Legislature(2003 - 2004)

06/17/2004 08:45 AM House BUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
                         JOINT MEETING                                                                                        
             LEGISLATIVE BUDGET AND AUDIT COMMITTEE                                                                           
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         June 17, 2004                                                                                          
                           8:45 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
LEGISLATIVE BUDGET AND AUDIT                                                                                                    
                                                                                                                                
 Representative Ralph Samuels, Chair                                                                                            
 Representative Mike Hawker                                                                                                     
 Representative Beth Kerttula                                                                                                   
 Representative Reggie Joule                                                                                                    
 Representative Mike Chenault (via teleconference)                                                                              
                                                                                                                                
 Senator Con Bunde                                                                                                              
 Senator Lyman Hoffman                                                                                                          
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Scott Ogan                                                                                                             
 Senator Tom Wagoner                                                                                                            
 Senator Fred Dyson                                                                                                             
                                                                                                                                
OTHER MEMBERS PRESENT                                                                                                           
                                                                                                                                
 Senator Gretchen Guess                                                                                                         
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
LEGISLATIVE BUDGET AND AUDIT                                                                                                    
                                                                                                                                
 Representative Vic Kohring                                                                                                     
                                                                                                                                
 Senator Gene Therriault, Vice Chair                                                                                            
 Senator Gary Wilken                                                                                                            
 Senator Ben Stevens                                                                                                            
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Ben Stevens                                                                                                            
 Senator Ralph Seekins                                                                                                          
 Senator Georgianna Lincoln                                                                                                     
 Senator Kim Elton                                                                                                              
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
Alaska Natural Gas Pipeline Issues/Pipeline Costs & Tariffs                                                                     
                                                                                                                                
Presentations By:                                                                                                               
                                                                                                                                
Mr. Harold  Heinze, Chief Executive  Officer, Alaska  Natural Gas                                                               
Development Authority                                                                                                           
                                                                                                                                
Mr.  Roger  Marks,  Petroleum  Economist,  Tax  Division,  Alaska                                                               
Department of Revenue                                                                                                           
                                                                                                                                
Mr.  John  Carruthers,   Vice  President,  Northern  Development,                                                               
Enbridge Pipelines, Inc.                                                                                                        
                                                                                                                                
Mr. Robin Brena, Partner, Brena, Bell & Clarkson, P.C.                                                                          
                                                                                                                                
Mr.  Tony Palmer,  Vice President,  Alaska Business  Development,                                                               
TransCanada Corporation                                                                                                         
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 04-9a, SIDE A [BUD TAPE][SIDE B IS NOT RECORDED]                                                                       
                                                                                                                                
CO-CHAIR  RALPH   SAMUELS  called   the  joint  meeting   of  the                                                             
Legislative Budget  and Audit Committee and  the Senate Resources                                                               
Standing  Committee  to  order   at  8:45  a.m.  Senate  Resource                                                               
Committee  members  Tom  Wagoner,  Fred Dyson,  and  Scott  Ogan,                                                               
Chair,  were  present.  Legislative Budget  and  Audit  Committee                                                               
members Con Bunde, Lyman Hoffman,  Mike Hawker, Beth Kerttula and                                                               
Reggie   Joule  were   present.   Senator   Gretchen  Guess   and                                                               
Representative Bill Stoltze were also present.                                                                                  
                                                                                                                                
CO-CHAIR SAMUELS announced  that Mr. Heinze would  present to the                                                               
committee first. He  informed members that Mr. Heinze  is the CEO                                                               
of the Alaska  Natural Gas Development Authority  (ANGDA) and has                                                               
been involved  in North Slope  gas issues  for over 30  years. He                                                               
was ARCO's engineering manager of  the Prudhoe Bay field start-up                                                               
in  1977   and  was  the   President  of  ARCO-Alaska   and  ARCO                                                               
Transportation    during   the    1980s.   During    the   Hickel                                                               
Administration, he was the commissioner  of natural resources and                                                               
the state-to-gas marketer.                                                                                                      
                                                                                                                                
MR. HAROLD HEINZE, Chief Executive  Officer of ANGDA, jested that                                                               
he has appeared  before legislative committees many  times in the                                                               
last  few years  but  this  is the  first  time  he is  appearing                                                               
without requesting any  money. He told members that he  is not an                                                               
expert on  tariff issues;  instead he  will discuss  cost related                                                               
issues and the  elements that go into a  tariff determination. He                                                               
said  he  would focus  on  the  in-state issues  because  ANGDA's                                                               
interest  is  what   happens  within  Alaska.  He   then  gave  a                                                               
PowerPoint  presentation  [paper   copy  available  in  committee                                                               
file], with the following explanation.                                                                                          
                                                                                                                                
     Number  one, this  is  sort of  the  slide J.P.  Morgan                                                                    
     showed  you yesterday  of a  number of  things that  go                                                                    
     into the tariff and,  in particular...the goldish color                                                                    
     were  the ones  they talked  about the  sensitivity and                                                                    
     gave you some  results. I'm going to  talk mainly about                                                                    
     the  ones that  are circled  in  red and  then I  think                                                                    
     between myself  and Roger Marks, who  follows me, we'll                                                                    
     pretty well will have covered  about every arrow on the                                                                    
     page   here  by   the  end   of  the   three  or   four                                                                    
     presentations.  Additionally,  I'm  going to  give  you                                                                    
     some thoughts that we have,  from our point of view, in                                                                    
     terms  of some  of  the projects  we're  looking at  in                                                                    
     terms  of the  relationship  between debt-equity  ratio                                                                    
     and  the  bond  rate  and how  that  might  affect  the                                                                    
     tariffs.                                                                                                                   
                                                                                                                                
     Here  [indisc.] is  the outline.  I hope  it's not  too                                                                    
     daunting but I intend to  go through it pretty fast and                                                                    
     we  can come  back and  spend time  wherever you  wish.                                                                    
     Number one,  I just wanted  to make sure  we understood                                                                    
     ANGDA now is  working on three basic  things, the first                                                                    
     of which,  of course,  is as  prescribed in  the ballot                                                                    
     measure was to look at an LNG project and we are.                                                                          
                                                                                                                                
     Secondly, we've  been asked  by the  Administration, as                                                                    
     part of  the broad  Administration effort  but separate                                                                    
     from  the Stranded  Gas Act  work that's  going on,  to                                                                    
     look at ways that ANGDA  as a public corporation of the                                                                    
     state might  be helpful  in moving  forward any  of the                                                                    
     highway gas line  projects and there are  ideas we have                                                                    
     there in terms  of how the state  might participate and                                                                    
     facilitate the project moving forward.                                                                                     
                                                                                                                                
     And then  finally, we've  been asked  very specifically                                                                    
     to even go  beyond the spur line  requirement of ballot                                                                    
     measure 3  and look very  specifically at how  we might                                                                    
     get  gas  to Cook  Inlet.  Right  now, as  required  in                                                                    
     ballot  measure  3, there  is  a  requirement that  was                                                                    
                                                           th                                                                   
     actually - we passed a couple of days  ago, on June 15                                                                     
     to issue  a report,  a development plan,  competency in                                                                    
     about 11  different items. We're frankly  late on that.                                                                    
     We're going to do that  by about mid-August. We believe                                                                    
     that is  a reasonable timeline. In  addition, we'll put                                                                    
     out at that  same time a report on how  we believe Cook                                                                    
     Inlet gas or  North Slope gas could be  brought to Cook                                                                    
     Inlet.                                                                                                                     
                                                                                                                                
     To put it  in perspective for you here, I  listed out a                                                                    
     list of the projects that I'm  sort of aware of and the                                                                    
     price  tags that  are thrown  out  as being  associated                                                                    
     with them. You heard  yesterday from the Port Authority                                                                    
     with their Y-line  concept that weighs in  at about $26                                                                    
     billion. The producers have talked  about a highway gas                                                                    
     line,  very large  in diameter,  maybe 52  inches, down                                                                    
     through Canada  and all  the way  to Chicago  for about                                                                    
     $19  billion. We've  heard from  Enbridge and  a little                                                                    
     bit from  TransCanada at this  point of maybe  a little                                                                    
     more modest  highway project weighing  in at  about $15                                                                    
     billion  to  Alberta.  If   you  remember  back,  Yukon                                                                    
     Pacific  had described  an LNG  project  for about  $12                                                                    
     billion out of  Valdez. The one we're  looking at would                                                                    
     be  about  $10.5  billion. Additionally,  a  number  of                                                                    
     years  ago, some  Cook Inlet  companies and  some North                                                                    
     Slope  companies  looked at  a  project  for 1  billion                                                                    
     cubic  feet a  day out  of Cook  Inlet and  that was  a                                                                    
     little under  $7 billion. We  are looking at  a concept                                                                    
     of a bullet  line - a small line direct  from the North                                                                    
     Slope to  Cook Inlet and  that would weigh in  at about                                                                    
     $2 to  $3 billion  and, additionally, we're  looking at                                                                    
     the spur line.                                                                                                             
                                                                                                                                
     ANGDA itself, as  you can see by the  chart, is tending                                                                    
     to look at  the lower side and the very  Alaska side of                                                                    
     these issues,  not to  say we don't  try to  learn from                                                                    
     and keep up with what's  going on in the other projects                                                                    
     and,  frankly,  look for  ways  to  interact with  them                                                                    
     because, for  instance, the  concept of  a spur  line -                                                                    
     who gets  the gas to where  - is a very  important part                                                                    
     of that notion.                                                                                                            
                                                                                                                                
     But  this is  kind of  the  suite and  even though  the                                                                    
     focus  of this  hearing  and the  focus of  everybody's                                                                    
     effort is very clearly at  that producer project at $19                                                                    
     billion, it's  very important that  you realize  all of                                                                    
     these other  potential projects are  on the  table. And                                                                    
     the reason, simply  put, is a $19  billion project that                                                                    
     requires  the  approval  of a  half-dozen  to  a  dozen                                                                    
     entities has a chance  factor of actually going forward                                                                    
     but it's  kind of low,  and so  you have to  have other                                                                    
     projects in  the screen or  we're going to end  up sort                                                                    
     of hitting the wall,  being stopped, and having nothing                                                                    
     to do at that point.                                                                                                       
                                                                                                                                
     The LNG project in particular  that we're looking at is                                                                    
     portrayed on  this chart.  Keeping in  mind that  a gas                                                                    
     conditioning  facility  and  the  first  530  miles  of                                                                    
     pipeline is common to  almost everybody's project. This                                                                    
     one happens  to be a  36 inch  line, which is  the same                                                                    
     size, for  instance, that  Enbridge proposed  for going                                                                    
     down  the highway.  But it  is definitely  smaller than                                                                    
     what the producers have talked about.                                                                                      
                                                                                                                                
     The  liquefaction  trains  here are  very  large.  They                                                                    
     reflect the latest kind of  a technology that's been in                                                                    
     use.  There  is capital  money  included  for a  tanker                                                                    
     fleet that is a mixture  of foreign flag and Jones Act.                                                                    
     And, again,  we don't intend  to own those  tankers. We                                                                    
     would contract  for them basically.  But to get  a feel                                                                    
     for the cost  of service and to be  comparable to other                                                                    
     projects  that deliver  to  a market,  we  felt it  was                                                                    
     important to include the money.                                                                                            
                                                                                                                                
     The other  basic piece  of ANGDA's  work in  looking at                                                                    
     the LNG  project has  to do  with the  benefits diagram                                                                    
     and a number of you  have seen this before. In addition                                                                    
     to just measuring  a project's return in  terms of just                                                                    
     dollars to  the State  of Alaska, you  have to  look at                                                                    
     the  full  suite  of  these   benefits.  We  have  just                                                                    
     completed,  and   it  is  now  available   publicly,  a                                                                    
     benefits   model,  a   huge   spreadsheet  model   that                                                                    
     incorporates  not only  the revenue  side, but  all the                                                                    
     whole  economic impacts  and all  the other  things. In                                                                    
     addition  you'll  notice  in here  we've  included  the                                                                    
     provision for  moving gas  to the  coastal communities,                                                                    
     moving gas for LPG to  the river communities of Alaska.                                                                    
     We think  that's a very  important part of it.  So that                                                                    
     is the totality of our focus.                                                                                              
                                                                                                                                
     It turns  out that  when we look  at all  these issues,                                                                    
     our business  model is  very clear.  If we  can provide                                                                    
     the lowest  cost of service,  delivery of gas,  that is                                                                    
     good for  everybody. It  encourages everything  good to                                                                    
     happen  on the  North Slope.  It encourages  everything                                                                    
     good  to  happen   in  Alaska  in  terms   of  our  own                                                                    
     consumers,  our own  industries,  everything else  and,                                                                    
     frankly, it's  good for the  ultimate customer  down in                                                                    
     the Lower 48 or across the seas.                                                                                           
                                                                                                                                
     If you take the $10.5  billion that we're looking at in                                                                    
     our capital  cost and recognize  that it's a  2 billion                                                                    
     cubic feet a  day project, we go  through a calculation                                                                    
     of a cost  of service. This is similar to  the kinds of                                                                    
     calculations you  saw yesterday from J.P.  Morgan. I've                                                                    
     shown two cases  here. The top one is a  30-70 split on                                                                    
     equity to  debt and a  12 percent return on  equity and                                                                    
     an 8 percent  bond rate basically on debt.  And you can                                                                    
     see the calculation here would  yield $2.51. Again, the                                                                    
     way you use  this kind of chart notionally  is then you                                                                    
     would add  to that a  wellhead value, let's say  it's a                                                                    
     dollar  - or  99 cents  to keep  the arithmetic  easy -                                                                    
     getting  $3.50. You  could then  compare that  $3.50 to                                                                    
     your  expectation  of  price  in  the  market.  If  you                                                                    
     expected a $3.50  price in the market,  what that would                                                                    
     say  is that  you have  a project  that can  realize 99                                                                    
     cents  at the  wellhead and  still yield  a 12  percent                                                                    
     return on equity and pay a debt rate of 8 percent.                                                                         
                                                                                                                                
     And  the alternative,  if  you  change the  debt-equity                                                                    
     structure and  you make  some different  assumptions on                                                                    
     what the  bond rate is,  that number goes down  in this                                                                    
     case to  $1.94. And again, all  these calculations have                                                                    
     been  made using  a  model that  was  developed and  is                                                                    
     available publicly  from Roger Marks in  the Department                                                                    
     of Revenue.  I've used that  as the base model  for all                                                                    
     our  calculations.  It  is  also   the  model  that  is                                                                    
     embedded   in  our   benefits  spreadsheet   model  and                                                                    
     everything else.  And, very frankly, I  would encourage                                                                    
     apples to apples  that while people might  want to look                                                                    
     at projects  other ways, it's  kind of helpful  if they                                                                    
     do the calculation  also with this model so  we can get                                                                    
     a  handle.  And that's  why  I  showed you  the  second                                                                    
     column  on this.  This is  the  producers' $19  billion                                                                    
     project plugged  into the  same model  and this  is the                                                                    
     result it  yields. You'll notice it's  a slightly lower                                                                    
     cost  of  service to  Chicago  and  it has  some  other                                                                    
     characteristics  that  are  positive. Again,  we  think                                                                    
     it's very important to explore  all of those issues and                                                                    
     see how they fit together.                                                                                                 
                                                                                                                                
     I guess I  wanted to just add a little  bit of a flavor                                                                    
     here. As  ANDGA looks  at this, it  is our  belief that                                                                    
     for  smaller projects  that are  undertaken by  a state                                                                    
     public  corporation  acting  as  a  utility,  we  could                                                                    
     achieve very  high debt rates  and very low  bond rates                                                                    
     on those. Now, certainly  for bigger projects measuring                                                                    
     in  the 10s  and 20  billions of  dollars, I  think the                                                                    
     advice you  heard probably  yesterday from  J.P. Morgan                                                                    
     is  more   indicative.  But   we  still   believe  that                                                                    
     something in  this range of say  70 percent debt-equity                                                                    
     ratio  is very  achievable.  We believe  also that  the                                                                    
     state   has   also    probably   more   modest   equity                                                                    
     considerations than others. And  I'll show you how that                                                                    
     comes into play towards the end of this presentation.                                                                      
                                                                                                                                
     I did want  to reflect to you a couple  things that are                                                                    
     going on  and, again, just  in a general sense,  say to                                                                    
     you this is why you  need to keep revisiting this issue                                                                    
     because  I know  the legislature  visited very  heavily                                                                    
     two-three  years ago  the gas  issue. Well,  I hate  to                                                                    
     break it  to you,  but the  world's changed  and that's                                                                    
     what this chart  shows. Up until several  years ago the                                                                    
     United  States,  because of  the  great  excess of  gas                                                                    
     supply to  demand, had  the lowest  price in  the world                                                                    
     for gas. What we've seen  is that supply go away. We've                                                                    
     seen  the price  rise  as you  would  expect and,  more                                                                    
     importantly,  we're  seeing  the  world  price  of  gas                                                                    
     converge. All those dynamics are  very powerful. One of                                                                    
     the things  in that convergence  is LNG and  moving gas                                                                    
     between  various  producing  countries all  around  the                                                                    
     world to  various marketplaces and  we should  see some                                                                    
     equilibrating  of  that  price, very  similar  to  what                                                                    
     happened to oil.                                                                                                           
                                                                                                                                
     Now we don't  necessarily believe a 'gas PEC'  or a 'G-                                                                    
     PEC'  will form  that  fulfills that  same function  of                                                                    
     supply demand price  balance but it is  very clear that                                                                    
     the  five mega-major  oil  companies,  British Gas  and                                                                    
     maybe a couple of  the Japanese trading companies, will                                                                    
     be  the major  players  controlling that  gas flow  and                                                                    
     it's reasonable  to expect that  we will  see something                                                                    
     happen that is not unlike what happened on oil.                                                                            
                                                                                                                                
     Again, we  have looked at  our project compared  to the                                                                    
     projects  around  the  world. Certainly  we  understand                                                                    
     why, for instance, British  Petroleum and Indonesia may                                                                    
     choose to develop that gas and  move it as LNG to Baja,                                                                    
     California.  Those   are  things   that  each   of  the                                                                    
     companies, each  of the players  in this, will  make an                                                                    
     analysis. One  of the  more interesting  comparisons we                                                                    
     would  point out  to you  is that  Shell, who  does not                                                                    
     have  any Alaska  gas, is  a major  player in  LNG, and                                                                    
     they  chose,   without  any  contracts  or   any  other                                                                    
     commitments to  develop Sakhalin - and  Sakhalin is, by                                                                    
     comparison to our LNG project,  Sakhalin is $10 billion                                                                    
     for 1.3  billion cubic feet a  day, - and if  you think                                                                    
     about  our project  as...$10.5  billion  for 2  billion                                                                    
     cubic feet a day, you  can see that we probably compare                                                                    
     very favorably  in terms of economics.  And that's what                                                                    
     our  broad look  says, is  that broadly  we are  in the                                                                    
     pack. We  are certainly  not the  highest cost.  We are                                                                    
     certainly not  the lowest cost  but we can  compete, we                                                                    
     believe, with all these projects.                                                                                          
                                                                                                                                
     Also  there are  some distance  advantages we  enjoy to                                                                    
     the West  Coast and some  of those may be  difficult to                                                                    
     capture  if  we act  exactly  like  the mega-major  oil                                                                    
     companies. The  great part  of being  ANGDA is  as this                                                                    
     public corporation of  the state, we don't  have to act                                                                    
     like the  mega-majors, we  can look  for other  ways to                                                                    
     compete  in   the  marketplace   with  them   that  are                                                                    
     different than  their strategies.  And again,  we don't                                                                    
     have  a portfolio  of projects.  We have  basically one                                                                    
     project and we have to find a way to make it work.                                                                         
                                                                                                                                
     On the  LNG scene,  there's also  some very  good news.                                                                    
     What  we've seen  is a  dramatic decrease  in the  unit                                                                    
     cost  to build  these  plants and  liquefy the  natural                                                                    
     gas.  And again,  I've identified  the  source of  this                                                                    
     chart. I left BP's identity  on it. It was presented in                                                                    
     Washington,  D.C. about  six,  seven months  ago. So  I                                                                    
     mean  it's very  recent  information.  It's very  real.                                                                    
     Almost everybody  has observed  this trend. One  of the                                                                    
     things we will  do by August is validate  the trend and                                                                    
     validate  whether it  is  applicable  to our  situation                                                                    
     here in Alaska. This  makes the difference, this chart,                                                                    
     between an LNG plant that  costs $2 billion, $3 billion                                                                    
     or $4 billion. I've  taken the conservative approach of                                                                    
     using only  $3 billion right  now but potentially  if I                                                                    
     took this chart  at its face value we  could write down                                                                    
     $2  billion  for  that. Those  kinds  of  cost  savings                                                                    
     dramatically alter your economics.                                                                                         
                                                                                                                                
