Legislature(2003 - 2004)

07/28/2004 10:00 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                                                                             
                         July 28, 2004                                                                                        
                           10:00 a.m.                                                                                         
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
LEGISLATIVE BUDGET AND AUDIT                                                                                                    
                                                                                                                                
 Representative Ralph Samuels, Co-Chair                                                                                         
 Representative Mike Chenault                                                                                                   
 Representative Mike Hawker                                                                                                     
 Representative Beth Kerttula                                                                                                   
 Representative Reggie Joule                                                                                                    
                                                                                                                                
 Senator Con Bunde                                                                                                              
 Senator Gene Therriault                                                                                                        
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Scott Ogan, Co-Chair                                                                                                   
 Senator Tom Wagoner                                                                                                            
 Senator Fred Dyson                                                                                                             
 Senator Ralph Seekins                                                                                                          
 Senator Kim Elton                                                                                                              
                                                                                                                                
OTHER MEMBERS PRESENT                                                                                                           
                                                                                                                                
 Senator Gretchen Guess                                                                                                         
 Senator Gary Stevens                                                                                                           
                                                                                                                                
 Representative Harry Crawford                                                                                                  
 Representative Les Gara                                                                                                        
 Representative Beverly Masek                                                                                                   
 Representative Ethan Berkowitz                                                                                                 
 Representative Paul Seaton - via teleconference                                                                                
 Representative David Guttenberg - via teleconference                                                                           
 Representative Bill Stoltze                                                                                                    
 Representative Lesil McGuire                                                                                                   
                                                                                                                              
MEMBERS ABSENT                                                                                                                
                                                                                                                                
LEGISLATIVE BUDGET AND AUDIT                                                                                                    
                                                                                                                                
 Representative Vic Kohring                                                                                                     
                                                                                                                                
 Senator Lyman Hoffman                                                                                                          
 Senator Lyda Green                                                                                                             
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Ben Stevens                                                                                                            
 Senator Georgianna Lincoln                                                                                                     
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
Alaska Natural  Gas Pipeline  Issues/Access to  Original Pipeline                                                               
and Expansion Capacity                                                                                                          
                                                                                                                                
Presentations                                                                                                                 
                                                                                                                                
In Need of  Access: Alaska's known and potential  gas resources -                                                               
David  Houseknecht, Research  Geologist, US  Geological Survey  -                                                               
Mark  Meyers,   Director,  Division   of  Oil  and   Gas,  Alaska                                                               
Department of Natural Resources (DNR)                                                                                           
                                                                                                                                
Original  and Expansion  Capacity:  What volumes,  when, on  what                                                               
terms  and  at  what  price  -  Joe  Marushack,  Vice  President,                                                               
ConocoPhillips, and  Pete Frost, Director of  Regulatory Affairs,                                                               
Gas  &  Power  Marketing  Group,  ConocoPhillips,  on  behalf  of                                                               
Producers BP, ConocoPhillips and ExxonMobil                                                                                     
                                                                                                                                
Access  to  Capacity  for  Producers  and  Explorers  Without  an                                                               
Ownership  Interest in  or Effective  Control of  the Pipeline  -                                                               
Mark Hanley, Manager, Public Affairs for Alaska, Anadarko                                                                       
                                                                                                                                
Access to Capacity for Alaskan  Communities - Charlie Cole, Board                                                               
of Directors, Alaska Gasline Port Authority                                                                                     
                                                                                                                                
Letter from James Whitaker, Mayor, Fairbanks North Star Borough                                                                 
                                                                                                                                
State  Revenue  Issues  of Gasline  Expansion  -  Larry  Persily,                                                               
Special  Assistant  to  the Commissioner,  Alaska  Department  of                                                               
Revenue                                                                                                                         
                                                                                                                                
Access  to  Capacity  for  Alaskan   Utilities  -  Anthony  Izzo,                                                               
President, Enstar Natural Gas Company                                                                                           
                                                                                                                                
Access  Under Current  Law v.  Access Under  Proposed changes  to                                                               
Federal Law - Bob Loeffler,  Senior Partner, Morrison & Foerster,                                                               
for Alaska Department of Law                                                                                                    
                                                                                                                                
Volumes, Timing, Terms and Price of  Access with 36", 48" and 52"                                                               
Pipelines   -   Eric   Watson,  Project   Manager,   Alaska   Gas                                                               
Development, Enbridge, Inc.                                                                                                     
                                                                                                                                
