got to  see the  Alaska without  the                                                               
benefit  of that  industry  and  then to  see  it  with. Over  60                                                               
percent of the Alaskan public has  lived here seven years or less                                                               
and  it struck  her  in going  through the  oil  tax debates  and                                                               
getting gas  to Alaskans  that perhaps  the element  of alignment                                                               
was missing.  Alaskans need  to know  they are  getting something                                                               
out  of this  partnership that  they have  with the  oil and  gas                                                               
industry  and  to  start  feeling  it in  a  tangible  way.  Upon                                                               
discussion with the DOR about  Securities and Exchange Commission                                                               
laws, she thought  it better to ask  them to come up  with a plan                                                               
for a way  that people could buy a share  of the pipeline through                                                               
their Permanent Fund  Dividend similar to the  "Pick, Click, Give                                                               
8:34:16 AM                                                                                                                    
CHAIR GIESSEL  said she  appreciated the  broad language  she put                                                               
in, since buying a share of the pipeline is a complex process.                                                                  
8:34:41 AM                                                                                                                    
MS. WILLIAMS said  that summed up the rest of  the changes in the                                                               
8:35:01 AM                                                                                                                    
SENATOR DYSON  said one of  the major construction unions  in the                                                               
state is one he had been a  member of and their by-laws said they                                                               
cannot take  any new members  in from Alaska including  ones that                                                               
are licensed  in the  state as  long as there  is anybody  on the                                                               
books in  Seattle or  Portland. Is  there any  way to  solve that                                                               
MR. PAWLOWSKI said  in all honesty that issue was  outside of his                                                               
comfort zone.                                                                                                                   
CHAIR  GIESSEL  said  it's  a  burning  question  for  the  whole                                                               
committee and  she would get the  Department of Law to  join them                                                               
this afternoon to talk about it.                                                                                                
SENATOR DYSON said the other union  has to do with Teamsters, and                                                               
Alaska  has a  mix of  company-owned trucks  and privately  owned                                                               
trucks; virtually  all the  private owners  have been  members of                                                               
the Teamsters for a long time,  but there are places in the state                                                               
where that  privately owned  truck cannot go  on the  real estate                                                               
and  they have  to spot  their load  and someone  else comes  and                                                               
picks it up.  It's an issue that keeps the  most efficient way of                                                               
delivering the freight, sometimes,  from happening. He hoped that                                                               
this was  so much work  for so many  people, that those  kinds of                                                               
small and arbitrary issues can  go away; removing the barriers to                                                               
Alaskans working.                                                                                                               
MR. PAWLOWSKI  said it may  be way too  early to deal  with that,                                                               
but  in general  the administration  has  tried to  come to  high                                                               
level  principle agreements  with companies  to say  this is  the                                                               
plan of how we're going to move forward.                                                                                        
CHAIR  GIESSEL,   finding  no  further  questions,   removed  her                                                               
objection and  said version N  CS for SB  138 was now  before the                                                               
committee. She held the bill in committee.                                                                                      

Document Name Date/Time Subjects
SB 138 vs N.pdf SRES 2/21/2014 8:00:00 AM
SB 138