     Additionally,  the world  trade right  now in  terms of                                                                    
     LNG tankers with all the  number of tankers being built                                                                    
     in a wide  variety of places around  the world, there's                                                                    
     a very definite trend  downward and how that translates                                                                    
     for us, how  the Jones Act issues get  worked, is going                                                                    
     to be a subject of  our report. We're very cognizant of                                                                    
     those issues. But  this is a very  favorable trend and,                                                                    
     again, this is from the  Department of Energy so I have                                                                    
     every reason to believe  the U.S. Government's got this                                                                    
     one right.                                                                                                                 
                                                                                                                                
     I wanted to  take a minute and talk a  little bit about                                                                    
     pipelining  costs and  the  reason  is that  everything                                                                    
     you've  heard  over  the  last  several  days  involves                                                                    
     anywhere from $2, $3, $4 billion  on up to $8, $10, $12                                                                    
     billion worth  of pipeline  and underlying  those costs                                                                    
     are  cost  estimates.  And  what I  did  was  I  pulled                                                                    
     together here  a whole series  of estimates  and actual                                                                    
     costs  covering  a  fairly wide  spectrum  of  people's                                                                    
     opinions  on  cost. For  instance,  the  last time  the                                                                    
     legislature looked  at this about three  years ago, the                                                                    
     detailed  cost  estimates  that   were  made  -  tariff                                                                    
     calculations and  all that, were  based on  the concept                                                                    
     of $140[,000]  per inch diameter mile.  In other words,                                                                    
     what  you do  is you  take the  billions of  dollars of                                                                    
     cost, you  divide by  how many  miles that  pipeline is                                                                    
     and by  how many inches in  diameter it is. It's  a way                                                                    
     of   kind  of   equating   different  size   pipelines,                                                                    
     different lengths,  and everything to one  number. It's                                                                    
     not certainly  a requirement of  science that  they all                                                                    
     be  exactly the  same but  generally, in  an estimating                                                                    
     sense, one  would expect them  to be very  similar. And                                                                    
     in the past  the number that was used  was $140,000 per                                                                    
     inch diameter mile. Well  the producers, after spending                                                                    
     $125  million,  have  published   a  number,  which  is                                                                    
     $115,000 per  inch diameter miles, and  somebody forgot                                                                    
     to say  thank you  to them because  they just  saved 25                                                                    
     percent  of   the  cost  of  the   pipeline.  That's  a                                                                    
     significant  reduction.  Again,  that makes  a  lot  of                                                                    
     difference in these numbers.                                                                                               
                                                                                                                                
     Now, at  this point do  we have any of  the information                                                                    
     that  allows us  to know  if  that's just  a result  of                                                                    
     somebody else doing  the estimate? And I  will tell you                                                                    
     as an engineer sometimes  that happens. People estimate                                                                    
     things different.  Or, is  there some  legitimate thing                                                                    
     that  we   can  understand?  Is  it   better  trenching                                                                    
     techniques   or  something?   Is  it   a  technological                                                                    
     innovation?  Does  it have  something  to  do with  the                                                                    
     metallurgy  of the  pipe or  whatever?  Maybe there  is                                                                    
     some difference there.                                                                                                     
                                                                                                                                
     The other part  of it is that the  actual experience in                                                                    
     the Lower  48, the last  big pipelines that  were built                                                                    
     in  Canada, and  these  are big,  long distance,  large                                                                    
     diameter pipelines, came out  on comparative cost to be                                                                    
     a  factor  of  three  or   four  lower  than  even  the                                                                    
     $115,000.   And  it   seems  to   me  that   again,  my                                                                    
     engineering   instincts  tell   me  that   I  need   to                                                                    
     understand why  building a pipeline in  Alaska is three                                                                    
     or  four times  more  costly than  building  it in  the                                                                    
     Lower 48.  These issues  are not  trivial because  as a                                                                    
     legislature you're going to be  asked to make decisions                                                                    
     -  multi-billion   dollar  decisions.  And   what  that                                                                    
     pipeline number is has some  real significance in which                                                                    
     way that decision may be  affected or altered or looked                                                                    
     at. So  again, we're hopeful that  over time, available                                                                    
     to the  public and for  some level of scrutiny  is some                                                                    
     of  the  background  that  kind   of  goes  with  these                                                                    
     numbers.                                                                                                                   
                                                                                                                                
     The  other issue  I wanted  to broadly  flag to  you is                                                                    
     that with the  array of projects on the  table, I think                                                                    
     it's kind of  good to go back to basics  and that's why                                                                    
     I included this  table, which just kind of  shows for a                                                                    
     whole  bunch  of  different   pipe  sizes  the  implied                                                                    
     nominal  capacity and,  more  importantly, the  implied                                                                    
     reserves that go with it.  And again, the way you would                                                                    
     use  this table  is if  you were  looking at  a 36-inch                                                                    
     pipe, its  nominal capacity is roughly  3 billion cubic                                                                    
     feet a  day and  for something  - say  a 30  year life,                                                                    
     would require about 22 trillion  cubic feet of reserves                                                                    
     to  support  that type  of  a  pipeline. Now  that's  a                                                                    
     pretty  significant consequence.  Again,  I'm going  to                                                                    
     show you some of the  variations that take place as you                                                                    
     vary the reserve but 22  trillion is very close to what                                                                    
     is not only  known but developed on the  North Slope in                                                                    
     terms of  Prudhoe Bay. The  bigger number,  35 trillion                                                                    
     we talk  about, is what is  quote, known but it  is not                                                                    
     necessarily  developed.  And   again,  as  a  petroleum                                                                    
     engineer type,  as a former  oil company type,  I'm not                                                                    
     particularly scared by that  difference but the bankers                                                                    
     might be. The  people that you go to  borrow money from                                                                    
     would look  very differently at  the 22  trillion cubic                                                                    
     feet as opposed to say the  35 or the 50 trillion cubic                                                                    
     feet.  And,  as   you  can  see,  it   does  make  some                                                                    
     difference in this.                                                                                                        
                                                                                                                                
     The  other thing  is that  we put  together this  chart                                                                    
     just  to   try  and   show  you   the  full   range  of                                                                    
     possibilities. If one wanted to  look at a bullet line,                                                                    
     for instance to Cook Inlet,  if that's the only project                                                                    
     that  we could  see happening  within the  next several                                                                    
     decades, it  could be a pretty  small diameter pipeline                                                                    
     and  I'll show  you a  little more  about that  in this                                                                    
     chart. After the hearing yesterday  I went home and, of                                                                    
     course, instructed the  ANGDA engineering department to                                                                    
     get  in   gear  and   do  some  calculations   for  me.                                                                    
     Unfortunately  the  graphics   art  department  was  on                                                                    
     vacation  yesterday  so you  have  to  accept the  hand                                                                    
     drawn version but  at least I do have a  scanner and my                                                                    
     green graph  paper at  least is  on a  PowerPoint slide                                                                    
     so.... What this  chart is trying to  illustrate to you                                                                    
     is the fact  that as you get to larger  and larger pipe                                                                    
     sizes,  you  will always  get  a  lower tariff  if  the                                                                    
     pipeline is full. But if  you look at how the decrement                                                                    
     of cost  goes, once you  start to get above  36 inches,                                                                    
     you're into a  huge pipe anyway and  so going huge-huge                                                                    
     does not change the tariff, if you will, by a lot.                                                                         
                                                                                                                                
     The other dash  lines on here show you  what happens if                                                                    
     you put in  a pipe but you wrong size  it and you don't                                                                    
     have the  ability to  flow through it  at that.  And as                                                                    
     you can  see, that  penalty can add  up pretty  fast in                                                                    
     certain cases. So  again, the term I would  use is, you                                                                    
     know, you got to right size  the pipe. You have to make                                                                    
     sense of  what pipe  size you select  in terms  of what                                                                    
     you think the volume is. For  instance, if you put in a                                                                    
     pipe to  handle 4.5  billion cubic feet  a day  but the                                                                    
     market  gags for  the  first five  years  and can  only                                                                    
     accept half  that volume, there  is a  very significant                                                                    
     increase in the tariff, maybe  in the order of 50 cents                                                                    
     for that one  happening. So again, you have  to be very                                                                    
     careful that you get it  right in terms of reserves, in                                                                    
     terms of  market volume and  everything else.  Again, I                                                                    
     flag  that to  you because  as a  great student  of the                                                                    
     public record,  I will  tell you  there is  nothing out                                                                    
     there at this time that  tells us about what the market                                                                    
     volume for  North Slope gas  might be.  There's nothing                                                                    
     you can look  at that will tell you  whether the market                                                                    
     for North Slope gas is say  2 billion cubic feet a day,                                                                    
     as one of the Stranded  Gas Act applicants has said, or                                                                    
     4.5 as  another applicant  has said,  or 6,  as another                                                                    
     applicant has  said. There's nothing  out there  on the                                                                    
     public  record   that  allows  you  to   look  at  that                                                                    
     difference  and it  does matter,  and it  is important.                                                                    
     This  is a  very  unsophisticated  calculation but  800                                                                    
     miles in this case, by  the way, is significant because                                                                    
     800 miles represents roughly  the distance from Prudhoe                                                                    
     Bay to  the Canadian border. It  represents roughly the                                                                    
     difference between  Prudhoe Bay and Valdez  and Prudhoe                                                                    
     Bay  to  Cook Inlet.  So  again,  you're looking  at  a                                                                    
     chart, which  portrays for  different volumes  and pipe                                                                    
     sizes roughly the pipelining cost  or tariff for any of                                                                    
     those cases.                                                                                                               
                                                                                                                                
     Here's  an example  of the  kind  of calculations,  and                                                                    
     again,  I've done  this with  the revenue  department's                                                                    
     model that Mr.  Marks developed and again,  you can run                                                                    
     cases until  you're blue in  the face on this.  This is                                                                    
     just  one looking  at the  reserve assumption  for both                                                                    
     the  LNG  project  and   the  highway  project.  What's                                                                    
     interesting is that  if you kind of look  at the middle                                                                    
     line  there,  if  I  move  about  the  same  amount  of                                                                    
     reserves through both projects,  even though it takes a                                                                    
     lot longer  in the  case of the  LNG project,  then you                                                                    
     would expect  roughly the cost  of service to  be about                                                                    
     the  same,  and  that's  what  the  chart,  the  model,                                                                    
     calculates  in this  case. And  it's just  a method  of                                                                    
     looking  at the  comparison.  Again, you  can see  what                                                                    
     happens in  the highway project, the  bottom right-hand                                                                    
     number, if there  is not enough reserves.  If you build                                                                    
     a project thinking  there's 50 but only  half shows up,                                                                    
     that does dramatically change the cost factors.                                                                            
                                                                                                                                
     And  then finally  I just  sort of  - because  I really                                                                    
     don't  have maybe  the time  this  afternoon to  really                                                                    
     participate, I wanted to offer  you one thought about -                                                                    
     as you kind of look at  how tariffs might be built and,                                                                    
     again,  the advantage  of having  ANGDA  in this  whole                                                                    
     fray is  that we are  able to think  constructively and                                                                    
     creatively  about how  to make  the  project work.  And                                                                    
     frankly, my trips  to the Lower 48  and my interactions                                                                    
     with a variety of people  that kind of quote, represent                                                                    
     the  market say  that Alaska  has to  find some  way to                                                                    
     have a little more customer  appeal. And I think one of                                                                    
     the  ways to  do that  is  to look  at some  conceptual                                                                    
     variable  tariff methodology,  which basically  invites                                                                    
     the customer to share and  help us get over our hurdle,                                                                    
     which is  low prices and,  at the same time,  offer the                                                                    
     customer  what they  want, which  is  some discount  at                                                                    
     higher  prices.   And in  talks  with regulators,  this                                                                    
     kind  of  a  scheme,  conceptually at  least,  is  very                                                                    
     appealing  to them.  And what  I've  portrayed here  is                                                                    
     simply,  for instance,  if the  market price,  whatever                                                                    
     that means, is  say $3 or less,  basically the customer                                                                    
     would  be willing  to  pay  an upper  floor  of $3  and                                                                    
     basically  there   would  be  for   transportation  and                                                                    
     production a split  that was agreed to on  that. As the                                                                    
     market price  went up,  there would be  a split  of who                                                                    
     garnered whatever price increases  there were here. And                                                                    
     as you'll  notice here in  this case, I've  allocated a                                                                    
     greater part  of the increase  to the wellhead  than to                                                                    
     the gas line or to  the transportation charge. And then                                                                    
     above a certain  point, the gas line  charge would fix,                                                                    
     basically,  at a  maximum and  then the  wellhead would                                                                    
     offer  some discount  to the  customer  in return.  And                                                                    
     again,  the advantage  is that  this kind  of a  scheme                                                                    
     would  allow   you  more  favorably  to   borrow  money                                                                    
     frankly, because by having  the customer participate in                                                                    
     the  form of  the guarantee  at the  low end,  which is                                                                    
     what  the  banker worries  about,  is  a very  powerful                                                                    
     thing because again, these customers  tend to have very                                                                    
     big  asset  bases.  They have  very  captured  sets  of                                                                    
     customers.  They  are   using  monopolies  -  regulated                                                                    
     monopolies,  and all  those things.  At  the high  end,                                                                    
     very  frankly, giving  up some  discount at  the higher                                                                    
     prices may be  the price of getting all this  to go and                                                                    
     some scheme  like this may  work. I don't  know. Again,                                                                    
     these numbers  are for  illustrative purposes  only and                                                                    
     obviously  that would  be subject  to a  lot of  multi-                                                                    
     party  discussion  and other  things  so  it's just  an                                                                    
     idea.                                                                                                                      
                                                                                                                                
     Mr.  Chairman,  with  that   I'll  quit  and  entertain                                                                    
     whatever  questions you  have.  I  did include  several                                                                    
     other sort  of handouts and  pass outs of  other things                                                                    
     that  are going  on or  other things  that people  have                                                                    
     said about us or whatever.                                                                                                 
                                                                                                                                
SENATOR TOM WAGONER said he  was cautioned, during a conversation                                                               
about FERC  controls, to be cognizant  that FERC has more  of the                                                               
control  over   that  pipeline  and  sometimes   asserts  certain                                                               
controls  over what  is  put  in the  pipeline  and the  delivery                                                               
point. He asked if that is true.                                                                                                
                                                                                                                                
MR. HEINZE said his personal  experience with FERC related to oil                                                               
pipeline issues but  FERC can do just about anything  it wants to                                                               
do.  He  said  sometimes  the  logic  of  its  decisions  is  not                                                               
apparent.  He noted  that ANGDA's  biggest concern  right now  is                                                               
that  the conditions  for getting  gas  off a  big pipeline,  the                                                               
highway  pipeline   for  example,   may  be  very   difficult  to                                                               
negotiate, especially  with FERC,  because [ANDGA] does  not have                                                               
any  great  standing  on  a  national  level.  Second,  the  lost                                                               
revenues of  gas taken off  within Alaska  would be counted  as a                                                               
cost against  the tariff ANGDA  is charged, which is  of concern.                                                               
He said that  is a fancy way  of saying that ANGDA  might have to                                                               
pay the full  fare even though it took gas  off only one-third of                                                               
the way down the pipeline. He  said he can find no guarantee that                                                               
Alaska  won't find  itself  in that  situation.  He offered  that                                                               
ANGDA has  proposed that  it be  an investor  in the  project, at                                                               
least for the  volume of the gas  that it would like  to see used                                                               
within Alaska. That way, ANDGA  could provide some protection for                                                               
the tariff and off-take point within  Alaska. He said in the long                                                               
run, that  is an issue  that will  have to be  guaranteed through                                                               
the  Stranded Gas  Act and  other  proceedings. ANGDA's  approach                                                               
continues  to be  the  positive  one, and  that  is  by being  an                                                               
investor, which lessens the risk  of the other parties and leaves                                                               
ANGDA in direct control of what happens in Alaska.                                                                              
                                                                                                                                
SENATOR  LYMAN  HOFFMAN  referred  to the  ANGDA  chart  entitled                                                               
"Benefits  to Alaskans"  and asked  how much  work has  gone into                                                               
calculating  the  feasibility  of  delivering LNG  to  the  river                                                               
communities and to barge LNG to the coastal communities.                                                                        
                                                                                                                                
MR. HEINZE  said last Friday  he met with the  municipal advisory                                                               
group on the  Stranded Gas Act and showed that  group, in detail,                                                               
this  benefits analysis  spreadsheet. He  said one  of the  major                                                               
factors would  be fuel  costs - power  cost equalization  and the                                                               
cost of fuel in rural communities  and other places. He said that                                                               
ANGDA  is  trying  to  go  beyond the  "pretty  drawing"  and  is                                                               
attempting  to reduce  those benefits  to hard  numbers. [End  of                                                               
TAPE 04-09, SIDE B]                                                                                                             
                                                                                                                                
TAPE 04-10, SIDE A                                                                                                            
                                                                                                                                
MR. HEINZE  continued by  saying second,  ANGDA believes  that on                                                               
the rivers,  propane may  be the  better way  to meet  the energy                                                               
needs of many rural villages. ANGDA  believes gas can be moved to                                                               
the coastal communities in the  form of LNG or compressed natural                                                               
gas. He  explained the reason  to liquefy natural gas  by cooling                                                               
it  to cryogenic  temperatures is  that it  provides a  600 to  1                                                               
volume  advantage. It  weighs the  same but  fits in  a container                                                               
1/600   of the size.  Compressing the  natural gas to  about 2500                                                               
psi  can  reduce the  size  of  the  container, and  that  volume                                                               
advantage is  about 100  to 1. Although  the volume  advantage is                                                               
not as  great as that of  LNG, the cost makes  compression a very                                                               
competitive idea.  ANGDA believes that compressed  natural gas is                                                               
certainly  a possibility  for many  of  the coastal  communities.                                                               
ANDGA has  looked at the idea  of barging LNG. A  small LNG plant                                                               
located  in  Cook   Inlet  could  be  the  source   for  the  LNG                                                               
distributed to the coastal communities.                                                                                         
                                                                                                                                
MR. HEINZE  said ANGDA  has estimated  that bringing  North Slope                                                               
gas to  the [Anchorage] area  will provide about $100  million of                                                               
disposable income  per year  in this  economy, the  equivalent of                                                               
adding $150  million in payroll.  He said ANGDA believes  it must                                                               
be  prepared to  implement some  of the  benefits no  matter what                                                               
project goes forward.                                                                                                           
                                                                                                                                
SENATOR  HOFFMAN   said  the  problem   with  propane   in  rural                                                               
communities is  that it is  used primarily for cooking,  which is                                                               
not the  largest consumptive use.  Electricity is  generated with                                                               
diesel  and  many  of  the communities  would  be  interested  in                                                               
converting to  LNG for  heating and  to generate  electricity. He                                                               
expressed interest in seeing a  comparison of the LNG numbers for                                                               
heating and electrical generation.                                                                                              
                                                                                                                                
MR. HEINZE  replied that compressed  natural gas may be  an ideal                                                               
feed  for a  very efficient  gas turbine  unit. Almost  any clean                                                               
hydrocarbon fuels, whether ethane,  propane, or methane, are very                                                               
good  feeds for  anything  resembling fuel  cell technology.  The                                                               
advantage of  propane is  that any appliance  can run  on propane                                                               
and any hardware  store has the gadgets necessary to  hook it up.                                                               
He  said  right  now,  the municipal  advisory  group  under  the                                                               
Stranded Gas  Act has  hired a  contractor to  look at  the total                                                               
socioeconomic  impacts. That  study will  answer some  of Senator                                                               
Hoffman's  questions   about  the  best  fuel   source  for  each                                                               
community and should be available within a matter of months.                                                                    
                                                                                                                                
SENATOR WAGONER  asked what impact  a bullet line  from Fairbanks                                                               
or  Delta to  Cook Inlet  would have  on current  exploration and                                                               
production in Cook Inlet.                                                                                                       
                                                                                                                                
MR. HEINZE said  he provided some background  information on Cook                                                               
Inlet and explained  that Cook Inlet is down to  2 trillion cubic                                                               
feet,  while the  amount used  per  year is  roughly 200  billion                                                               
cubic feet. That amounts to a ten-year supply. He commented:                                                                    
                                                                                                                                