The  Array   of  State  Tools   for  Improving  Access   -  Marty                                                               
Rutherford,  Deputy Commissioner,  Alaska  Department of  Natural                                                               
Resources                                                                                                                       
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 04-13, SIDE A [BUD TAPE]                                                                                                 
                                                                                                                                
CO-CHAIR  RALPH   SAMUELS  called   the  joint  meeting   of  the                                                             
Legislative Budget  and Audit Committee and  the Senate Resources                                                               
Standing  Committee  to  order  at  10:00  a.m.  Senate  Resource                                                               
Committee  members present  were Tom  Wagoner, Fred  Dyson, Ralph                                                               
Seekins, Kim  Elton and Co-Chair  Scott Ogan.  Legislative Budget                                                               
and  Audit Committee  members present  were Representatives  Mike                                                               
Chenault,  Mike Hawker,  Beth  Kerttula,  Reggie Joule,  Co-Chair                                                               
Ralph  Samuels  and  Senators  Gene  Therriault  and  Con  Bunde.                                                               
Senators  Gretchen Guess  and  Gary  Stevens and  Representatives                                                               
Bill Stoltze, Les  Gara, Beverly Masek, Harry  Crawford and Ethan                                                               
Berkowitz were also present.                                                                                                    
                                                                                                                                
CO-CHAIR RALPH SAMUELS announced that  this meeting is the second                                                               
in a series  of three interim hearings on  the issues surrounding                                                               
the gas pipeline.                                                                                                               
                                                                                                                                
CO-CHAIR SCOTT OGAN  said the decisions the  Legislature would be                                                               
making  in the  next months  regarding the  natural gas  pipeline                                                               
were  the most  important ones  it would  be making  in the  next                                                               
couple of decades.  He noted that statute  allows the Legislature                                                               
30  days  to   consider  a  negotiated  settlement   once  it  is                                                               
submitted.  So,  it's  important  to  do  this  work  during  the                                                               
interim.                                                                                                                        
                                                                                                                                
CO-CHAIR  SAMUELS said  the first  segment is  titled In  Need of                                                               
Access. He welcomed Dave Houseknecht and Mark Myers.                                                                            
                                                                                                                                
MR. MARK MYERS, Director, Division  of Oil and Gas, Department of                                                               
Natural Resources  (DNR), acknowledged that  the USGS does  a lot                                                               
of cooperative  work on resource  issues and that  Brenda Pierce,                                                               
Energy  Coordinator,   USGS,  is  attending  the   hearing.  USGS                                                               
assessments are  done independent of  him, although DNR  input is                                                               
used.  Work in  the federal  government is  focused primarily  on                                                               
assessing  federal lands,  but includes  state lands  and is  on-                                                               
going.                                                                                                                          
                                                                                                                                
He  said  there   is  a  big  difference   between  reserves  and                                                               
resources.  The reserve  base on  the  North Slope  is known  and                                                               
economic. Undiscovered resources is what  you think is there, but                                                               
don't know  for sure.  Probabilistic modeling  is used  for those                                                               
resources and  has a  range of  outcomes. The  North Slope  has a                                                               
known reserve base  that he is confident  exists predominantly in                                                               
two fields  - Prudhoe Bay  and Point Thompson, although  there is                                                               
undiscovered resource  potential elsewhere. Access  and expansion                                                               
revolve around whether or not there is sufficient gas potential.                                                                
                                                                                                                                
He demonstrated  in a slide the  known reserves in bright  red at                                                               
around 33  - 36 TCF  (trillion cubic feet). The  proposed project                                                               
size, a 4.5 BCF (billion cubic  feet) pipeline is only about a 20                                                               
- 22  year supply of  gas and is  insufficient to monetize  a 30-                                                               
year  or  longer   project  that  Alaska  would   like.  If  that                                                               
undiscovered resource base  isn't there, the 4.5  BCF pipeline is                                                               
too large. Furthermore, expansion of  a pipeline bigger than that                                                               
would  not  be  logical  or  economic, because  a  4.5  BCF  pipe                                                               
expanded through compression-only  numbers gets you only  16 - 18                                                               
years of  life. Then the  undiscovered resource is looked  at and                                                               
the question is asked how  much undiscovered resource needs to be                                                               
there to  justify the project. If  30-plus years is needed,  50 -                                                               
60 TCF  of gas  are needed  - a  significant amount.  However, if                                                               
those  numbers are  greater than  60 TCF,  a 5.6  BCF line  could                                                               
produce  for 50  - 75  years.  Early expansion  of that  pipeline                                                               
would  be important  to maximize  both  the economics  of it  and                                                               
maximize the revenue  stream to the state  and federal government                                                               
and encourage oil exploration overall.                                                                                          
                                                                                                                                