     When you get down to a  10-year supply, a lot of things                                                                    
     stop working  in terms of  borrowing money if  you're a                                                                    
     utility  so  basically Cook  Inlet  finds  itself in  a                                                                    
     situation  where it  probably  needs  to replace  every                                                                    
     year  just about  what it  consumes. The  good news  is                                                                    
     that can be done. The bad  news is to do it, it's going                                                                    
     to cost more  money than we pay right now  for gas. The                                                                    
     replenishment  probably has  to  take  place at  prices                                                                    
     competitive with  the Lower 48, because  that's what it                                                                    
     takes to attract  capital to explore for  the gas here.                                                                    
     If North Slope gas with  a very large supply was hooked                                                                    
     to  this area,  it  is reasonable  to  expect that  the                                                                    
     prices would  return to today's levels.  Roughly today,                                                                    
     the  prices are  about $2.50  wholesale. It's  expected                                                                    
     that the new  prices, you might say,  will eventually -                                                                    
     and  in about  five years  that's what  we'll pay  - is                                                                    
     something double  that, about  $5. The  availability of                                                                    
     North Slope gas into this  area as a large supply would                                                                    
     probably take the  prices back to $2.50.  What it would                                                                    
     probably do  is discourage  exploration in  that sense.                                                                    
     The  exploration   that  is   taking  place   now,  the                                                                    
     decisions  people  are  making now,  they  are  selling                                                                    
     under long-term contracts at very nice prices.                                                                             
                                                                                                                                
     So, what  would I  predict? I  predict that  people who                                                                    
     find gas  now are  going to  get a  good price  for it.                                                                    
     Would  I predict  that  they should  wait  five or  six                                                                    
     years to go  looking? No. I mean if it  was me, I'd get                                                                    
     on  with  it right  now  and  be  uncertain as  to  the                                                                    
     future.                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS thanked  Mr.  Heinze and  called  Mr. Marks  to                                                               
testify.  He told  members that  Mr. Marks  has been  a petroleum                                                               
economist  with the  Tax Division  of the  Department of  Revenue                                                               
since  1983 and  that  much of  his recent  work  has focused  on                                                               
analyzing the commerciality of North Slope gas.                                                                                 
                                                                                                                                
MR.  ROGER  MARKS,  Department   of  Revenue,  told  members  his                                                               
presentation would focus on the  impact of property and corporate                                                               
income taxes on tariffs. [A  paper copy of Mr. Marks's PowerPoint                                                               
presentation is located in the committee file.] He began:                                                                       
                                                                                                                                
     Just to review on what the  elements of a tariff are, a                                                                    
     tariff is  simply a way  of passing through all  of the                                                                    
     costs and so  the pipeline owner can  be reimbursed for                                                                    
     all  of his  costs and  also make  a profit.  There are                                                                    
     different  ways to  characterize  the  costs. I've  put                                                                    
     them  into  seven  different categories  here:  capital                                                                    
     costs,  which are  recovered through  depreciation over                                                                    
     time and  include interest during construction  and, on                                                                    
     the  equity  part,   funds  used  during  construction;                                                                    
     operating  costs;  debt  or  interest  costs;  property                                                                    
     taxes; state  and federal  corporate income  taxes; and                                                                    
     the  return on  equity,  which is  the profit  element,                                                                    
     which we'll discuss in some detail.                                                                                        
                                                                                                                                
     So starting  out with the  property tax on page  3, the                                                                    
     property tax  administered under  AS 43.56 is  based on                                                                    
     20 mills,  or 2 percent  of the remaining value  of the                                                                    
     pipeline at  any point  in time.   Value  is determined                                                                    
     based  on  both  a  cost  or  income  approach  by  our                                                                    
     assessors. Since  it's based on remaining  value at any                                                                    
     point in time,  it starts high and  declines. Any piece                                                                    
     of property  that's within a municipality,  they retain                                                                    
     their share of  the property tax up to  their mill rate                                                                    
     and the state gets the  remainder. In other words if, I                                                                    
     believe, the  Fairbanks North Star Borough,  their mill                                                                    
     rate is I  think about 15 mills now, so  they would get                                                                    
     15 mills, the remaining 5 mills would go to the state.                                                                     
                                                                                                                                
     On  the producers'  proposed project,  the $19  billion                                                                    
     project to  Chicago, the portion  of that in  Alaska is                                                                    
     about  $7  billion,  which  includes  the  conditioning                                                                    
     plant  and  the  pipeline  part.  My  estimate  of  the                                                                    
     property tax  part of  that would be  about 8  cents on                                                                    
     the tariff.                                                                                                                
                                                                                                                                
     Page  4  -  in  thinking about  the  economics  of  the                                                                    
     project  and  the  viability, there  are  a  couple  of                                                                    
     issues  that   the  property  tax  presents   that  are                                                                    
     problematic to some extent for  the pipeline. The first                                                                    
     is  that the  property tax  is what  we call  front-end                                                                    
     loaded. The way we administer  the tax through the law,                                                                    
     the tax starts accruing as  soon as property enters the                                                                    
     state,  which  could  be  years  before  it  goes  into                                                                    
     service  and  starts  producing revenue.  On  the  time                                                                    
     value of money, paying those  taxes reduces the rate of                                                                    
     return. And  again, the interest and  funds used during                                                                    
     construction  accumulate and  are  put in  part of  the                                                                    
     tariff base.                                                                                                               
                                                                                                                                
     The  second problem  with the  property  tax is  what's                                                                    
     called  regressive  and  regressive, in  terms  of  tax                                                                    
     terms means that when profits  are low, the taxes are a                                                                    
     high  percentage of  the profits  and when  profits are                                                                    
     high, taxes  are a low  percentage of the  profits. The                                                                    
     regressivity  part creates  an  economic problem  again                                                                    
     when profits are low.                                                                                                      
                                                                                                                                
     In the case  of the property tax, one of  the big risks                                                                    
     of this project  is a cost overrun. If there  is a cost                                                                    
     overrun,  not only  do  you have  a  cost overrun,  but                                                                    
     since the property tax is  based on value, not only are                                                                    
     your costs  higher but your  property taxes  are higher                                                                    
     too, which kind of presents a double whammy.                                                                               
                                                                                                                                
     In the Stranded Gas Development  Act, a couple of these                                                                    
     problems have  been presented as  issues that  could be                                                                    
     addressed  in negotiations  with project  sponsors, the                                                                    
     idea being  there may be  a way to modify  the property                                                                    
     tax. This  has naturally created  a lot of  concern for                                                                    
     the  local municipalities  in terms  of their  tax base                                                                    
     being modified.  With the highway project,  it would be                                                                    
     the Fairbanks  North Star Borough  and the  North Slope                                                                    
     Borough who  would be affected  if the property  tax is                                                                    
     modified. Per the Stranded Gas  Act, it says that if we                                                                    
     do develop  a contract with the  project sponsors, that                                                                    
     a fair and  reasonable share of the amount  of money we                                                                    
     take in  as a  state should be  given to  both revenue-                                                                    
     affected communities, which are  ones whose tax base is                                                                    
     being affected,  and economically-affected communities,                                                                    
     ones  who  are  bearing  social burdens  because  of  a                                                                    
     project, that a fair and  reasonable share of the taxes                                                                    
     should be given  to them with due regard  to the amount                                                                    
     of the tax base, the amount of the social burdens.                                                                         
                                                                                                                                
     A  municipal advisory  group has  been established  for                                                                    
     the  Stranded  Gas Act  to  address  concerns that  the                                                                    
     local  jurisdictions have  over modifying  the property                                                                    
     tax and that group is up and running.                                                                                      
                                                                                                                                
     That's  really all  I have  to say  about the  property                                                                    
     tax. I was  going to go on to the  corporate income tax                                                                    
     now on  page 5.  In understanding the  corporate income                                                                    
     tax,  it's important  to sort  of understand  just what                                                                    
     the source  of income  is that's  being subject  to the                                                                    
     tax and, as we saw back  on slide 2, the tariff is made                                                                    
     up  of  several elements  and  all  those elements  are                                                                    
     costs  that  are  recovered  through  the  tariff.  The                                                                    
     return equity is not a  cash flow cost. What the return                                                                    
     on   equity  represents   is   an   allowance  for   an                                                                    
     opportunity  cost for  the cost  of equity  and, again,                                                                    
     that represents the income that's subject to the tax.                                                                      
                                                                                                                                
     On  page  6,  there's   an  example  showing  a  simple                                                                    
     derivation  of  the  return on  equity.  Just  in  this                                                                    
     example we assume  a $500 asset that's  80 percent debt                                                                    
     and 20  percent equity so  the equity part of  it would                                                                    
     be $100.  And let's  just assume it  has a  5-year life                                                                    
     and it's depreciated, I just  assumed for this example,                                                                    
     a  straight-line depreciation  where  there's just  $20                                                                    
     depreciated  each year  for 5  years.  There are  other                                                                    
     methods of  depreciation that are allowable  under FERC                                                                    
     methods,  depending  on  whether  you  want  to  get  a                                                                    
     declining  tariff   or  an   increasing  tariff   or  a                                                                    
     levelized  tariff, but  just a  real simple  method for                                                                    
     the   example  here,   it's   just   a  straight   line                                                                    
     depreciation.  And so,  you can  see if  you start  out                                                                    
     with  $100  and depreciate  $20  each  year, the  third                                                                    
     column  shows the  undepreciated amount  each year  and                                                                    
     then assuming  a return  on equity  of 10  percent, the                                                                    
     return on  equity in  each year would  be 10  the first                                                                    
     year,  then  8-6-4  and   2.  Under  long-term  capital                                                                    
     markets, return  on equity would probably  be something                                                                    
     around  12  percent. It  would  really  depend on  just                                                                    
     exactly when  the pipeline comes into  service and what                                                                    
     the capital  markets are  at the time.  I just  used 10                                                                    
     percent  here because  it's easier  to  multiply by  10                                                                    
     percent in looking at these figures.                                                                                       
                                                                                                                                
     But this return on  equity represents the income that's                                                                    
     subject to taxation  and I'll just note  here with this                                                                    
     straight-line depreciation, you get  a return on equity                                                                    
     that  declines  each  year and  this  would  produce  a                                                                    
     declining   tariff.   Again,    there   are   different                                                                    
     depreciation  methods  you  can  do to  have  either  a                                                                    
     levelized tariff or an increasing tariff.                                                                                  
                                                                                                                                
     On the  debt side  there's a mirror  image in  terms of                                                                    
     the tariff also. A similar  way to calculate the return                                                                    
     on debt, in this case it  would be with 80 percent debt                                                                    
     it would be  a $400 debt that there would  be return on                                                                    
     debt. The  debt would  have a  lower rate  of interest.                                                                    
     Again,  the  long-term  capital markets  -  that  would                                                                    
     probably  be about  8 percent.  Again, that  depends on                                                                    
     just  when  the  pipeline  is  built  and  the  capital                                                                    
     markets at  that time. On  the debt side of  this, what                                                                    
     we call the  return on equity here, the  return on debt                                                                    
     would actually be interest payments  and those - again,                                                                    
     it would be an element in  the tariff as well. But this                                                                    
     return  on  equity   is  not  a  cash   flow  cost  but                                                                    
     represents again the income subject to taxation.                                                                           
                                                                                                                                
     When  talking about  the  state  corporate income  tax,                                                                    
     it's useful to  know how it works on page  7. The state                                                                    
     corporate  income tax  - and  income  taxation in  most                                                                    
     states  is  administered  by  a  method  that's  called                                                                    
     apportionment  where either  U.S.  income or  worldwide                                                                    
     income  is apportioned  to the  state and  that becomes                                                                    
     the income  subject to taxation. The  reason states use                                                                    
     apportionment rather  than an actual sort  of cash flow                                                                    
     method of measuring income -  an example that's used is                                                                    
     sort of  if you have  General Motors producing  cars in                                                                    
     Michigan  and selling  them all  over  the country,  it                                                                    
     would  be  very difficult  to  determine  how much  the                                                                    
     income is determined  in each state. So  what states do                                                                    
     in general  is use this method  of apportionment where,                                                                    
     based  on economic  factors in  the  state relative  to                                                                    
     worldwide, you  apportion the worldwide or  U.S. income                                                                    
     back  to the  state. With  oil and  gas in  Alaska, the                                                                    
     apportionment  factors are  property  sales within  the                                                                    
     state  or  for a  pipeline  it  would be  gross  tariff                                                                    
     income,  and extraction  or production  if the  company                                                                    
     also  produces  oil  or  gas.  If  it's  just  a  plain                                                                    
     pipeline company it would be  two factors, property and                                                                    
     sales.                                                                                                                     
                                                                                                                                
     Moving over  to page 8,  this is how  the apportionment                                                                    
     factor  in Alaska  for oil  and gas  is determined.  It                                                                    
     looks  at the  relative  amount of  property sales  and                                                                    
     extraction  in  Alaska to  the  world....  There is  an                                                                    
     error  on  this. The  last  fraction  should be  Alaska                                                                    
     Extraction/Worldwide Extraction - not worldwide sales.                                                                     
                                                                                                                                
     But the three factors -  Alaska Property, as opposed to                                                                    
     the property tax,  where the property kicks  in when it                                                                    
     enters the state  with the income tax  as property when                                                                    
     the asset  goes into service.  So what we have  here is                                                                    
     the  three fractions,  the Alaska  part divided  by the                                                                    
     worldwide  part and  the average  of  those divided  by                                                                    
     three and that  gives you a factor. That's  sort of the                                                                    
     percent of your worldwide  activity that's deemed to be                                                                    
     in Alaska.                                                                                                                 
                                                                                                                                
     On the  extraction part, if  there's both oil  and gas,                                                                    
     the gas is  put on the BTU equivalent with  oil so it's                                                                    
     an   apples-apples  approach.   They   just  take   the                                                                    
     thousands of cubic  feet and divide by  six. That's the                                                                    
     mcf of gas  and the barrels of oil  on an apples-apples                                                                    
     basis.  Now   this  is  what   is  called   a  modified                                                                    
     apportionment. Most  states, and  with non-oil  and gas                                                                    
     activity in  the state  instead of  extraction, payroll                                                                    
     is   used  but   starting   in   1981,  this   modified                                                                    
     apportionment has  been used. And the  other difference                                                                    
     again between oil  and gas and other  activities in the                                                                    
     state, the way our corporate  income tax works, is with                                                                    
     non-oil and  gas it's Alaska  property divided  by U.S.                                                                    
     property  and  Alaska  sales  divided  by  U.S.  sales.                                                                    
     That's called  a water's edge approach,  just putting a                                                                    
     ring fence  around U.S. activity  and bringing  in U.S.                                                                    
     income rather than worldwide. With  oil and gas, it's a                                                                    
     worldwide approach.                                                                                                        
                                                                                                                                
     Page 9  - so  once you  know the  apportionment factor,                                                                    
     the   Alaska  income   is   the  apportionment   factor                                                                    
     multiplied by  the worldwide  income and  our corporate                                                                    
     income tax  rate, I  believe once  your income  is over                                                                    
     $100,000  a  year,  is 9.4  percent  so  the  corporate                                                                    
     income tax is 9.4 percent times the Alaska income.                                                                         
                                                                                                                                
     So what  does all this  mean? Well if this  gas project                                                                    
     happens, there are seven things  that will happen. One,                                                                    
     worldwide  income will  increase. Alaska  property will                                                                    
     increase.  Alaska's  extraction will  increase.  Alaska                                                                    
     sales  will increase.  Worldwide  sales will  increase.                                                                    
     Worldwide  extraction   will  increase   and  worldwide                                                                    
     property will increase. That's a sure thing.                                                                               
                                                                                                                                
     What  does  this  mean?  On  the  income  side,  again,                                                                    
     worldwide   income   would   increase   but   the   way                                                                    
     apportionment    works,    this   income    is    never                                                                    
     distinguished  between  Alaska  income  and  non-Alaska                                                                    
     income.  That's the  whole  point  of apportionment  is                                                                    
     that that's difficult to do so  it just goes in one big                                                                    
     pot  called  worldwide  income  and  the  apportionment                                                                    
     factor allocates  worldwide income into the  Alaska tax                                                                    
     base.  So, for  example,  if  the Alaska  apportionment                                                                    
     factor is 10 percent and  worldwide income is $100, $10                                                                    
     gets  apportioned  into  the  worldwide  tax  base  and                                                                    
     that's subject to the 9.4 percent tax rate.                                                                                
                                                                                                                                
     And  income   generated  by   the  Alaska   project  is                                                                    
     apportioned only  to the same  extent any  other income                                                                    
     is so  if there's  $20 generated  by an  Alaska project                                                                    
     and  there's  a  10 percent  apportionment  factor,  $2                                                                    
     comes  into the  Alaska tax  base. But  if there's  $20                                                                    
     generated  in Peru,  same thing,  with  the 10  percent                                                                    
     apportionment  factor,  $2  would be  apportioned  into                                                                    
     Alaska.  So,  again,   income  is  never  distinguished                                                                    
     between Alaska and non-Alaska in origin.                                                                                   
                                                                                                                                
     On  the apportionment  side,  again, the  apportionment                                                                    
     factor  would increase  as the  result of  this project                                                                    
     and the [indisc.]  apportionment factor would apportion                                                                    
     more worldwide  income into the state.  For example, if                                                                    
     we were  10 percent before,  the project might  make it                                                                    
     go to  11 percent.  That might  not sound  [like] much,                                                                    
     but  you're getting  an extra  1  percent of  worldwide                                                                    
     income. That's  quite a  bit of  money coming  into the                                                                    
     Alaska tax base.                                                                                                           
                                                                                                                                
     So for the  derivation of the tax rate  for the tariff,                                                                    
     what  does  this mean  for  the  tariff? Again,  income                                                                    
     generated   in   Alaska   is  apportioned   for   taxes                                                                    
     everywhere,  not just  Alaska, but  in the  tariff, the                                                                    
     tariff is designed  to recover all of the  costs to the                                                                    
     company, including  the taxes they pay  everywhere as a                                                                    
     result of tariff income, not just in Alaska.                                                                               
                                                                                                                                
     Now  taxes rates  are  not  uniform everywhere.  Income                                                                    
     could be  apportioned to  all the  other 49  states but                                                                    
     they all  have their own individual  tax rates. They're                                                                    
     not 9.4 percent. However, since  each state has its own                                                                    
     apportionment  factor  and  its   own  tax  rate,  it's                                                                    
     impossible  to determine  the exact  tax burden  that's                                                                    
     going  to be  borne  by the  pipeline  owner. And  what                                                                    
     regulators  generally do  is assume,  for the  piece of                                                                    
     property  within a  jurisdiction, they  assume the  tax                                                                    
     rate in  that jurisdiction.  So for  the piece  of pipe                                                                    
     that's in Alaska,  they would assume a  9.4 percent tax                                                                    
     rate.                                                                                                                      
                                                                                                                                
     This  just   shows  sort  of  the   derivation  of  the                                                                    
     corporate  income  tax  allowance in  the  tariff.  The                                                                    
     allowance is an after tax  allowance and in the example                                                                    
     we  had back  on  slide  number 6  where  we  had a  10                                                                    
     percent return on  equity, that 10 percent  is an after                                                                    
     tax return. To  get an after tax - you  need to recover                                                                    
     more before tax  to get a 10 percent  return after tax.                                                                    
     And  in  that example,  with  a  10 percent  return  on                                                                    
     equity -  let me just go  back to slide 6  for a second                                                                    
     here,  just  looking  at  that first  year  with  a  10                                                                    
     percent  return on  equity, that  $10 is  an after  tax                                                                    
     return. For taxes, the way  a pipeline company will pay                                                                    
     its taxes,  it will receive tariff  income for shipping                                                                    
     the gas and the tariff times  the amount of gas will be                                                                    
     its gross  income. Then it  will subtract its  cost and                                                                    
     that will  be its taxable  income and then  they'll pay                                                                    
     tax on that. Now the  tariff gives the pipeline company                                                                    
     an allowance to  cover the taxes and, in  this case, so                                                                    
     that they're left  with $10 after they pay  the tax. So                                                                    
     they need  to recover  more than $10  before tax  to be                                                                    
     left with $10 after tax  and that's done with something                                                                    
     called a tax gross-up factor  and that's simply the tax                                                                    
     rate divided  by 1 minus  the tax rate and  again, with                                                                    
     our  state, with  a 9.4  percent income  tax rate,  9.4                                                                    
     divided  by  1.94  is  10.38 percent  as  sort  of  the                                                                    
     effective amount of  tax you need to  collect before so                                                                    
     that you're left with return  on equity afterwards. So,                                                                    
     if  your return  on  equity target  is  $10, the  state                                                                    
     corporate  income tax  allowance needs  to be,  in this                                                                    
     example, you know, .1038 times 10 or $1.038.                                                                               
                                                                                                                                
     And just in the box here,  to see how it works, if your                                                                    
     return  on  equity  allowance  is   $10  and  your  tax                                                                    
     allowance is  $1.038, you have $11.038  and when you're                                                                    
     computing your taxes  if you take 9.4  percent for your                                                                    
     tax  times the  $11.038, that  gives you  1.038 and  so                                                                    
     your return after  tax is your total  allowance minus a                                                                    
     tax  allowance, 11.038  minus 1.038,  which leaves  you                                                                    
     with  $10. Again,  that's what  your  return on  equity                                                                    
     was.                                                                                                                       
                                                                                                                                
     Again,  this is  for  tariff making  purposes. This  is                                                                    
     again   pro  forma,   the  calculation   for  the   tax                                                                    
     allowance. It's  different than  the actual  taxes that                                                                    
     will  be  paid.  They'll  be   paid  again  subject  to                                                                    
     apportionment  and worldwide  income.  If this  project                                                                    
     goes forward there  will also be state  income taxes on                                                                    
     upstream  profits  that  are made  from  the  producers                                                                    
     selling  the  gas.  In   addition  to  state  corporate                                                                    
     taxation, there's also federal  income taxation - which                                                                    
     there's  an allowance  for that  in a  tariff as  well.                                                                    
     That's  computed  similarly.  The only  difference  is,                                                                    
     again, the feds  have a different tax rate.  It's at 35                                                                    
     percent and the state income  tax is deductible for the                                                                    
     federal  tax.  My  estimate  of  the  Alaska  corporate                                                                    
     income tax  adds about  2 cents to  the tariff  and the                                                                    
     federal  side,  again, on  a  $19  billion project,  is                                                                    
     about 20 cents.                                                                                                            
                                                                                                                                
      That concludes my remarks and I'd be happy to answer                                                                      
     questions if I can. Thank you.                                                                                             
                                                                                                                                
CO-CHAIR  SAMUELS said  the committee  heard  yesterday that  the                                                               
amount of  risk a pipeline owner  has in a project  would also be                                                               
factored into  the tariff by  FERC. He  asked Mr. Marks  where he                                                               
would  incorporate  that  risk  on   page  2  of  his  PowerPoint                                                               
presentation.                                                                                                                   
                                                                                                                                
MR. MARKS said  risk would be explicitly addressed  as the return                                                               
on  equity.  Generally,  pipeline  companies  need  a  throughput                                                               
commitment and  a shipper pay  commitment to get financing.  In a                                                               
shipper pay  commitment, the  shipper will commit  to put  gas in                                                               
the line and pay  to ship it, whether the shipper  has the gas or                                                               
not. That reduces the risk of  the project. The 12 percent return                                                               
on equity is commensurate with that amount of business risk.                                                                    
                                                                                                                                
With no  further questions of  Mr. Marks, CO-CHAIR  SAMUELS asked                                                               
Mr. Carruthers to present.                                                                                                      
                                                                                                                                
MR. JOHN  CARRUTHERS, Vice President  of Northern  Development at                                                               
Enbridge,  informed  members  that   Enbridge  has  submitted  an                                                               
application  that  was  approved   under  Alaska's  Stranded  Gas                                                               
Development  Act. He  said the  goal  of his  presentation is  to                                                               
provide context to  some of the questions  members have regarding                                                               
what must  happen to the  gas once  it reaches Alberta.  He noted                                                               
that  recently, the  Canadian producers  could not  ship stranded                                                               
gas out  of Alberta due  to pipeline constraints. They  found the                                                               
most economical way  to move the gas was through  Alliance, a new                                                               
high-pressure   liquid-rich  system   that  is   consistent  with                                                               
Alaska's  needs.   Alliance  began   service  in  2001   and  was                                                               
considered  to  be  very successful  by  the  industry.  Enbridge                                                               
worked  with producers  throughout the  process and  now owns  50                                                               
percent  of  Alliance. He  introduced  Jack  Crawford, the  Chief                                                               
Operating  Officer  of  Alliance  Pipeline  and  noted  that  Mr.                                                               
Crawford   has   been   with  Alliance   throughout   conception,                                                               
construction, and operation.                                                                                                    
                                                                                                                                
MR. CARRUTHERS began by explaining  that Enbridge has 50 years of                                                               
experience  in pipeline  transmission. It  owns and  operates the                                                               
world's largest crude oil pipeline  system, which moves crude oil                                                               
from the Western Canadian sedimentary  basin through the Midwest.                                                               
Enbridge also owns the Norman  Wells pipeline; therefore Enbridge                                                               
is the  only pipeline  company with  extensive experience  in the                                                               
construction  and  operation  of   pipelines  in  continuous  and                                                               
discontinuous permafrost. He continued:                                                                                         
                                                                                                                                
     We also bring  a market perspective as  the largest gas                                                                    
     distribution company  in Canada,  shown in  yellow, but                                                                    
     today we want to focus  on our experience in completing                                                                    
     the Alliance  pipeline. Again, it  was a response  to a                                                                    
     consistent  situation  - pipeline-constrained  gas,  in                                                                    
     this case in Alberta.  It's a high-pressure liquid-rich                                                                    
     line that transverses both the  U.S. and Canada and was                                                                    
     permitted efficiently in both  Canada and the U.S. That                                                                    
     line is shown in red on the map that you have.                                                                             
                                                                                                                                
     I think we  can skip forward a bit. I've  given some of                                                                    
     this information to some of  you previously and some of                                                                    
     it was  discussed earlier. I  really want to go  to the                                                                    
     forecast of Canadian supply. It's  going to be very key                                                                    
     and  this  forecast  is  back   a  few  pages  in  your                                                                    
     presentation.  It's  consistent  with  many  and  shows                                                                    
     continuing  growing  production   out  of  the  Western                                                                    
     Canadian    sedimentary    basin   although    a    key                                                                    
     consideration  is much  of this  portion  of growth  is                                                                    
     from natural gas from goal. So  we do have a huge asset                                                                    
     in Canada that  parallels that of the  United States in                                                                    
     terms  of size  but certainly  we haven't  developed it                                                                    
     nearly as much as the U.S.  has. Less that 1 percent of                                                                    
     our  total  production  is  from   gas  from  coal,  in                                                                    
     comparison  to over  10 percent  in the  United States,                                                                    
     although we  have a similar  resource. It  will require                                                                    
     significant  capital  going   forward  and,  given  the                                                                    
     decline  of traditional  reserves,  our expectation  is                                                                    
     that  capital  will come  but  it's  very important  to                                                                    
     continue to  watch that. Clearly,  the key for  that in                                                                    
     Canada is  the use  of water,  something that  has some                                                                    
     opposition to  the development of coal  bed methane but                                                                    
     we  think there's  a significant  resource that  can be                                                                    
     developed.                                                                                                                 
                                                                                                                                
     This graph  is very relevant. You'll  see a significant                                                                    
     decline  in   the  lower  portion,  which   is  Alberta                                                                    
     conventional.  Again, we  would  see  coal bed  methane                                                                    
     being able  to make  up a  significant portion  of that                                                                    
     decline. But I think  what's more important, this graph                                                                    
     is relevant, it's  about the time that  Alaska gas will                                                                    
     come on in  2012, 2015 period, so  it's quite relevant.                                                                    
     Really what's  important is what will  the picture look                                                                    
     like  going  forward  from   2015  because  we'll  have                                                                    
     investment in  a 30-year  asset and  we'd like  to have                                                                    
     consideration.                                                                                                             
                                                                                                                                
     I  think  what  we're  trying  to  show  here  is  that                                                                    
     although  we  can  have   forecasts  and  they're  well                                                                    
     thought through, there's  considerable uncertainty with                                                                    
     what  actually [it]  will look  like -  what production                                                                    
     will look  like out of  the Western Canadian  basin. So                                                                    
     it's  something that  we'll have  to have  a number  of                                                                    
     alternatives that we need to consider.                                                                                     
                                                                                                                                
     So let's start  with where the gas goes  today with the                                                                    
     capacity of the pipelines. The  good news is that there                                                                    
     is  well-developed infrastructure  out  of Alberta  and                                                                    
     there  will  be  competitive options  for  Alaska  gas.                                                                    
     There is the potential  to fill underutilized capacity.                                                                    
     I think Tony  will talk to you a little  bit about that                                                                    
     today. In  the red -  and these graphs as  I mentioned,                                                                    
     are relative,  TransCanada is the largest  - moves much                                                                    
     of the gas  out of the system. Eastern Gas,  as you can                                                                    
     see  on the  graph, handles  7  bcf per  day and  today                                                                    
     you'll see something  in the order of 2 bcf  per day of                                                                    
     spare  capacity.  As you  look  at  the other  pipeline                                                                    
     systems, Alliance,  Northern Border, Duke are  all near                                                                    
     capacity  and they  would have  existing shippers  with                                                                    
     contractual rights.                                                                                                        
                                                                                                                                
     When  you  look  at  the  capacities  from  a  producer                                                                    
     perspective, which includes  royalty owners like Alaska                                                                    
     and Alberta governments, you  want the pipeline systems                                                                    
     to remain below full  capacity to avoid bottlenecks and                                                                    
     reduce prices. We went through  that situation prior to                                                                    
     the  construction of  Alliance and  as a  producer they                                                                    
     saw significantly  reduced prices,  so you  always want                                                                    
     to have some  extra capacity in your  system. You don't                                                                    
     want  significant underutilized  assets, as  those have                                                                    
     associated costs.                                                                                                          
                                                                                                                                
     So  it does  provide good  context to  understand these                                                                    
     systems  today  but again,  you'll  have  to take  that                                                                    
     previous forecast  and overlay  it on these  systems to                                                                    
     see what  they look like  going forward. I  think you'd                                                                    
     also  have to  be  cognizant of  what capacity  remains                                                                    
     going  forward. It  is possible  that certain  capacity                                                                    
     would  be taken  out of  the system  if it's  not being                                                                    
     utilized  so  it  could  be  retired  so  some  of  the                                                                    
     capacity  lines  could change  as  well.  So it's  very                                                                    
     important to  understand the  systems and  the capacity                                                                    
     of those.  It's also  important to understand  what the                                                                    
     contractual commitments  are with each of  those. As we                                                                    
     heard  yesterday, there's  a number  of -  the existing                                                                    
     shippers  will  have  rights to  certain  capacity.  So                                                                    
     again, it  would be important  to look at  the contract                                                                    
     [expirations] over the course  of development of Alaska                                                                    
     gas.  As you  can  see  from this  graph,  many of  the                                                                    
     contracts  expire. Typically  they  can  be renewed  on                                                                    
     one-year extensions  with six months notice.  So again,                                                                    
     just  in  terms of  consideration  of  the project  and                                                                    
     downstream opportunities,  people have to  be cognizant                                                                    
     of what  shippers are on  what systems and  what rights                                                                    
     they have.  Alliance itself has signed  15-year shipper                                                                    
     pay agreements that could expire in 2015.                                                                                  
                                                                                                                                
     Again,  I think  this slide  is included  just to  show                                                                    
     that once  you reach  the Western  Canadian sedimentary                                                                    
     basin, there  is significant  optionality out  of there                                                                    
     to markets across  North America and what  we wanted to                                                                    
     look  at  was the  capacity  outlook  going forward.  I                                                                    
     think it's good context  to understand what's happening                                                                    
     today, what  might happen when MacKenzie  gas comes on-                                                                    
     stream  and  then  look  at   what  might  happen  once                                                                    
     Alaska's gas arrives.                                                                                                      
                                                                                                                                
     So  if you  look at  the top  right hand  corner, which                                                                    
     summarizes  it, I  won't go  through this  entire slide                                                                    
     but I think it does  provide good context for people to                                                                    
     work  through. Today  the Western  Canadian sedimentary                                                                    
     basin produces about  17 bcf per day and  we export 12.                                                                    
     Supply is  expected to increase with  MacKenzie by 2010                                                                    
     and Alaska  gas certainly  by 2015.  At the  same time,                                                                    
     Alberta  demand will  increase largely  in response  to                                                                    
     the oil sands  development. So you have to  look at the                                                                    
     Western Canadian  sedimentary basin  production, what's                                                                    
     coming in from  MacKenzie and Alaska, and  then what is                                                                    
     the  internal   market  within  Alberta.  So   the  box                                                                    
     immediately  below  the  one  in  the  top  right  hand                                                                    
     corner, we  are looking at the  pipeline capacity based                                                                    
     on the earlier throughput. And  today, you'd look at it                                                                    
     and say we  have something in the order of  3.3 bcf per                                                                    
     day of spare capacity, but  again, I'd caution you as a                                                                    
     royalty owner,  you do want  some spare capacity.  On a                                                                    
     practical basis,  we think there's  more like 1.5  to 2                                                                    
     bcf per day of practical underutilization.                                                                                 
                                                                                                                                
     If  you  work down  that  line  based on  the  previous                                                                    
     forecast, it shows that we need  2.1 bcf per day of new                                                                    
     pipeline  capacity. Again  there are  a lot  of factors                                                                    
     that go  into that forecast. It's  consistent with most                                                                    
     around but you  would want something like  a 90 percent                                                                    
     load factor  in order  to manage  your load.  You don't                                                                    
     want to  be full  up against the  pipeline utilization.                                                                    
     If you  take that into  account, you need  something in                                                                    
     the order of new pipeline capacity  at 4 bcf per day if                                                                    
     you assume Alaska gas is in  the order of 5 bcf per day                                                                    
     at  that time.  It could  be a  situation where  you do                                                                    
     need a full 4 bcf per day pipeline.                                                                                        
                                                                                                                                
     At  that amount,  Alliance would  have the  lowest cost                                                                    
     option -  would be  to loop Alliance  and would  be the                                                                    
     most attractive option. But again,  that's not the only                                                                    
     [indisc.]. You'd  still have to look  forward past 2015                                                                    
     to  what  the  Canadian  sedimentary  basin  is  doing,                                                                    
     what's  spare  capacity.  You could  have  a  situation                                                                    
     where  the more  measured  approach  that Enbridge  had                                                                    
     proposed  might   fit  better   where  you   have  some                                                                    
     underutilization of  capacity and you build  a pipeline                                                                    
     that  could handle  more like  2.5 bcf  per day  out of                                                                    
     Alaska  initially with  expansion to  5 going  forward.                                                                    
     Again,  there are  some scenarios.  You'd want  to keep                                                                    
     your optionality  open as developments occur  as we get                                                                    
     better insight as to whether  there is coal bed methane                                                                    
     development  in  Alberta,  how the  existing  basin  is                                                                    
     progressing, and  the timing of Alaska  gas. The bottom                                                                    
     line is you'd want to maintain optionality.                                                                                
                                                                                                                                
     Clearly,  of course,  the advantage  to  not having  to                                                                    
     build  the  pipeline out  of  Alberta  is its  cost  is                                                                    
     estimated  to be  close to  $5 billion,  so if  you can                                                                    
     utilize existing  capacity, there could  be significant                                                                    
     advantage.                                                                                                                 
                                                                                                                                
     Some of the  key points I think we  should be cognizant                                                                    
     of  that  -  I mean  Alberta  should  have  significant                                                                    
     capacity to handle Alaska gas  by a phased approach. If                                                                    
     you expect  2.5 bcf  of spare capacity,  if you  need a                                                                    
     full 4, Alliance would be  your most economic option at                                                                    
     this point.  And then  there's ways  too, if  you don't                                                                    
     need it all, you'll see  a number of the pipelines that                                                                    
     could  have a  spare  capacity  and you  see  a more  -                                                                    
     potentially  PG&E has  some  spare  capacity, Duke  has                                                                    
     about  200 million,  Alliance has  500 million,  so you                                                                    
     could have a  way to make up the needed  volumes with a                                                                    
     variety of pipes, TransCanada, Alliance, et al.                                                                            
                                                                                                                                
     I think  again on this  slide - again, I'm  not wanting                                                                    
     to necessarily  go through all  of the  numbers. Really                                                                    
     to take away I think  you'll want to recognize in terms                                                                    
     of tolls,  tariffs - tolls  are important but  also, of                                                                    
     course,  the fuel  is  important,  particularly at  the                                                                    
     high  gas prices  - from  Alaska gas  development, high                                                                    
     gas  prices are  positive, in  terms of  the fuel  cost                                                                    
     they are not. So  you certainly, you know, alternatives                                                                    
     downstream you need to look  at tolls plus fuel and the                                                                    
     other thing  that's most  important...[END OF  TAPE 04-                                                                    
     09, SIDE A]                                                                                                                
                                                                                                                                
TAPE 04-10, SIDE B                                                                                                            
                                                                                                                                
MR. CARRUTHERS continued:                                                                                                       
                                                                                                                                
     ...additional  volumes -  what the  expectation is  and                                                                    
     what  those  volumes would  be,  and  what those  tolls                                                                    
     would be  with new expanded  volumes, both from  a toll                                                                    
     and fuel perspective.                                                                                                      
                                                                                                                                
     So tolls  are clearly  important but  you have  to also                                                                    
     understand which market you're going to.                                                                                   
                                                                                                                                
     Again,  some  historical  reference   as  to  what  the                                                                    
     spreads have  been between Alberta and  current markets                                                                    
     in the  United States. [Indisc.] toll  the pipeline and                                                                    
     the   advantage  of   going  there   is  an   important                                                                    
     consideration.  You'd  need  to  look at  -  always  in                                                                    
     pipeline development  you need to look  at what happens                                                                    
     if  you do  build a  pipeline and  what happens  if you                                                                    
     don't build  a pipeline  in all  scenarios and  I think                                                                    
     that  will   dictate  where  much  of   this  gas  will                                                                    
     ultimately go.  And really, what  you'd really  want to                                                                    
     have,  from  a  resource ownership  perspective,  is  a                                                                    
     competitive alternative  out of  Alberta when  it comes                                                                    
     and probably, as  you heard yesterday, the  best way is                                                                    
     to have an  open season where there  are proposals from                                                                    
     different proponents  and then the market,  in the end,                                                                    
     ultimately speaks  as to which  market they want  to go                                                                    
     to  under which  scenario because  there are  different                                                                    
     risks associated with  the different markets, different                                                                    
     scenarios  -  clearly  less risk  with  utilization  of                                                                    
     existing pipe.                                                                                                             
                                                                                                                                
     And I  think the other thing  is that - it  won't drive                                                                    
     the pipeline  economics but you need  to understand the                                                                    
     NGL  processing  considerations.  Alberta does  face  a                                                                    
     methane shortage  and does want to  access the liquids.                                                                    
     I'm not aware  of any proposals that  would not provide                                                                    
     access  to the  liquids.  Certainly  the producers  can                                                                    
     [indisc.]  contemplated   liquids  being   stripped  in                                                                    
     Alberta  but  you  can  also   do  it  commercially  in                                                                    
     Chicago.   Those  seem   to   be   the  two   preferred                                                                    
     alternatives at this time.                                                                                                 
                                                                                                                                
     So  really  what   we  wanted  to  do   was  provide  a                                                                    
     perspective of  some of the  questions you  might think                                                                    
     about,  some  of  the  ways  you  might  look  at  that                                                                    
     information. But also Jack  Crawford joined us because,                                                                    
     as  I mentioned,  Alliance has  just been  through this                                                                    
     process in terms  of concept of a  pipeline, looking at                                                                    
     tolls, tariffs,  looking at the  regulatory perspective                                                                    
     and the  financing, and  some of  the things  we talked                                                                    
     about yesterday.  So certainly  we would be  willing to                                                                    
     answer any questions you have today.                                                                                       
                                                                                                                                
SENATOR BUNDE said  he understands the need  for competition once                                                               
Alaska  gas  reaches  Alberta but  expressed  concern  about  the                                                               
"dotted line"  between the  Alaska border  and Alberta.  He asked                                                               
Mr. Carruthers his view of the  challenges of building a new line                                                               
in  Canada  between the  Alaska  border  and Alberta  instead  of                                                               
connecting with an existing pipeline.                                                                                           
                                                                                                                                
MR.  CARRUTHERS said  the fact  that  the pipeline  will cross  a                                                               
border is no different than  other projects Enbridge has recently                                                               
been involved  with. He noted  the engineering would be  the same                                                               
and Enbridge  would not split  the project at the  border because                                                               
there would be no sales there.                                                                                                  
                                                                                                                                