     The  issue   of  undiscovered  resources   becomes  the                                                                    
     critical  lynchpin if  you're worried  about expansion,                                                                    
     if you're  worried about the economics,  in general the                                                                    
     pipeline,  but  also  if you're  worried  about  access                                                                    
     terms.                                                                                                                     
                                                                                                                                
MR. MYERS said  he used $1.50 per MCF netback  to the North Slope                                                               
for demonstration purposes. A 4.5  BCF netback to the North Slope                                                               
would be  worth about $2.4 billion  a year or about  $6.6 million                                                               
per day.  Expanding to  5.6 BCF  by adding  pressure to  the line                                                               
changes the  cash flow to $600  million per year or  $1.6 million                                                               
per day.                                                                                                                        
                                                                                                                                
     What's important  from the  state's perspective  on one                                                                    
     front,  at least,  is the  state will  capture part  of                                                                    
     that differential.  So, early expansion, if  the gas is                                                                    
     there, makes  a tremendous difference on  the economics                                                                    
     of the project and  the benefits the state receives....                                                                    
     Also, the  earlier you define those  reserve bases, the                                                                    
     more secure the project is. It  is a lot easier to fund                                                                    
     and back a project that has  30 to 50 years of reserves                                                                    
     than it is for one that has 20.                                                                                            
                                                                                                                                
     So, understanding  what the  resource potential  is and                                                                    
     how likely you  are to achieve that  really becomes the                                                                    
     critical issue  on many of  things you'll have  to deal                                                                    
     with through the Stranded Gas Application process....                                                                      
                                                                                                                                
MR. MYERS  explained that an  expansion would lead to  an overall                                                               
lower tariff on  the pipeline for all  shippers, initial shippers                                                               
and expansion. If  the cost of expansion is  more through looping                                                               
or  other  means, typically  the  people  expanding the  pipeline                                                               
beyond that bear the full cost of the incremental expansion.                                                                    
                                                                                                                                
He said  that the ability to  expand early is almost  required if                                                               
the necessary reserve  base is there. Exploration  can't occur if                                                               
gas is stranded for a long  period of time, because the economics                                                               
aren't  there for  the  company to  drill  the exploration  wells                                                               
until there is capacity in the line.                                                                                            
                                                                                                                                
Under  the 4.5  BCF/day  proposed scenario  for  Prudhoe Bay  and                                                               
Point Thompson, the initial gas  producer who has the open season                                                               
will fill the  pipeline for the first 12 years.  If it take eight                                                               
years to build, there is a  20-year period before any new gas can                                                               
come into  the line. The  state has 10-year leases  and companies                                                               
simply cannot afford  to expend huge dollars upfront  and wait 20                                                               
years to capitalize their investment.                                                                                           
                                                                                                                                
     So, it is a chicken  or egg situation, unless the rules                                                                    
     on expansion  are clear and  that access  is available.                                                                    
     Again,  that's not  an  important  question unless  you                                                                    
     believe the gas resources  are really there. If they're                                                                    
     not  there,   then  there  is  really   no  issue  with                                                                    
     expansion. That's why  the technical assessments become                                                                    
     critical.                                                                                                                  
                                                                                                                                
MR. MYERS believed that the  gas resources are highly probable to                                                               
be in  sufficient quantities for  an expanded pipeline to  have a                                                               
50-year life.                                                                                                                   
                                                                                                                                
     Finally, one  of the key  things to recognize  is there                                                                    
     will be  folks who tell  you that expansion  isn't that                                                                    
     important and  that it will happen  naturally. Well, it                                                                    
     won't   with  enough   certainty  to   get  the   early                                                                    
     exploration going. Again,  from DNR's perspective, it's                                                                    
     critical to the  state to see that we  have good access                                                                    
     terms,  that expansion  is available  for parties  that                                                                    
     wish  to  explore.  That  confidence,  then,  leads  to                                                                    
     exploration  and  valuation  of state  lands  and  will                                                                    
     ultimately lead to accelerated  revenue stream; it will                                                                    
     lead to more oil and  gas being produced. Because along                                                                    
     with  that gas,  a significant  amount of  oil will  be                                                                    
     produced, as well.                                                                                                         
                                                                                                                                