SENATOR BUNDE clarified  that putting in an  Alaska pipeline will                                                               
require  major congressional  legislation  to  solve some  Native                                                               
American issues and  he expects Canada to have to  deal with some                                                               
of the same issues with its  First Nations peoples. He asked what                                                               
challenges exist on  a national level for Canadians  to support a                                                               
pipeline in that area.                                                                                                          
                                                                                                                                
MR. CARRUTHERS  said Canada supports  the development  of natural                                                               
gas. There was  opposition to the production tax  credit that was                                                               
included   in  the   legislation.  The   provinces  support   the                                                               
development  as well  and  the First  Nations  are supportive  of                                                               
pipeline development  but want to  assure that they  benefit from                                                               
the pipeline activity  and that the environment  is respected. He                                                               
stated:                                                                                                                         
                                                                                                                                
     But  I  think your  question  about  the potential  for                                                                    
     aboriginal   delay  is   very  relevant   and  a   good                                                                    
     indication would  be how the MacKenzie  gas pipeline is                                                                    
     being developed  today and there [are]  issues in terms                                                                    
     of aboriginal  support so it's  a very  important issue                                                                    
     that needs  to be  considered.  Relationships  with the                                                                    
     aboriginals  will be  key in  Canada to  development of                                                                    
     the  pipeline.  But  again, I  think  there's  actually                                                                    
     support for  it, but  it will have  to be  managed well                                                                    
     and  there  is  an  expectation  and  a  need  for  the                                                                    
     aboriginals to have benefited out of the project.                                                                          
                                                                                                                                
CO-CHAIR OGAN asked  if the Enbridge proposal is to  phase in the                                                               
amount of  gas that comes  down the highway and  whether Enbridge                                                               
wants  to start  with  a 36  inch pipeline  and  add another  one                                                               
later.                                                                                                                          
                                                                                                                                
MR. CARRUTHERS said he thinks  consideration needs to be given in                                                               
comparison to a  48 to 52 inch pipeline, which  has the economies                                                               
of  scale   and  is  a  very   competitive  alternative.  Another                                                               
alternative that  should be explored  is the  initial development                                                               
of a  36-inch pipeline that would  bring in the order  of 2.5 bcf                                                               
of  gas per  day and  then subsequently  looping another  36-inch                                                               
line. The  second line could  be bigger depending  on exploration                                                               
activity  and the  market but  that is  a more  measured approach                                                               
that has less risk.                                                                                                             
                                                                                                                                
CO-CHAIR OGAN asked if the lines would primarily be buried.                                                                     
                                                                                                                                
MR. CARRUTHERS said yes.                                                                                                        
                                                                                                                                
CO-CHAIR  OGAN thought  digging  two trenches  for two  pipelines                                                               
would  not  be as  cost  effective  as  building one  trench  and                                                               
putting  a bigger  line in  to start  with. He  said he  would be                                                               
interested  in  getting more  information  on  the costs  because                                                               
those costs will increase the tariff.                                                                                           
                                                                                                                                
MR. CARRUTHERS  said that  is the key  consideration. He  said as                                                               
the process  goes forward,  the commitment  for shippers  for gas                                                               
will  have to  be  determined. Clearly,  building  a larger  line                                                               
would not  be useful  if the commitments  aren't there.  The next                                                               
consideration  would  be  competitiveness of  supply.  Generally,                                                               
there  is  more competitiveness  on  a  more conventional  build,                                                               
which should reduce costs. The  third consideration is that fewer                                                               
funds would be  used during construction before  any revenue from                                                               
the pipeline comes in. Enbridge  sees less risk in a conventional                                                               
build so it could  be that the expected costs might  be less on a                                                               
52-inch line. He said the crux  of the matter is what commitments                                                               
have been made to support it and how much risk is involved.                                                                     
                                                                                                                                
CO-CHAIR OGAN  said the state  wants to encourage  development in                                                               
the foothills  where there  are large quantities  of gas.  With a                                                               
36-inch line, that gas could be run  for a long time but it would                                                               
discourage development  in other areas.  He agreed that  too much                                                               
gas to  market in the  Lower 48 could  affect pricing but  he has                                                               
heard the  market will  need as  much gas  as Alaska  can produce                                                               
unless  nuclear or  coal fired  generation plants  are built.  He                                                               
said the  legislature wants to  encourage the development  of the                                                               
frontier areas so it needs  to consider how much that development                                                               
will be delayed if the state starts off with a 36-inch pipeline.                                                                
                                                                                                                                
MR. CARRUTHERS said in terms  of exploration, there is a scenario                                                               
in which  a loop line  would accommodate  that better. It  may be                                                               
difficult  for explorers  to indicate  a  shipping commitment  up                                                               
front. But  the expanded pipeline scenario  might facilitate more                                                               
exploration because companies  could come in at  the second round                                                               
and  the line  could  be sized  even larger.  He  added that  the                                                               
phased approach would entail a longer construction period.                                                                      
                                                                                                                                
MR.   JACK   CRAWFORD,   Executive   Vice   President,   Northern                                                               
Development,  Enbridge, told  members part  of the  flip side  of                                                               
that, in terms  of looping, is that development  could take place                                                               
over a  period of  years. He noted  the TransCanada  pipeline was                                                               
expanded in increments over a  number of years and that levelized                                                               
the construction  boom in a  significant way. He pointed  out the                                                               
Alaska  line  could   be  looped  in  increments  if   a  lot  of                                                               
exploration took place, depending on  how much gas was developed.                                                               
Supply would be matched with transportation capability.                                                                         
                                                                                                                                
CO-CHAIR OGAN asked Mr. Crawford to explain looping.                                                                            
                                                                                                                                
MR.  CRAWFORD  said looping  is  another  term for  twinning  the                                                               
pipeline  so a  single  line  system today  could  be twinned  by                                                               
building a  second parallel  pipeline. Additional  capacity could                                                               
also  be  garnered  by  building short  sections  of  loop  along                                                               
sections of  the pipe.  He noted  that Alliance's  stations today                                                               
are 120 miles  apart. It could loop 30 miles  and then the entire                                                               
120  miles  over a  staged  period  of  time and  get  additional                                                               
capacity at each juncture.                                                                                                      
                                                                                                                                
CO-CHAIR  SAMUELS  asked  Mr.  Crawford  if  he  had  a  separate                                                               
presentation.                                                                                                                   
                                                                                                                                
MR.  CRAWFORD  said  he  did  not but  was  available  to  answer                                                               
questions.                                                                                                                      
                                                                                                                                
SENATOR WAGONER asked  Mr. Crawford his opinion of  how FERC will                                                               
exercise  its  authority over  the  distribution  of the  product                                                               
going through the line once the pipeline is built.                                                                              
                                                                                                                                
MR.  CRAWFORD  said he  shares  some  of the  previous  speaker's                                                               
concerns about  some of the things  FERC has done over  the years                                                               
that haven't always  made sense to him. However,  he believes the                                                               
concern  that FERC  would  divert  destinations or  significantly                                                               
impact the market  is overblown. FERC has tried to  step back and                                                               
let  the market  work in  the past  few years.  He believes  FERC                                                               
operates  with the  philosophy that  it would  prefer to  let the                                                               
market work  rather than  to be  interventionist and  dictate how                                                               
the market should develop.                                                                                                      
                                                                                                                                
CO-CHAIR  SAMUELS thanked  Mr. Carruthers  and  Mr. Crawford  and                                                               
asked Mr. Palmer to present.                                                                                                    
                                                                                                                                
MR.  TONY PALMER,  Vice President,  Alaska Business  Development,                                                               
TransCanada  Pipelines, Ltd.,  told members  there has  been some                                                               
commonality in  what a couple  of speakers have said  with regard                                                               
to  facilities   from  Alberta  to  market   and  integration  of                                                               
facilities  rather   than  constructing  a  bullet   line  beyond                                                               
Alberta. He then began his testimony:                                                                                           
                                                                                                                                
     The  Alaska project  will be  a  huge undertaking  with                                                                    
     large  risks  for  all  stakeholders.  We  believe  the                                                                    
     project  should be  limited  to  the frontier  pipeline                                                                    
     from Prudhoe  Bay to Alberta  and, at that  point, take                                                                    
     an integrated approach from Alberta  to market and that                                                                    
     will  give optimal  results  for  Alaskan and  Canadian                                                                    
     stakeholders.  By  integrated,  I mean  that  from  the                                                                    
     Alberta trading  hub, which is the  largest trading hub                                                                    
     in North  America, Alaskan gas will  integrate into the                                                                    
     existing North  American gas pipeline grid  and Alaskan                                                                    
     gas  at that  point can  flow east  or west  to markets                                                                    
     across North America from San  Francisco all the way to                                                                    
     New York.                                                                                                                  
                                                                                                                                
     This is a map similar to  what I had up yesterday, just                                                                    
     to show  the integrated  approach - a  little different                                                                    
     color  scheme. Actually  I see  that  the color  scheme                                                                    
     doesn't actually  show up that  well on the  screen but                                                                    
     hopefully it  does in your  hard copy. You can  see the                                                                    
     Prudhoe  Bay to  Alberta system  being a  new piece  of                                                                    
     pipe at that point, going to an integrated approach.                                                                       
                                                                                                                                
     You heard this morning  from participants from Enbridge                                                                    
     and   Alliance  with   regards  to   their  facilities.                                                                    
     TransCanada's  facilities  within  Alberta  -  we  have                                                                    
     about 15,000 miles  of big inch pipe that  you would be                                                                    
     integrating  into and  we have  another 9,000  miles of                                                                    
     big inch  pipe going across  Canada or into  the United                                                                    
     States.  We own  the pipeline  going east  from Alberta                                                                    
     into eastern  Canada and ultimately service  markets in                                                                    
     eastern Canada  and into  New York  and Boston.  We own                                                                    
     the  piece  of  the  pipeline that  goes  down,  called                                                                    
     Northern  border, that  goes down  into Chicago  and we                                                                    
     own Foothills Pipelines, of  course, the Canadian piece                                                                    
     that connects  to the borders,  and we are soon  to own                                                                    
     what  used to  be called  PGT, which  is the  line from                                                                    
     British  Columbia.  On the  map  it's  a greenish  line                                                                    
     running  down to  Northern California.  It  used to  be                                                                    
     owned by  PG&E. It  is still  currently owned  by them.                                                                    
     We're in the process of closing that transaction.                                                                          
                                                                                                                                
     So our  'B to  C' Proposition  has an  integration with                                                                    
     the TransCanada  System at Boundary Lake,  which is the                                                                    
     dark  blue  line,  as I  mentioned,  by  extending  the                                                                    
     Foothills prebuild to that point.                                                                                          
                                                                                                                                
     Our underlying  principle of our  'B to  C' proposition                                                                    
     recognizes   that   integration   with   the   existing                                                                    
     TransCanada  system will  best serve  the interests  of                                                                    
     all  constituents  by  fully  utilizing  the  extensive                                                                    
     natural gas  pipeline grid and the  spare capacity that                                                                    
     exists on that  grid today and is  expected to continue                                                                    
     when Alaskan gas flows.                                                                                                    
                                                                                                                                
     Our   proposal  provides   the  most   competitive  and                                                                    
     flexible  economic   solution  for   Alaska  producers,                                                                    
     Alaska  royalty owners,  and all  affected constituents                                                                    
     across a broad range of alternatives, we would argue.                                                                      
                                                                                                                                
     What are key criteria  and perspectives to examine when                                                                    
     you're   constructing   a  pipeline?   Well,   normally                                                                    
     greenfield pipeline decisions are  based on an analysis                                                                    
     of  routing, volumes,  and capital  cost. The  shortest                                                                    
     route  with the  highest volume  and lowest  cost would                                                                    
     always be the preferred route.                                                                                             
                                                                                                                                
     However, there  are a number of  aspects to integration                                                                    
     that  we believe  provide  advantages  over the  normal                                                                    
     distance,  volume  and   capital  relationships.  Those                                                                    
     major factors  are volumetric requirements.  The Alaska                                                                    
     volumes are expected  to ramp up over a  5-10 year time                                                                    
     frame to  6 bcf/d. Our  understanding at this  point is                                                                    
     that the  major North Slope producers  would anticipate                                                                    
     commencing with  a volume in  the 4 to 4.5  bcf/day and                                                                    
     expand from that volume. I spoke to that yesterday.                                                                        
                                                                                                                                
     The  last  increment  of  that  volume  may  depend  on                                                                    
     exploration and  production activity once  the pipeline                                                                    
     is  constructed. If  you take  6  bcf/day and  multiply                                                                    
     that  by   a  25-year   or  30-year  life,   there  are                                                                    
     insufficient proven reserves today  so you would expect                                                                    
     that drilling and other proving  up would be undertaken                                                                    
     over the course of the life of the project.                                                                                
                                                                                                                                
     The liquids  composition of the gas  likely will change                                                                    
     over this time  frame as well. That's normal  for a gas                                                                    
     project. Because the range of  potential outcomes is so                                                                    
     broad, and may involve  more producers than the initial                                                                    
     three  Alaska producers,  the  facilities planning  for                                                                    
     what's described  as B to  C, which is from  Alberta to                                                                    
     market, needs to be flexible.                                                                                              
                                                                                                                                
     The   facilities  planning   for   total  supply,   not                                                                    
     incremental  supply, is  a very  important factor  from                                                                    
     Alberta. I addressed some of that yesterday.                                                                             
                                                                                                                                
     The interconnection  with the  existing grid  can occur                                                                    
     when  the  Alaska gas  reaches  Alberta.   The  Western                                                                    
     Canadian   Sedimentary   Basin  (WCSB)   is   producing                                                                    
     approximately 17  bcf/d and the Mackenzie  Delta can be                                                                    
     expected  to ramp  up  to 1.5  bcf/d.   The  additional                                                                    
     Alaska  gas  of  4.0  or   4.5  bcf/d  would  create  a                                                                    
     requirement  of   about  22.5  bcf/d  in   total.  This                                                                    
     fundamental assumption drives  the integration prospect                                                                    
     that you're planning  for a 22.5 bcf/d  gas supply, not                                                                    
     just planning for 4 to 4.5 bcf/d.                                                                                          
                                                                                                                                
     We  believe  that  market   flexibility  will  be  very                                                                    
     important  for Alaskan  gas. It's  important for  every                                                                    
     other  source of  gas. They  will look  to attract  and                                                                    
     attach to  the most  attractive market and  that market                                                                    
     may  change  over  time.  Rather  than  constructing  a                                                                    
     bullet  line  to  one  particular  market,  we  believe                                                                    
     there's  value for  Alaskans as  there is  for Canadian                                                                    
     gas  in  being  connected   to  multiple  markets.  The                                                                    
     combination  of  reduced  Western Canadian  supply  and                                                                    
     expansions on  the existing pipelines driven  by market                                                                    
     factors  prior  to  Alaskan  volumes  ramping  up  will                                                                    
     influence the  appetite to sign  up for  new greenfield                                                                    
     pipelines from the basin.                                                                                                  
                                                                                                                                
     Depending upon the marketing  strategy and the existing                                                                    
     commitments from  each producer's portfolio,  a variety                                                                    
     of commitments  may or  may not be  made.   The Alaskan                                                                    
     producers  do   not  have  to  precisely   match  their                                                                    
     additional  Alaskan production  with downstream  market                                                                    
     commitments as  they may choose  to sell some  of their                                                                    
     Alaskan  gas  within  Alberta.   That  would  be  their                                                                    
     choice. Clearly, you see  today major producers seeking                                                                    
     a portfolio  of markets  and a  portfolio of  terms and                                                                    
     that's generally how they optimize their structure.                                                                        
                                                                                                                                
     So  what are  the  system  integration benefits  beyond                                                                    
     what  I've  spoken to  today?  The  Alberta system  has                                                                    
     several  unique  features   that  are  not  immediately                                                                    
     evident  when examining  a map  of the  pipeline system                                                                    
     that give Alberta several advantages.                                                                                      
                                                                                                                                
     The Alberta  system is not operating  at full capacity.                                                                    
     You heard testimony from a  number of parties yesterday                                                                    
     to  that effect  and I  heard that  again this  morning                                                                    
     from the  parties from Enbridge and  Alliance. However,                                                                    
     the  Alberta  system  was partially  offloaded  by  the                                                                    
     construction  of the  Alliance  pipeline so  you had  a                                                                    
     facility   that  was   built  to   match  TransCanada's                                                                    
     northern  border system.  Once Alliance  was built  and                                                                    
     there wasn't  a subsequent  addition to gas  supply out                                                                    
     of  Western   Canada,  you've   effectively  offloaded,                                                                    
     unfortunately, our  system because we had  the shorter-                                                                    
     term  contract  and  you  saw  evidence  of  that  this                                                                    
     morning.  New  supply has  not  been  robust enough  to                                                                    
     refill this  capacity. This  spare capacity  can handle                                                                    
     some  volumes with  no incremental  construction costs,                                                                    
     no   incremental   environmental   impact.   Additional                                                                    
     compression  can   further  add  volumes   with  little                                                                    
     incremental cost.                                                                                                          
                                                                                                                                
     The  net supply  additions and  demand requirements  on                                                                    
     the Alberta  system are also  shifting. If you  look at                                                                    
     the  map  of Alberta,  you  should  be aware  that  the                                                                    
     supply in the northeastern  section of Alberta near the                                                                    
     oil sands,  near Fort McMurray,  is declining.  That is                                                                    
     in addition  to having  an increase  in demand  in that                                                                    
     region so you  have two factors that  are unloading the                                                                    
     pipeline system on the  northeastern section of Alberta                                                                    
     and there's likely  to be a pipeline  constructed by us                                                                    
     in  addition to  our existing  facility to  connect the                                                                    
     northwest part  of our  province with  the northeastern                                                                    
     part of  the province  to meet that  incremental demand                                                                    
     from  gas entering  in from  either western  Alberta or                                                                    
     northeastern B.C. That is likely  to happen in the next                                                                    
     several years.  That will also improve  the integration                                                                    
     benefits  for this  project. This  shift in  the system                                                                    
     load  creates   a  low-cost  addition   of  incremental                                                                    
     capability from the northwest  to the southeast portion                                                                    
     of the Alberta system.                                                                                                     
                                                                                                                                
     I'd  like to  address  construction  costs. The  single                                                                    
     largest  variable  having  the biggest  impact  on  the                                                                    
     toll,  on  the  pipeline tariff,  is  the  construction                                                                    
     cost. You've heard that from  a number of parties.  The                                                                    
     estimation of the costs is  influenced by pipe size and                                                                    
     by competition  for resources if  both 'A to B'  and 'B                                                                    
     to C'  are constructed  in a  two-year time  frame with                                                                    
     the  same pipe  size,  the same  compressors, the  same                                                                    
     valves.   Construction  of  a smaller  sized  'B to  C'                                                                    
     pipeline,  as necessary,  with  more conventional  pipe                                                                    
     sizing,  not only  increases the  certainty around  the                                                                    
     construction   cost    estimates   but    reduces   the                                                                    
     competition for  steel mill space that  would influence                                                                    
     the costs  of the  A to  B portion  of the  pipeline as                                                                    
     well. Clearly there  is going to be  a worldwide supply                                                                    
     of steel pipe  for this project. That is going  to be a                                                                    
     necessity. It's  very clear  that North  American mills                                                                    
     can be  competitive, however they  will not  supply 100                                                                    
     percent of the steel pipe  for this project. If there's                                                                    
     a  variation in  pipe  size to  Alberta  and away  from                                                                    
     Alberta,  that  will  bring more  competitors  to  that                                                                    
     marketplace,  not only  in the  steel business,  but in                                                                    
     the  valve  business as  well  as  the contractors.  We                                                                    
     think that's to the benefit of all parties.                                                                                
                                                                                                                                
     The  roll-in,   and  I  believe  that   term  has  been                                                                    
     described  here  before  -   roll-in  simply  means  an                                                                    
     averaging of old  costs and new costs,  but the roll-in                                                                    
     of  new  capital  expenditures  with  existing  capital                                                                    
     investment to  create a toll  charged to  shippers also                                                                    
     influences  the capital  obligations.   In a  rolled-in                                                                    
     toll,  the incremental  capital is  proportionally less                                                                    
     so the impact  of a hot construction market  is less in                                                                    
     the  blended average  toll. Clearly,  one of  the fears                                                                    
     that you heard me describe  yesterday with regards to a                                                                    
     potential cost overrun, is there's  real potential on a                                                                    
     project  of this  scale for  a hot  construction market                                                                    
     and that environment can  affect capital cost overruns.                                                                    
     It's prudent to try to minimize that.                                                                                      
                                                                                                                                
     Toll integration  - so integrating the  toll would also                                                                    
     have a mitigating effect  on construction costs because                                                                    
     the system  costs are essentially spent  today and will                                                                    
     be unlikely to increase  over the planning horizon. The                                                                    
     tariff  design in  Alberta  has  created an  expressway                                                                    
     toll  concept   from  the  northwest  portion   of  the                                                                    
     province where  the 'B' is,  near the  British Columbia                                                                    
     border,  and  therefore  all the  way  through  to  the                                                                    
     southern portions  of the province of  Alberta and into                                                                    
     the  export  market.  Therefore  future  additions  are                                                                    
     likely to have a smaller toll impact at Boundary Lake.                                                                     
                                                                                                                                
     Another advantage  of the Alberta system  that is often                                                                    
     not appreciated  is the volumetric size  of our system.                                                                    
     System  receipts are  approximately  11.5 bcf/d  today,                                                                    
     and  the  export   deliveries  are  approximately  10.0                                                                    
     bcf/d. So those are volumes  in the two and three times                                                                    
     the  expected Alaska  volumes.  That's  the system  you                                                                    
     would be integrating into. The  size of our system adds                                                                    
     tremendous  stability  to  the toll.  It  changes  very                                                                    
     slowly,  very insignificantly,  if you  add volumes  of                                                                    
     gas and  variances in volumes  are relatively  small so                                                                    
     the toll does not change significantly.                                                                                    
                                                                                                                                
     Just to  summarize - our integration  model is flexible                                                                    
     and  it appeals  to  a broad  cross  section of  market                                                                    
     participants.    Consequently the  regulatory  approval                                                                    
     for this solution  is likely to be  less contested and,                                                                    
     in fact,  supported by more interested  parties, a very                                                                    
     important factor we would argue.                                                                                           
                                                                                                                                
     And a key to the  integrated approach is to continually                                                                    
     monitor  the  requirement  for  facilities  and  to  be                                                                    
     poised to  gain market support for  the timely addition                                                                    
     of new facilities.                                                                                                         
                                                                                                                                
     I would  like to  address a few  scorecard items  as to                                                                    
     how we compare -  our integrated proposition with other                                                                    
     alternatives.  We believe  that an  integrated solution                                                                    
     is  more  attractive and  will  be  more attractive  to                                                                    
     Alaskans and  Canadians. It's economically  superior to                                                                    
     any alternative for an  independent pipeline - separate                                                                    
     pipeline - from Boundary Lake  through a broad range of                                                                    
     Western Canadian supply  and capacity scenarios. You've                                                                    
     heard  my  testimony as  well  as  others that  Western                                                                    
     Canadian supply  and demand  numbers are  changing. Our                                                                    
     forecasts are changing, have changed  over the past two                                                                    
     years,  and   I  believe   that's  common   across  the                                                                    
     industry.   We  are   less  optimistic   about  Western                                                                    
     Canadian supply than we would  have been two years ago.                                                                    
     We also  believe that demand  will not grow  as quickly                                                                    
     as we expected. But fundamentally,  the gap - the spare                                                                    
     capacity in  the pipeline is  growing and  depending on                                                                    
     what happens  over the next  several years, you  may or                                                                    
     may  not  be  constructing additional  facilities  away                                                                    
     from Alberta to  serve Alaska gas. That  will depend on                                                                    
     what happens with parties' actual forecasts.                                                                               
                                                                                                                                
     One of  the key advantages  for integration is  you can                                                                    
     defer  the decision  on constructing  the specifics  of                                                                    
     pipelines beyond  Alberta. The  time frame to  strike a                                                                    
     commercial  deal  on  the project  in  advance  of  in-                                                                    
     service from A to B -  from Prudhoe Bay to Alberta as I                                                                    
     described  yesterday in  my testimony,  in our  case is                                                                    
     seven  years so  if  there's a  commercial deal  struck                                                                    
     next year,  we have indicated  we can be in  service to                                                                    
     Alberta by 2012.  If you want to be in  service by 2012                                                                    
     from  Alberta away  to whatever  market you're  seeking                                                                    
     from San  Francisco east to  New York, if  you're using                                                                    
     existing facilities,  clearly that commercial  deal can                                                                    
     be struck  several years later  than 2005. If  you want                                                                    
     to  build  a new  pipeline  or  some component  of  the                                                                    
     additional volumes needs a new  pipeline, you also have                                                                    
     a  significant  time  frame lag  of  approximately  two                                                                    
     years. You  wouldn't have to  make the decision  on the                                                                    
     downstream pipeline increment  until about 2007. That's                                                                    
     a  two-year advantage  to see  what's happening  in the                                                                    
     marketplace with  supply and  demand in  Western Canada                                                                    
     and also  to see  what's happening in  overall markets.                                                                    
     We  would   argue  having   additional  time   is  very                                                                    
     valuable.  It   generally  means  you  make   a  better                                                                    
     decision.                                                                                                                  
                                                                                                                                
     So,  just to  walk through  some scorecard  items -  we                                                                    
     think  that an  integrated  approach  will provide  the                                                                    
     highest  netback price  to  producers  and royalty  gas                                                                    
     netback  owners at  Boundary Lake.  The  tolls -  there                                                                    
     will  be  more stable  tolls  across  a wide  range  of                                                                    
     western Canadian  supply and demand forecasts  - lowest                                                                    
     tolls   and   fuel   compared  to   alternatives.   The                                                                    
     TransCanada Alberta  system tolls receive  an immediate                                                                    
     benefit from  Alaskan gas. That  will be  attractive to                                                                    
     Canadian producers  and that will be  attractive to the                                                                    
     Canadian government I would argue as well.                                                                                 
                                                                                                                                
     Capital and warranty costs  - the lowest infrastructure                                                                    
     capital  cost across  different pipe  size alternatives                                                                    
     away from Alberta.                                                                                                         
                                                                                                                                
     Lowest warranty  capital cost.   By warranty  capital I                                                                    
     mean the commitment cost to  commit for pipeline demand                                                                    
     charges  away  from  Alberta   will  be  lower  because                                                                    
     fundamentally the existing pipelines  do not require 15                                                                    
     and  20 and  25 and  30  year contracts.  As you  heard                                                                    
     testimony  this  morning,  on existing  pipes  you  can                                                                    
     contract  for one-year  worth of  service with  renewal                                                                    
     rights and  continue to roll  forward that  contract if                                                                    
     you wish. You can also  get expansions on our system in                                                                    
     Alberta with a  5-year contract rather than a  15 to 30                                                                    
     year  contract. That  has value  for  parties that  are                                                                    
     making commitments.                                                                                                        
                                                                                                                                
     Flexibility - We believe that  having access to liquids                                                                    
     processing  within  Alberta  will have  value.  Clearly                                                                    
     there  may  be  liquids  removed within  the  state  of                                                                    
     Alaska.  There may  be liquids  removed within  Alberta                                                                    
     and there may be liquids  removed on the way to market.                                                                    
     Having additional access  to liquids removal facilities                                                                    
     will  give Alaskan  gas one  more  opportunity to  sell                                                                    
     their  liquids.  You'd  be connected  to  an  extremely                                                                    
     liquid Alberta hub  at AECO, and you  also hear another                                                                    
     term  sometimes  called  NIT -  that's  Nova  Inventory                                                                    
     Transfer  that's on  our existing  system. That  is the                                                                    
     most liquid  hub today in  North America -  more liquid                                                                    
     than NYMEX.                                                                                                                
                                                                                                                                
     Easy access  to flexible and diverse  markets away from                                                                    
     Alberta  Hub -  I think  I've addressed  that, and  the                                                                    
     shortest  lead-time for  capital  decisions. I've  also                                                                    
     addressed that for new capacity away from Alberta.                                                                         
                                                                                                                                
     Risk  mitigation  - also  important  -  lowest risk  of                                                                    
     'hot-market' cost overruns.  Spread the downstream risk                                                                    
     at the  integrated hub by  having more  participants in                                                                    
     new  capacity  may  not require  additional  downstream                                                                    
     facilities,  depending  on  the timing  and  volume  of                                                                    
     Alaskan  flows, and  the existing  certificates provide                                                                    
     the lowest regulatory risk and fastest in-service.                                                                         
                                                                                                                              
     I  would  wrap up  by  indicating  that the  integrated                                                                    
     TransCanada    Foothills   proposition    -   Foothills                                                                    
     Pipelines  is now  100  percent  owned by  TransCanada.                                                                    
     They have  held the  certificates for  constructing the                                                                    
     Alaska pipeline  project within Canada, including  B to                                                                    
     C,  since 1978.  They  have met  those commitments  and                                                                    
     still hold  those certificates today and,  as you would                                                                    
     have seen from the map,  they have an existing pipeline                                                                    
     today called  the prebuild that  has capacity  of about                                                                    
     3.3  bcf/d  from  central  Alberta   to  the  Lower  48                                                                    
     interconnects.                                                                                                             
                                                                                                                                
     The underlying  principle of  TransCanada's proposition                                                                    
     is integration  of Alaskan gas into  its existing grid,                                                                    
     including  the Foothills  prebuild.  The concepts  that                                                                    
     originally underpinned  the Foothills  certificates are                                                                    
     still  valid  today  and we  would  argue  the  overall                                                                    
     public interest will best be  served by fully utilizing                                                                    
     the  extensive  natural  gas  pipeline  that  currently                                                                    
     supports Canadian and American gas consumers.                                                                              
                                                                                                                                
     To conclude,  the benefits of integration  are many and                                                                    
     substantial.  The economic  advantages  in capital  and                                                                    
     warranty costs  will not only  provide lower  prices to                                                                    
     consumers,  but   also  higher  netbacks   to  resource                                                                    
     owners. What was  true in '78 remains  true today, that                                                                    
     TransCanada   and  Foothills   can  provide   the  most                                                                    
     beneficial  products  for  the  development  of  Alaska                                                                    
     reserves.                                                                                                                  
                                                                                                                                
        Thank you for this opportunity to appear at this                                                                        
       session today and I'm available to respond to your                                                                       
     questions.                                                                                                                 
                                                                                                                                
SENATOR  HOFFMAN asked  Mr. Palmer  to address  any consideration                                                               
given by TransCanada  of the potential benefits  of this proposal                                                               
to Alaskan consumers, in particular  to consumers along the river                                                               
system and coastal communities, and of the spur line.                                                                           
                                                                                                                                
MR.  PALMER said  the original  project, which  TransCanada is  a                                                               
proponent of,  always anticipated volumes  would be taken  off of                                                               
the line at several locations  to connect to Alaskan communities.                                                               
TransCanada's focus  is the  main line  from Prudhoe  Bay through                                                               
Alaska to  market but off  takes from  the line to  serve Alaskan                                                               
consumers were always contemplated.  Valves and connections would                                                               
be   built  and   Alaskan  and   other  investors   would  pursue                                                               
constructing those  laterals. He  noted the  original legislation                                                               
contains   specific  language   regarding  reasonable   tolls  to                                                               
Alaskans and making gas available to Alaskans.                                                                                  
                                                                                                                                
SENATOR  HOFFMAN thanked  Mr. Palmer  for addressing  benefits to                                                               
Alaskans as that topic was missing from his presentation.                                                                       
                                                                                                                                
SENATOR WAGONER asked if the 3.3  bcf/d capacity in the system is                                                               
additional capacity that is not currently being used.                                                                           
                                                                                                                                
MR. PALMER said  that is currently fully  utilized and contracted                                                               
by  Alberta Gas.  The project  was initially  constructed because                                                               
there was  seven years of  spare Alberta gas  at the time  in the                                                               
1980s, which subsequently turned out to  be more than that. It is                                                               
fully  contracted  today, generally  on  a  short-term basis.  He                                                               
believed  the remaining  terms on  those contracts  would be  one                                                               
through four years. At the time  Alaska gas comes on line, Alaska                                                               
gas  would have  that  as  an alternative,  as  would Alberta  or                                                               
Western Canadian gas.                                                                                                           
                                                                                                                                
The committee took a 15-minute at-ease at 10:45 a.m.                                                                            
                                                                                                                                
CO-CHAIR  SAMUELS announced  that  Mr. Brena  would  be the  next                                                               
presenter  and that  he has  represented ratepayers  before FERC,                                                               
the  RCA, the  APUC  and  the Supreme  Court  of  Alaska. He  has                                                               
participated  in   virtually  all  the  major   rate  proceedings                                                               
affecting Alaska for the past couple of decades.                                                                                
                                                                                                                                
MR. ROBIN BRENA,  Partner, Brena, Bell &  Clarkson, P.C., thanked                                                               
the chair  for his introduction,  but said  he left out  the most                                                               
important  part -  that he  is from  Skagway. He  stated that  he                                                               
represents Tesoro, Anadarko and Agrium, but he is not                                                                           
representing anyone today and wants to give the committee his                                                                   
opinion on this topic as a citizen.                                                                                             
                                                                                                                                
     It goes  without saying that  the vast majority  of our                                                                    
     resources  and our  wealth are  going  to flow  through                                                                    
     pipeline     infrastructure     that    is     monopoly                                                                    
     infrastructure.  It's   absolutely  essential   to  our                                                                    
     economic future  that this monopoly  infrastructure has                                                                    
     just and  reasonable cost-based rates. Rates  in excess                                                                    
     of  that  will  result   in  less  development  of  our                                                                    
     resources,  less  revenue  from  the  resources  we  do                                                                    
     develop and  fewer opportunities for  manufacturing and                                                                    
     value-added jobs in Alaska.                                                                                                
                                                                                                                                
     This is  something that you've  got to get right.  I am                                                                    
     here  today to  encourage the  state to  act to  insure                                                                    
     that   cost-based  just   and   reasonable  rates   are                                                                    
     established  for this  pipeline infrastructure  now and                                                                    
     into the  future and anything  that you can do  to help                                                                    
     that, I think, would be good.                                                                                              
                                                                                                                                
     I  have  sat  through  many of  the  presentations,  as                                                                    
     you've  heard and,  were I  in your  position, I  would                                                                    
     consider myself  to have been 'technocrated'  to death.                                                                    
     So, what  I'm going to try  to do is try  to bring this                                                                    
     home in real  dollars and cents and real  issues that I                                                                    
     think, as  a legislator,  you should be  concerned with                                                                    
     in  the forming  of policy.  I thought  I'd begin  with                                                                    
     what the true  cost is of not getting  this issue right                                                                    
     - of  not establishing  just and reasonable  rates. The                                                                    
     example   that   you   were   encouraged   by   several                                                                    
     participants to  consider was an example  from history,                                                                    
     which  is TAPS.  It's  the first  time  around, it's  a                                                                    
     large project; it has a  great many similarities to the                                                                    
     process. And so, what are the lessons of TAPS?                                                                             
                                                                                                                                
     To date,  the TAPS carriers have  charged and collected                                                                    
     transportation rates  that are $12.5 billion  over just                                                                    
     and reasonable  rates. They have charged  and collected                                                                    
     and  earned an  additional $10.1  billion in  excess of                                                                    
     just and  reasonable DR&R rates.  If you  only consider                                                                    
     the transportation  over-collections of  $12.5 billion,                                                                    
     the impact  to state  revenues is $8.5  billion. Framed                                                                    
     somewhat  differently, our  Alaska  Permanent Fund,  if                                                                    
     rates were just and reasonable  on TAPS, we'd have $8.5                                                                    
     billion more in  it today, if the state  would have got                                                                    
     this  issue right.  It would  have a  balance of  $36.5                                                                    
     billion instead  of $28 billion.  That is what  many of                                                                    
     the technical  analysts have told you.  You've heard it                                                                    
     in bits and  pieces and percentages, and  please ask me                                                                    
     to defend those calculations at  some point. I would be                                                                    
     more than happy to.                                                                                                        
                                                                                                                                
     With regard  to the transportation rate,  it was simply                                                                    
     done. The  RCA has done  a comprehensive review  of the                                                                    
     rates  on  TAPS.  The  chair  at  the  time,  Thompson,                                                                    
     presented  to you.  She referred  you  and offered  you                                                                    
     copies of Order  151, docket P974. In  that docket, the                                                                    
     commission  held  that  the  TAPS  carriers  had  over-                                                                    
     collected these  amounts of money.  All that  I've done                                                                    
     is  take the  amounts that  the RCA  has said  is over-                                                                    
     collected  and   plugged  in  what  is   the  Permanent                                                                    
     Dividend  annual return  - if  those  funds had  rather                                                                    
     than  being  collected by  the  carriers  had not  been                                                                    
     collected  by the  carriers. That's  10.3  cents and  I                                                                    
     contacted  the Permanent  Fund and  got their  rates of                                                                    
     return for the past 20 years. So, that number is real.                                                                     
                                                                                                                                
     The state  got it wrong on  TAPS and it's cost  us $8.5                                                                    
     billion.  Let's  get it  right  this  time. There's  no                                                                    
     excuses  for  not  getting  it   right  this  time.  To                                                                    
     understand how to get it  right, you have to understand                                                                    
     how the  state got it wrong.  So, I want to  talk about                                                                    
     some of these concepts.... If  you have an alignment of                                                                    
     ownership  between  production  and  transportation  so                                                                    
     that  people are  paying  themselves  the tariff  rate,                                                                    
     then they will charge  the highest possible tariff rate                                                                    
     they can,  because they save  a quarter in  royalty and                                                                    
     severance  taxes  on   every  dollar  they  over-charge                                                                    
     themselves. So,  their incentives  will be to  have the                                                                    
     highest rates possible while  holding their costs down.                                                                    
     So,  where the  rubber meets  the road  is what  is the                                                                    
     return  component -  because the  return is  they don't                                                                    
     have  to pay  it,  they just  get it  and  they save  a                                                                    
     quarter  in taxes  for  every  dollar they  over-charge                                                                    
     from the state. They also  save money because they make                                                                    
     that excessive  profit from  independents that  need to                                                                    
     use this  monopoly infrastructure. So, there  is a huge                                                                    
     incentive for the producers to  own and to control this                                                                    
     line and to manage the  ownership structure so it stays                                                                    
     perfectly aligned  with the production interests  - and                                                                    
     to  transfer profitability  from their  production into                                                                    
     their transportation.  That is what has  happened here.                                                                    
     That is  the game that  is afoot  and that is  the game                                                                    
     that we haven't figured out yet, well enough.                                                                              
                                                                                                                                
     Let me say, too, that [END OF TAPE 04-10, SIDE B]                                                                          
                                                                                                                              
TAPE 04-11, SIDE A                                                                                                            
                                                                                                                                
MR.  BRENA explained  that oversight  of regulators  didn't work,                                                               
because the reality  of regulatory practice is  that someone must                                                               
ask them to  regulate or they will not. All  the shippers will be                                                               
affiliated with the  producers and their incentive  will have the                                                               
highest rates.  Most shippers will  ask for reasonable  rates and                                                               
that leaves only the state  or small independents. It's difficult                                                               
for  small independents  to carry  the ball.  He illustrated  his                                                               
point by saying  that he represented a client in  a rate case and                                                               
won; the  rate was  set through negotiation  at about  $1.25, but                                                               
his client  can no longer ship  on that line. The  producers will                                                               
only sell oil to his client at the end of the line.                                                                             
                                                                                                                                
     It's tough for  them to get the oil,  because they rely                                                                    
     on the oil. It's tough for  them to stay on the line if                                                                    
     the producers don't  want to sell it and  allow them to                                                                    
     ship  it. It's  tough  because  the small  independents                                                                    
     need   cooperation   in   the  field   and   with   the                                                                    
     transportation  infrastructure  in   order  to  survive                                                                    
     here.  So,   don't  rely  on  the   small  independents                                                                    
     carrying the water  for the state; the state  has to do                                                                    
     it.                                                                                                                        
                                                                                                                                
MR.  BRENA said  the state  settled on  the TAPS  project and  it                                                               
should have litigated. Many of  the assumptions in the settlement                                                               
were proved  wrong, but  the settlement  didn't have  a re-opener                                                               
clause; so, there  was no opportunity for the state  to come back                                                               
in and get something that was  fair. He summarized how he thought                                                               
the state should try to get things right on slide 5.                                                                            
                                                                                                                                
   · Establish clear goals. Ratemaking is not complex and a                                                                     
     transparent informed process among all the participants is                                                                 
     necessary.                                                                                                                 
   · Properly staff and resource the litigation effort.                                                                         
   · Maximize the state's leverage - the state needs to win a                                                                   
     rate case once in a while.                                                                                                 
                                                                                                                                
Back to the  subject of establishing clear goals,  MR. BRENA said                                                               
cost-based, just and reasonable rates are very simple.                                                                          
                                                                                                                                
     When  it costs  somebody to  build something,  you give                                                                    
     them  their  investment  back.  Until  they  get  their                                                                    
     investment  back, whatever  their  investment is,  they                                                                    
     get  a reasonable  return on  it. They  get to  recover                                                                    
     their operating costs and a  tax allowance. And, that's                                                                    
     it.  Rates should  be based  on the  cost of  providing                                                                    
     service.                                                                                                                   
                                                                                                                                
He  cautioned  that the  first  question  to  be asked  with  any                                                               
settlement  or   any  proposal  is:   Are  the  rates   just  and                                                               
reasonable, cost-based rates? Business  people don't want to know                                                               
the rate will be $1; they want  to know the rate will stay linked                                                               
to the actual costs.                                                                                                            
                                                                                                                                
Fair terms and  conditions for access for  future independents is                                                               
a  major consideration.  Independents  always come  to the  party                                                               
later and develop  the marginal fields. They will  need access to                                                               
the  infrastructure  on  a  forward-going  basis.  If  the  major                                                               
producers  lock the  transportation and  can control  access, the                                                               
independents will be squeezed out.  He encouraged the Legislature                                                               
to do  what it can to  encourage transparency of the  process and                                                               
include all  financially interested parties. "Everybody  needs to                                                               
be at the table."                                                                                                               
                                                                                                                                
MR.  BRENA  said  Professor  Witherspoon,  one  of  the  foremost                                                               
experts  on  pipelines  in  the   nation,  drafted  the  enabling                                                               
legislation.                                                                                                                    
                                                                                                                                
     I  don't  think it's  fully  appreciated  that you  are                                                                    
     negotiating  matters  with  companies  that  have  more                                                                    
     sophistication and  greater incomes than  most nations.                                                                    
     You  need  to recognize  that.  So,  please devote  the                                                                    
     resources equal to  the task and recognize  the task or                                                                    
     the cost will  be at another $8 billion  or $10 billion                                                                    
     ten years from now.                                                                                                        
                                                                                                                                
     Recognize  you're   negotiating  and   litigating  with                                                                    
     certain disadvantages. Like  it or not, the  state is a                                                                    
     political  process  and   there  are  opportunities  to                                                                    
     influence  the  political  process that  don't  go  the                                                                    
     other way  with the other negotiated  parties. So, it's                                                                    
     important  because   of  your  disadvantages   in  this                                                                    
     process  to have  it be  an open  process. I  think the                                                                    
     state should focus on  maximizing its [negotiation] and                                                                    
     litigation leverage and you have huge amounts of it.                                                                       
                                                                                                                                
     On slide nine,  you are the owner of  the resource. You                                                                    
     can put anything in the  lease that you want. It's your                                                                    
     oil; it's  your gas.  If there  are games  being played                                                                    
     that you  can't figure out the  solution for downstream                                                                    
     - if  there's not enough  tankage to get  our resources                                                                    
     to the market for fair  prices, if there's a bottleneck                                                                    
     in transportation and  monopoly profits being realized,                                                                    
     if  the  independents can't  get  the  access to  field                                                                    
     facilities because they aren't  able to negotiate cost-                                                                    
     based use of  field facilities - those  are three major                                                                    
     bottlenecks that  the state will  have to deal  with in                                                                    
     terms of future public policy.  All you've got to do is                                                                    
     put a sentence in your lease.                                                                                              
                                                                                                                                
     The   right-of-way.    You're   the   owner    of   the                                                                    
     transportation corridor.  That sentence could  be under                                                                    
     right-of-way. This  infrastructure crosses  state land.                                                                    
     You  have tremendous  authority  and  control over  the                                                                    
     circumstances  under which  that is  used. Your  taxing                                                                    
     authority and I won't emphasize  that, but I would hate                                                                    
     to negotiate  with someone  that had  the power  to tax                                                                    
     me. I would not assume I  was in a position of strength                                                                    
     in that situation. You have the power to tax.                                                                              
                                                                                                                                
     The power to regulate.... I  was very interested in the                                                                    
     chair's question  from an  earlier speaker  with regard                                                                    
     to  state  ownership  and whether  state  ownership  is                                                                    
     appropriate or  not. The important thing  isn't whether                                                                    
     the  state  owns  or  doesn't  own  it,  setting  aside                                                                    
       financing opportunities that may exist for a state-                                                                      
     owned  facility.  The  issue  is  whether  or  not  the                                                                    
     production interest is  aligned with the transportation                                                                    
     interest. If, to  use an example, BP as  a producer has                                                                    
     to pay  TransCanada or me  if I own the  pipeline, then                                                                    
     you  can  bet  that  rate  is  going  to  be  just  and                                                                    
     reasonable. If it's  not, BP will go to FERC  and get a                                                                    
     just  and reasonable  rate. So,  you have  control over                                                                    
     what the  ownership structure  of this  pipeline should                                                                    
     be.  Let's say,  for  example, you  decide  you want  a                                                                    
     third-party owner of that pipeline.  If you are able to                                                                    
     get third-party ownership of  that pipeline, then those                                                                    
     rates  will be  just and  reasonable, because  then the                                                                    
     producers will have a huge  incentive that they be just                                                                    
     and  reasonable and  they will  beat down  FERC's doors                                                                    
     getting a just and reasonable rate.                                                                                        
                                                                                                                                
     Avoid  litigating against  the  state's own  interests.                                                                    
     I'm  litigating against  the state,  I'm trying  to get                                                                    
     just and reasonable rates for  instate shippers and the                                                                    
     state  is opposing  me at  every step  of the  way. The                                                                    
     positions   they  are   taking  are   compromising  and                                                                    
     undermining   their    ability   to    negotiate   good                                                                    
     settlements  and to  litigate good  settlements in  the                                                                    
     future. It doesn't make any sense.                                                                                         
                                                                                                                                
     Avoid compromising state authority.  Last year, you had                                                                    
     an  opportunity to  take  a  look at  HB  277. I  can't                                                                    
     imagine a  more broad-scaled  give-away of  the state's                                                                    
     own  authority  to  regulate   these  issues  than  was                                                                    
     proposed through HB 277. Please  do not compromise your                                                                    
     authority  -   and  understand  something   about  your                                                                    
     regulatory authority. As  Professor Witherspoon drafted                                                                    
     the  legislation, what  he intended  is the  state have                                                                    
     the  power that  the  federal  government didn't  have.                                                                    
     There was  no gap  between the two.  That may  be very,                                                                    
     very important to  you in the future -  that there's no                                                                    
     gap between the two.                                                                                                       
                                                                                                                                
MR. BRENA said the FERC can't force extension or expansion of                                                                   
the pipeline, but the local commission can.                                                                                     
                                                                                                                                
     If the  federal government doesn't have  the authority,                                                                    
     under your  current act, the  state does.  That's very,                                                                    
     very  important.  That  was  very  well  conceived  and                                                                    
     thought-out   by   the    Legislature   and   Professor                                                                    
     Witherspoon.  Please  don't  compromise away  your  own                                                                    
     leverage  to negotiate  and litigate  better deals  for                                                                    
     the state!                                                                                                                 
                                                                                                                                
     Next, win a  rate case. You know, if  the state's going                                                                    
     to run  with the big dogs,  it has to have  more than a                                                                    
     bark and the  state has never won a rate  case. At some                                                                    
     point...if  you're  not  able  to  win  in  litigation,                                                                    
     you're  not  able to  get  a  good settlement.  If  the                                                                    
     settlement is before a litigation  victory, then it's a                                                                    
     bad  settlement; it's  costing you  money. In  the last                                                                    
     settlement, the state knew that.  There wasn't a secret                                                                    
     about  it.  The  assistant  AG said  we  think  we  can                                                                    
     litigate and  get $2.5  billion more  out of  this deal                                                                    
     than what  we can get, but  we can't get a  better deal                                                                    
     through  settlement.  So,   they  took  the  settlement                                                                    
     anyway.  Well,  fairly  compare  the  cost  results  in                                                                    
     efficiencies  of settling  with  litigating. I  realize                                                                    
     it's popular to bash  attorneys; I realize it's popular                                                                    
     to  say that  litigation  is something  that should  be                                                                    
     avoided.  Well, 20-years  ago you  avoided it.  You had                                                                    
     $35  million  into  litigation, largely  on  the  wrong                                                                    
     issues -  I just throw  that in as  an aside -  and you                                                                    
     settled. It  cost you $8.5 billion.  Everyone is trying                                                                    
     to avoid litigation. What for?  Why didn't you litigate                                                                    
     that to its end? I hope  I'm not back 10 years from now                                                                    
     talking  to  a  different legislature  with  a  similar                                                                    
     message.  Don't just  assume  that  settlement must  be                                                                    
     done. In these  circumstances, it has proved  to be the                                                                    
     worst result  in almost every settlement  for the state                                                                    
     that I've reviewed with  regard to rate transportation.                                                                    
     I  have  felt,  without  exception,  that  a  litigated                                                                    
     result would have been far favorable.                                                                                      
                                                                                                                                
     The ratemaking  strategy that the  state is  faced with                                                                    
     is to make  regulation as difficult as  possible for as                                                                    
     long  as possible  until the  state settles  with them.                                                                    
     Let me tell you, for  example, the last 79 rate filings                                                                    
     on the  TransAlaska Pipeline system have  been rejected                                                                    
     as  inadequate or  not  supported -  the  last 79!  All                                                                    
     right? They're  not trying to  get it right.  The local                                                                    
     electric company  in Skagway  makes filings  to support                                                                    
     its  rates  every three  or  four  years. They  get  it                                                                    
     right; they  know -  what we  call it  a 275A  filing -                                                                    
     it's what  you're supposed to file  with your testimony                                                                    
     to say what your rates  are supposed to be. Every small                                                                    
     utility  and bush  company in  this state  with 5  or 6                                                                    
     employees gets  it right. The  last 79 filings  on TAPS                                                                    
     haven't met  that minimum standard. They're  not trying                                                                    
     to   get  it   right.  So,   don't  underestimate   the                                                                    
     successfulness  of  not meaningfully  participating  in                                                                    
     the ratemaking  process - dragging  it along  until the                                                                    
     state finally settles.                                                                                                     
                                                                                                                                
     Finally, if  I were you, I  would like to know  what to                                                                    
     look for in a future  settlement that would come before                                                                    
     me, so I just thought I'd tell you.                                                                                        
                                                                                                                                
     Indications  of  a  bad  settlement  -  rates  are  not                                                                    
     determined based on  standard ratemaking principles. As                                                                    
     soon  as people  start  talking  about rates  different                                                                    
     than just  and reasonable rates  or rates based  on the                                                                    
     cost of service,  then you've lost. It's  just a matter                                                                    
     of  trying to  figure  out how  much  and you'll  never                                                                    
     figure out how much.                                                                                                       
                                                                                                                                
     Future  access is  somehow limited  so the  people that                                                                    
     come  late to  the party  can't get  in the  party. The                                                                    
     people that come late to  the party are the people that                                                                    
     the state  needs to develop  their marginal  fields and                                                                    
     outer fields.  They're the independents. After  the big                                                                    
     puddles of  oil and gas  are gone, they are  the people                                                                    
     that are  left here developing our  marginal fields. If                                                                    
     that future  is that  the infrastructure  is controlled                                                                    
     by  the majors,  then the  independents are  who you're                                                                    
     relying  on for  the exploration,  then the  state will                                                                    
     lose.                                                                                                                      
                                                                                                                                
     Return  is not  based on  investment. Actually,  in the                                                                    
     TAPS, they  gave them  a return  that was  unrelated to                                                                    
     investment.  Five years  before  I filed  a protest  on                                                                    
     TAPS, the  rate of return  on equity for TAPS  was over                                                                    
     100 percent per  year for the last  five years, because                                                                    
     it wasn't linked to investment.                                                                                            
                                                                                                                                
     Long-term  agreements  with  no  re-openers,  if  their                                                                    
     assumptions prove false - I  put throughput down there.                                                                    
     When you  build pipelines, you  don't know how  much of                                                                    
     the resource is really there.  So, you need to admit to                                                                    
     yourself that  you don't know.  You also need  to admit                                                                    
     to yourself that  you know less than  the people you're                                                                    
     negotiating  with about  what's there.  Once you  admit                                                                    
     those two things,  then you're on the  way to realizing                                                                    
     the   limitations   that   if  there   are   throughput                                                                    
     assumptions that  go into setting those  rates, that if                                                                    
     they  go  out and  develop  three  or four  times  more                                                                    
     resource, that  that three or four  times more resource                                                                    
     isn't flowing  through at those set  rates because that                                                                    
     will result  in exorbitant returns.  So, if there  is a                                                                    
     settlement, be  sure that  it can  be reopened  if it's                                                                    
     needed. If the assumptions prove  false - and the state                                                                    
     has  essentially  taken  itself  and TAPS  out  of  the                                                                    
     litigation for  25 years -  that's the reason  why it's                                                                    
     gotten so out  of kilter. Many of  the assumptions that                                                                    
     were made are false and throughput was one of them.                                                                        
                                                                                                                                
     If the settlement  that comes before you  is so complex                                                                    
     that it takes a team of  experts a long time to explain                                                                    
     it, ratemaking  is not  complicated -  not withstanding                                                                    
     you  sitting through  two days  of  less than  pleasant                                                                    
     comment. If you don't  understand it, then it's because                                                                    
     it's  a  bad  deal.  It's not  because  you're  missing                                                                    
     something.  If the  settlement  trust  process was  not                                                                    
     transparent,  if other  parties didn't  participate, if                                                                    
     certainty is  confused with  predictability -  and that                                                                    
     goes back to my earlier point  that if you see any kind                                                                    
     of  set rate  rather  than a  methodology, then  you've                                                                    
     lost. Then, if  what you hear when  it's presented [is]                                                                    
     the limitations,  costs and risks of  FERC litigation -                                                                    
     FERC litigation is  not difficult. FERC has  done a lot                                                                    
     to streamline its  process. It would take  18 months to                                                                    
     two  years for  a  rate  case on  this  pipeline to  go                                                                    
     through and one  of the things that  people continue to                                                                    
     confuse is that it matters  what FERC's opinion is. The                                                                    
     D.C. Circuit really  establishes ratemaking principles,                                                                    
     not FERC.                                                                                                                  
                                                                                                                                
     So, the  question is how  is the  settlement consistent                                                                    
     or inconsistent with the  ratemaking authority that the                                                                    
     D.C.  Circuit  has  established that  it  will  use  to                                                                    
     review FERC....  So, don't have  overstated to  you the                                                                    
     costs or limitations of FERC  litigation. Every once in                                                                    
     a while, go find out. For  a $10 million check, you can                                                                    
     go set  a just and  reasonable rate  at FERC in  a two-                                                                    
     year  process and  that  gives  everybody a  tremendous                                                                    
     amount  of predictability  because you  then will  have                                                                    
     established  what the  ratemaking principles  that will                                                                    
     govern this line  through its life will be.  One of the                                                                    
     real problems with settlement is  that you never really                                                                    
     know  how  that  line  is going  to  be  regulated  and                                                                    
     oftentimes  complex settlements  deviate  so much  that                                                                    
     they  create their  own  problems  if greater  problems                                                                    
     than  standard  ratemaking  were allowed  to  continue.                                                                    
     Those are  my comments and  I'd be happy to  answer any                                                                    
     questions I can.                                                                                                           
                                                                                                                                
CO-CHAIR SAMUELS thanked Mr. Brena for his presentation.                                                                        
                                                                                                                                
CO-CHAIR OGAN  considered Mr. Brena's allegations  that the state                                                               
had been overcharged  $12 billion to be serious and  asked him to                                                               
explain what he meant.                                                                                                          
                                                                                                                                
MR. BRENA replied that he didn't  intend it as an allegation, but                                                               
the Regulatory  Commission of Alaska  (RCA) sat through  weeks of                                                               
hearings  and  Order  151  shows,  on  a  year-by-year  basis  on                                                               
spreadsheets,  that   the  over-collections  were   $9.9  billion                                                               
through 1996.  He added investment  return to  that - had  it not                                                               
been  overcharged. The  over-collection happened  when the  state                                                               
settled by signing a bad deal when it should have litigated.                                                                    
                                                                                                                                
CO-CHAIR OGAN  said while he  appreciated Mr.  Brena's testimony,                                                               
it  might  throw  a  wet  blanket on  the  enthusiasm  of  people                                                               
investing in Alaska. He has told  investors the best way to avoid                                                               
this type of thing is to have clear and concise rules upfront.                                                                  
                                                                                                                                
MR.  BRENA  agreed   and  said  he  thought   getting  terms  and                                                               
conditions  right in  the  first place  would  result in  greater                                                               
investment  in the  state,  not  less. Tilting  the  cost of  the                                                               
pipeline infrastructure  so that there are  excessive returns for                                                               
it would drive  out the independents. The best  public policy for                                                               
the state to adopt is to make  sure that the people who build the                                                               
line  get their  costs back  for  building it,  get a  reasonable                                                               
return  for investing  in it  and  get their  cost of  operation,                                                               
which they  are entitled to  under just and reasonable  rates. If                                                               
they got  more than  that, it  would discourage  investment. Fair                                                               
rules for everybody encourage more investment.                                                                                  
                                                                                                                                
SENATOR   DYSON  commented   that  the   state  needs   the  best                                                               
consultants to  negotiate with these  oil companies that  are the                                                               
biggest corporations employing the best minds in the world.                                                                     
                                                                                                                                
MR. BRENA emphatically agreed.                                                                                                  
                                                                                                                                
SENATOR HOFFMAN  stated that  the industry  should not  view this                                                               
hearing  as a  wet blanket  because  they are  talking about  the                                                               
state's  resources and  legislators need  to make  sure they  are                                                               
maximized.                                                                                                                      
                                                                                                                                
CO-CHAIR SAMUELS said the point  is to educate legislators with a                                                               
variety of ideas and to expose  the public on the complexities of                                                               
this issue. He  mentioned there would be another  hearing in July                                                               
with entirely different points of view.                                                                                         
                                                                                                                                
MR. BRENA  said he  would be  happy to  discuss these  ideas with                                                               
anyone if the legislature thought that would be helpful.                                                                        
                                                                                                                                
CO-CHAIR OGAN said he favored  an alignment between the state and                                                               
producers  with  an  independent   pipeline  and  both  would  be                                                               
interested in having the lowest  tariff possible. He thought that                                                               
would bring the best netback.                                                                                                   
                                                                                                                                
MR. BRENA  cautioned that there  would be many  opportunities for                                                               
misalignment.                                                                                                                   
                                                                                                                                
      You don't need complete misalignment, you just need                                                                       
      sufficient misalignment so you have a major shipper                                                                       
     who has an economic incentive  in a just and reasonable                                                                    
     rate and  that can  be a  single shipper.  For example,                                                                    
     when BP  and Arco  merged, Arco's interest  was allowed                                                                    
     to be acquired by BP. If  it weren't, BP would be TAPS'                                                                    
     major shipper  and there would  be just  and reasonable                                                                    
     rates on TAPS. I just used  the merger as an example. A                                                                    
     condition  of the  merger could  have been  that Arco's                                                                    
     interest was acquired by a  third-party. Then the state                                                                    
     would not be losing $100 million a year right now.                                                                         
                                                                                                                                
CO-CHAIR SAMUELS thanked Mr. Brena  for his testimony and invited                                                               
Mr.  John  Carruthers,   Vice  President,  Northern  Development,                                                               
Enbridge,  to testify  next on  how he  would move  forward on  a                                                               
business plan.                                                                                                                  
                                                                                                                                
MR.  JOHN  CARRUTHERS,   Vice  President,  Northern  Development,                                                               
Enbridge, said he  wasn't going to forward a  proposal, but would                                                               
reinforce the idea  that there are some options for  the state to                                                               
consider. Enbridge  has had some  success with  incentive tolling                                                               
in Canada in terms of  aligning pipeline companies with shippers.                                                               
Pipeline  companies want  to  maximize revenue,  but  not at  the                                                               
expense of shippers. Obviously there  has to be a fair allocation                                                               
of costs based on risk  assumptions. Shippers often want to align                                                               
the  pipeline  companies with  incentive  at  as  low a  cost  as                                                               
possible.                                                                                                                       
                                                                                                                                
MR. JACK  CRAWFORD, Vice President  and Chief  Operating Officer,                                                               
Alliance Pipeline, added that in  terms of alignment, he realizes                                                               
that  almost all  cost issues  are related  to capital  costs and                                                               
it's very  important to control those.  Historically, a regulated                                                               
pipeline company  has the incentive  to spend more  money because                                                               
it makes  money on what  it spends. So,  it makes sense  to focus                                                               
attention at the  outset on the capital costs.  As a consequence,                                                               
the arrangements  that Alliance  put in  place had  incentives to                                                               
control  capital costs.  He didn't  know if  the same  incentives                                                               
would be appropriate here because the risks are different.                                                                      
                                                                                                                                
     It is pretty  much a risk-allocation-type procedure....                                                                    
     It's  probably premature  to  forecast  how that  might                                                                    
     look given there is still  a number of factors that are                                                                    
     not  settled  in  terms  of   how  the  risk  would  be                                                                    
     allocated in the future.                                                                                                   
                                                                                                                                
MR. CARRUTHERS  added that companies with  experience in building                                                               
pipelines in  the Western Canadian  sedimentary basin are  apt to                                                               
take more  risk in terms of  building something if they  had done                                                               
it before. "It's  more difficult in Alaska,  because there hasn't                                                               
been  an underground  pipeline built...."  The Alliance  pipeline                                                               
might be able to take more  risk because of its recent experience                                                               
in the area.                                                                                                                    
                                                                                                                                
     We've had  some good experience with  incentive tolling                                                                    
     in    negotiations   with    producers   in    Alberta.                                                                    
     Historically, costs  were based on cost  of volumes and                                                                    
     it became  fairly adversarial where it  was in opposing                                                                    
     interests in  terms of estimating costs  and estimating                                                                    
     volumes. They  tended to  be adversarial  and litigated                                                                    
     and you came up with a solution.                                                                                           
                                                                                                                                
     We  moved from  that  to looking  at incentive  tolling                                                                    
     where  the  tolls  are separated  from  the  costs  and                                                                    
     trying  to   align  the  shippers  with   the  pipeline                                                                    
     companies. So, the results you  were trying to obtain -                                                                    
     that was  how you  were rewarded  on the  attainment of                                                                    
     those.                                                                                                                     
                                                                                                                                
MR. CARRUTHERS said Enbridge had  the first pipeline in Canada to                                                               
negotiate incentive  tolling and it  had good success.  The first                                                               
agreement  was   in  1995   for  a   five-year  period.   It  was                                                               
renegotiated  in 2000  and is  being renegotiated  again. It  has                                                               
worked well reducing costs for both  parties. A lot has been done                                                               
with cost reduction  and the renewed negotiations  are focused on                                                               
providing additional  services. Flexibility  is needed  over time                                                               
to realign.                                                                                                                     
                                                                                                                                
MR. CARRUTHERS  noted that  work still  needs to  be done  on the                                                               
pipeline  tariffs, which  need  to align  with  the strategy  for                                                               
commercialization of  gas -  how it  would ramp  up and  what the                                                               
shippers' needs are.  While they have heard  testimony today that                                                               
shippers  want   predictability  versus  certainty,   that's  not                                                               
consistent with  his experience.  Experienced companies  are able                                                               
to  take more  operating risk  if they  have confidence  in their                                                               
capabilities.                                                                                                                   
                                                                                                                                
     There's a trade-off between project  rating in terms of                                                                    
     AA,  AAA, B,  whatever and  the amount  of equity  risk                                                                    
     that is being taken. So,  it's not like [a company] can                                                                    
     always  go to  one corner  of the  matrix and  pick the                                                                    
     lowest  cost, because  there  is  certainly more  risk,                                                                    
     which  increases  the  need   for  returns  and  higher                                                                    
     equity.  As   we  progress   through  the   design  and                                                                    
     development of  the project, there  certainly is  a way                                                                    
     we  can align  interests between  the shippers  and the                                                                    
     companies building it.                                                                                                     
                                                                                                                                
REPRESENTATIVE  BETH   KERTTULA  said  his  point   about  having                                                               
incentives  to   control  the   capital  costs   is  particularly                                                               
important and asked what some of the incentives would be.                                                                       
                                                                                                                                
MR.  CARRUTHERS  replied  that  Alliance  has  the  most  current                                                               
system.                                                                                                                         
                                                                                                                                
MR. CRAWFORD related that the  Alliance system was constructed on                                                               
a  contract that  used  12 percent  as a  target  rate of  return                                                               
realizing that at some point, there  was a limit on what the rate                                                               
of return could be.                                                                                                             
                                                                                                                                
TAPE 04-11, SIDE B                                                                                                            
                                                                                                                              
REPRESENTATIVE KERTTULA asked him what the rate went up to.                                                                     
                                                                                                                                
MR. CRAWFORD  remembered that it  went up  to 14 percent,  but he                                                               
would have to check.                                                                                                            
                                                                                                                                
REPRESENTATIVE KERTTULA asked how that was measured.                                                                            
                                                                                                                                
MR.  CRAWFORD replied  that it  was  pretty straightforward,  but                                                               
there has to be agreement on the initial estimate.                                                                              
                                                                                                                                
     When we  were going through  the open season, we  had a                                                                    
     capital cost that translated through  a number of fixed                                                                    
     factors into  a rate  that customers  found reasonable.                                                                    
     As long  as that  was reasonable,  then in  effect, the                                                                    
     capital cost  was reasonable.  There was  a recognition                                                                    
     that to  the extent  that we spent  more than  what the                                                                    
     capital costs were  that the rate would  be higher than                                                                    
     what  it would  otherwise be,  but  not as  high as  it                                                                    
     would  be  if  the  rate of  return  stayed  the  same.                                                                    
     Likewise, if  we had been  successful in  inflating the                                                                    
     cost  estimate and  we came  in under  budget, then  we                                                                    
     would  earn  a  higher  rate of  return,  but  all  the                                                                    
     shippers  would see  a lower  rate than  what they  had                                                                    
     signed  up for  in the  first place.  So, why  worry as                                                                    
     long as  it was  acceptable at  the target  rate? Then,                                                                    
     there  was  a restraint  on  what  ultimately could  be                                                                    
     considered  a rate-based  company in  over-spending and                                                                    
     incentives to minimize costs.                                                                                              
                                                                                                                                
REPRESENTATIVE  KERTTULA said  that explanation  was helpful  and                                                               
added the  state has done something  similar in some of  its rate                                                               
cases. However, the  state has a lot more  factors in determining                                                               
the reasonableness of the costs all the way along rather than                                                                   
just saying it's set.                                                                                                           
                                                                                                                                
CO-CHAIR SAMUELS thanked Mr. Crawford and Mr. Carruthers for                                                                    
their comments and asked Mr. Palmer to give his presentation.                                                                   
                                                                                                                                
MR. TONY PALMER, Vice President, Alaska Business Development,                                                                   
TransCanada Pipelines, Ltd., prefaced his remarks saying he                                                                     
wouldn't address specifics on how he would structure a tariff.                                                                  
                                                                                                                                
     There are  a number of different  methodologies used to                                                                    
     create gas  pipeline tariffs in  the United  States and                                                                    
     Canada. My  testimony will focus  primarily on  a cost-                                                                    
     of-service methodology,  which is the  traditional form                                                                    
     for  a new  long pipeline  system with  high risks,  as                                                                    
     this project  will see.  At the end  of my  testimony I                                                                    
     will  discuss a  couple of  alternatives that  could be                                                                    
     utilized  for   a  project  such  as   the  Alaska  gas                                                                    
     pipeline.                                                                                                                  
                                                                                                                                
     The  initial pipeline  from Alaska  can be  expected to                                                                    
     remain regulated  by U.S. and Canadian  governments. It                                                                    
     will  be highly  capital intensive  with route-specific                                                                    
     investments that cannot readily  be redirected to serve                                                                    
     other purposes. Once you lay  that steel in the ground,                                                                    
     it's  very  difficult to  move  it  to provide  another                                                                    
     service.  The inherent  business risks  for a  pipeline                                                                    
     include   development  risk,   construction  completion                                                                    
     risk, reserve, credit,  operating, etc.... The pipeline                                                                    
     will be  a contract  carrier; that  is standard  in the                                                                    
     gas business....  The regulators  in the  United States                                                                    
     and Canada  - FERC in  the United States,  the National                                                                    
     Energy Board  in Canada -  for commercial  matters that                                                                    
     determine  the types  and levels  of  tariffs, which  a                                                                    
     pipeline may  charge its customers for  the services it                                                                    
     provides and also the terms  and conditions of service.                                                                    
     The approved  tariffs and terms and  conditions attempt                                                                    
     to balance the interests  of shippers, consumers, other                                                                    
     stakeholders and the  pipeline investors. It's intended                                                                    
     to be a fine balance of interests.                                                                                         
                                                                                                                                
     The  terms and  conditions of  service are  an integral                                                                    
     part  of   the  tariff   and  must  be   considered  in                                                                    
     conjunction with the tariff.  Natural gas pipelines are                                                                    
     highly leveraged businesses  with significant financial                                                                    
     risk  and lower  business  risk than  many other  large                                                                    
     corporations. That's the  structure. Pipeline companies                                                                    
     generally have  higher financial risk because  they are                                                                    
     highly leveraged and they have  lower business risk and                                                                    
     that  enables  them to  take  on  the additional  debt.                                                                    
     That's   the   fundamental   structure  that   is   the                                                                    
     foundation for most pipeline projects.                                                                                     
                                                                                                                                
     The  Alaska gas  pipeline can  be expected  to commence                                                                    
     operations with a high debt  ratio in order to minimize                                                                    
     the  pipeline  tariff.  You heard  testimony  yesterday                                                                    
     from J.P.  Morgan. They  gave you  some evidence  as to                                                                    
     how that  variation can change the  pipeline structure,                                                                    
     but the fundamental business risk  must be matched with                                                                    
     the leverage on  the pipe - the debt equity  ratio - as                                                                    
     well as the returns.                                                                                                       
                                                                                                                                
     So,  the  high  debt  ratio  will  require  a  properly                                                                    
     secured  contract  with  low   business  risk  for  the                                                                    
     pipeline. The proposed U.S.  energy bill provisions for                                                                    
     the Alaska  project stipulate that the  U.S. government                                                                    
     may provide loan  guarantees [for] up to  80 percent of                                                                    
     the  capital   costs  of  the  project.   Such  a  loan                                                                    
     guarantee   would  assist   the   pipeline  owners   in                                                                    
     obtaining  the  multibillions  in  debt  financing  and                                                                    
     improve  the  interest  rate  and  loan  terms  to  the                                                                    
     benefit  of  all  project  stakeholders.  In  order  to                                                                    
     obtain  the financing,  the  pipeline must  demonstrate                                                                    
     the  ability  to  make  payments   on  its  debt,  both                                                                    
     principle  and  interest, generally  through  long-term                                                                    
     shipping commitments  from credit-worthy  customers and                                                                    
     by meeting certain debt  service coverage covenants and                                                                    
     other loan conditions.                                                                                                     
                                                                                                                                
MR.  PALMER  showed  the  committee a  schematic  of  the  equity                                                               
investment  that   goes  into  a   project  of  this   scale.  It                                                               
demonstrated that  risk capital  is advanced by  equity investors                                                               
early in the project and before the debt is invested.                                                                           
                                                                                                                                
     So,  the current  investment that  my  company has,  as                                                                    
     well as others, in this  project is 100 percent equity.                                                                    
     There  is  no  debt   behind  the  project  during  the                                                                    
     development phase; it is 100  percent equity - all risk                                                                    
     capital.  Even  during  construction, that  also  is  a                                                                    
     period  where  you have  equity  capital.  If you  have                                                                    
     contractual  terms  resolved  at that  point,  you  can                                                                    
     start  to advance  your  debt  during the  construction                                                                    
     phase.                                                                                                                     
                                                                                                                                
Recovery of  the equity comes  over the  life of the  project and                                                               
while  he used  20  years for  his  illustration, it's  typically                                                               
spread over the life of a contract.                                                                                             
                                                                                                                                
     Most new  pipes in  North America have  been structured                                                                    
     on  a  cost-of-service   basis  and  a  cost-of-service                                                                    
     methodology  allows the  pipe  company  to recover  all                                                                    
     prudently incurred  costs for  providing transportation                                                                    
     service including a fair  return on capital investment.                                                                    
     This  usually results  in an  efficient use  of capital                                                                    
     with the  lowest possible  tariffs. These  low tariffs,                                                                    
     however, are achieved by  minimizing the business risks                                                                    
     to  the pipeline  company. The  tariffs are  subject to                                                                    
     full discovery  and are  completely transparent  to all                                                                    
     stakeholders  for   each  component  of  the   cost  of                                                                    
     service.  That cost  of service  model allows  the pipe                                                                    
     company to recover  its fixed costs in  a demand charge                                                                    
     to its  customers -  in other  words, unrelated  to the                                                                    
     actual volumes transported on any particular day....                                                                       
                                                                                                                                
The  variable costs  are recovered  through  a commodity  charge,                                                               
which is related  to the actual volumes.  His schematic addressed                                                               
property   and   income   taxes  and   depreciation   rate.   The                                                               
depreciation rate is often a factor  that is used on a project of                                                               
this scale to adjust the variability  of the tariff over time. It                                                               
normally reflects  the economic life  of the pipeline  and allows                                                               
the recovery  of capital, both  equity and debt, invested  in the                                                               
pipeline over  that life. The traditional  model had depreciation                                                               
rates  established on  a straight-line  basis collecting  an even                                                               
amount of depreciation over the life of the project.                                                                            
                                                                                                                                
     For large  new pipelines  that need  to compete  in the                                                                    
     marketplace with  existing infrastructure, depreciation                                                                    
     rates are  sometimes modified  to levelize  the tariff.                                                                    
     This means  a lower  collection of depreciation  in the                                                                    
     early years of  the project and a  higher collection in                                                                    
     the  later  years,  much like  a  residential  mortgage                                                                    
     schedule  for principle  repayment.... This  method, of                                                                    
     course,  increases the  risk  for  a pipeline  company.                                                                    
     Instead of getting an even  recovery, an early recovery                                                                    
     of your capital,  you're moving that to  the back. That                                                                    
     increases   risk.  There   are   a   number  of   other                                                                    
     methodologies  that  have  been  used  over  the  years                                                                    
     instead of cost-of-service for gas pipelines.                                                                              
                                                                                                                                
MR.  PALMER said  forms of  incentive regulation  have been  used                                                               
that apply some  degree of sharing between  shippers and pipeline                                                               
owners   for   both   capital   costs,   operating   costs   and,                                                               
occasionally, debt costs.                                                                                                       
                                                                                                                                
     Other forms  of negotiated  rates include a  fixed toll                                                                    
     model with  some or all  of the components  of cost-of-                                                                    
     service fixed for the shipper  for some period of time.                                                                    
     This  methodology  provides   toll  certainty  for  the                                                                    
     customer, but significantly increases  the risk for the                                                                    
     pipeline  company.   Changes  in   inflation,  interest                                                                    
     rates,  equity  returns   for  investments  of  similar                                                                    
     risks, capital cost  overruns, operating tax variations                                                                    
     in a fixed  toll model may not be  fully passed through                                                                    
     to the customer  as would be the case  for the cost-of-                                                                    
     service  methodology. There  are  definitely merits  to                                                                    
     different tariff  methodologies that can  be considered                                                                    
     for the Alaska gas  pipeline by project stakeholders. A                                                                    
     traditional  cost-of-service   methodology  with  terms                                                                    
     negotiated between  the pipe  company and  the shippers                                                                    
     and  ultimately  approved  by regulators  will  usually                                                                    
     result  in  the lowest  tariff  over  the life  of  the                                                                    
     project as it should have  the lowest business risk for                                                                    
     the  pipeline  company, assuming  solid  transportation                                                                    
     contracts   with    strong   credit-worthy   customers.                                                                    
     However,   this   methodology    increases   the   risk                                                                    
     allocation  for the  shipper and  may  not provide  the                                                                    
     highest value  to the shipper.  If actual  costs differ                                                                    
     from estimated  costs, then all  these changes  will be                                                                    
     fully  borne by  the  customer  in the  cost-of-service                                                                    
     methodology. That's the way it  works. For example, you                                                                    
     have current  interest rates  at extremely  low levels.                                                                    
     You heard testimony to that  effect yesterday from J.P.                                                                    
     Morgan.  An  estimated   cost-of-service  tariff  today                                                                    
     would  likely  use those  low  interest  rates. If  the                                                                    
     actual  interest rates  are  several percentage  points                                                                    
     higher  at   the  time   the  pipeline   were  actually                                                                    
     financed,  cost-of-service   methodology  would  insure                                                                    
     that  100 percent  of those  increased  costs would  be                                                                    
     passed through to  the customer in their  tariff and it                                                                    
     works the other  way, as well. If  interest rates fall,                                                                    
     that's  a pass-through  to the  customer. That's  not a                                                                    
     risk the  pipeline company  bears in  a cost-of-service                                                                    
     methodology.... You  would have an estimation  based on                                                                    
     interest  rates, inflation  and  other components.  The                                                                    
     actuals will be what will  show up in people's tariffs.                                                                    
     A fixed toll model  or other incentive mechanisms shift                                                                    
     some or all of the  inflation, interest rate return and                                                                    
     equity,  operating  costs,  capital costs  and  capital                                                                    
     cost  recovery  onto   the  pipeline  company.  Capital                                                                    
     recovery shifts  can imply the pipeline  is bearing gas                                                                    
     reserves  risk in  the case  where proven  gas reserves                                                                    
     are  insufficient  to  fill  the  pipeline  beyond  the                                                                    
     contract term.  That may  be a  risk that  the shippers                                                                    
     want to  bear and it may  be a risk that  they want the                                                                    
     pipeline to  bear or  some sharing  of that  risk. This                                                                    
     shifting of risk could be  beneficial to a shipper that                                                                    
     cannot or will  not bear the risks inherent  in a cost-                                                                    
     of-service  tariff. A  fixed  tariff with  commensurate                                                                    
     lower risks  can provide higher value  to some shippers                                                                    
     despite a  higher nominal tariff than  would be applied                                                                    
     with a cost-of-service methodology.                                                                                        
                                                                                                                                
     I'll give you an example in  ordinary life - is some of                                                                    
     us  choose  to  sign   up  for  a  30-year  residential                                                                    
     mortgage  because we  want to  know that  the price  of                                                                    
     that  interest rate  over the  life  of that  mortgage.                                                                    
     Others  of us  choose  to go  for six-month  mortgages.                                                                    
     Generally, the six-month mortgage  has a lower interest                                                                    
     rate.  Which  is  better?  Well,  it  depends  on  your                                                                    
     circumstances and  which suits your pistol,  in effect,                                                                    
     as to  how you would  like to structure  your business.                                                                    
     It's  not  that one  is  better  than the  other.  Some                                                                    
     parties will  prefer one and  some parties  will prefer                                                                    
     another.  We  would  suggest   that  the  shippers  and                                                                    
     pipeline   companies   and  other   stakeholders   will                                                                    
     negotiate  the   methodology  that  is  best   for  all                                                                    
     parties.   North   American    regulators   have   been                                                                    
     cooperative  in recent  years  in approving  negotiated                                                                    
     methodologies if sophisticated  parties have negotiated                                                                    
     arrangements   on  both   sides.   So,   if  you   have                                                                    
     independent   pipeline   companies   negotiating   with                                                                    
     sophisticate    shippers    or   other    stakeholders,                                                                    
     regulators   have   generally   been   cooperative   in                                                                    
     approving    those.    Transcanada   has    significant                                                                    
     experience  in   cost-of-service  models  as   well  as                                                                    
     negotiated or  other incentive  models and  we're ready                                                                    
     to negotiate  with shippers  and other  stakeholders on                                                                    
     the tariff  model which best suites  the project, which                                                                    
     provides  a reasonable  reward  commensurate with  risk                                                                    
     for  the pipeline  and a  clear regulatory  path to  an                                                                    
     early   in-service  date.   If   customers  and   other                                                                    
     stakeholders   want   a  cost-of-service   methodology,                                                                    
     that's  just  fine with  our  company.  If they  prefer                                                                    
     other alternatives that will  shift some risks assuming                                                                    
     that there's a balance of risk and reward, we're happy                                                                     
     to negotiate on those, as well.                                                                                            
                                                                                                                                
CO-CHAIR SAMUELS thanked him for his testimony. There being no                                                                  
further business to come before the committee, he adjourned the                                                                 
meeting at 12:20 p.m.                                                                                                           
                                                                                                                                

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