SENATOR CON  BUNDE asked him  to explain why expansion  might not                                                               
be advantageous for some companies.                                                                                             
                                                                                                                                
MR. MYERS replied:                                                                                                              
                                                                                                                                
     If  you  have  down-stream  markets  that  can  take  a                                                                    
     limited  amount of  gas and  you're  selling into  that                                                                    
     market,  you're competing  with other  gas coming  from                                                                    
     the basin.  If you  own the pipeline  and also  own the                                                                    
     gas infrastructure,  there may be cases  where you have                                                                    
     two profit  centers and those  two profit  centers come                                                                    
     in  conflict,  if  there's  more   gas  coming  in  and                                                                    
     competing with your gas.                                                                                                   
                                                                                                                                
     So,   there  are   natural  competitive   forces,  that                                                                    
     depending  on  the  ownership   and  alignment  of  the                                                                    
     pipeline,  make  your individual  companies'  economics                                                                    
     different. I'll  just say,  if a lot  of gas  comes off                                                                    
     the North Slope,  it could have an effect  on the value                                                                    
     of  gas  say  at  the  Acho Hub.  In  which  case,  the                                                                    
     companies that have a lot gas  in the Acho Hub now will                                                                    
     see an overall  lowering of that gas price  for a short                                                                    
     period of  time until  the market recalibrates,  but it                                                                    
     will affect  their market position  and other  gas they                                                                    
     own within other  basins that are affected  by the same                                                                    
     markets. So, there's lots of complications in here....                                                                     
                                                                                                                                
He said the state wants all the  gas to come because it helps our                                                               
economics,  but  the  individual  company  may  have  a  slightly                                                               
different set  of economics. Much  of today's discussion  will be                                                               
on the areas  in the southern part  of the basin that  are in the                                                               
North Slope Foothills and the  NPRA (National Petroleum Reserve -                                                               
Alaska).                                                                                                                        
                                                                                                                                
In addition  to known fields  at Prudhoe Bay and  Point Thompson,                                                               
there  are   unconventional  gas  resources.  Gas   hydrates  are                                                               
basically gas  that is frozen in  a lattice that sits  under much                                                               
of the existing infrastructure.  Current reserve estimates exceed                                                               
that of  Prudhoe Bay and Point  Thompson combined, about 37  - 44                                                               
TCF. He  would not  talk about gas  hydrates today,  because they                                                               
haven't been  demonstrated from an  engineering standpoint  to be                                                               
commercial,  although  drilling  intervals have  determined  that                                                               
they are geologically present.                                                                                                  
                                                                                                                                
SENATOR FRED  DYSON asked a  question about the chart,  which Mr.                                                               
Myers explained. He  said there is a lot  more unconventional gas                                                               
between coalbed methane and gas hydrates.                                                                                       
                                                                                                                                
MR.  MYERS further  explained that  access  and expansion  issues                                                               
affect other  basins on the  way to the  North Slope -  the Yukon                                                               
Flats and the Nenana Basin,  in particular, whose economics would                                                               
be dramatically  improved if  it could not  only serve  the local                                                               
market for  gas, but could  have export capacity all  through the                                                               
gas  line. The  Nenana Basin  has a  significant quantity  of gas                                                               
present; it's  a question of  whether it's present  in commercial                                                               
quantities  and how  it can  be  maximized. The  access issue  is                                                               
important  here   in  terms  of   development  of   rural  energy                                                               
strategies.   Certainly,  the   best  markets   are  local,   but                                                               
additional  capacity could  be exported  making the  project much                                                               
more economic.                                                                                                                  
                                                                                                                                
The  Copper   River  and  Cook  Inlet   Basins  have  exploration                                                               
licensing  that  will benefit  through  access  and expansion.  A                                                               
larger pipeline gives more options  for marketing gas in multiple                                                               
locations and  companies are actively  exploring in  these basins                                                               
specifically for gas.                                                                                                           
                                                                                                                                
MR. DAVID  HOUSEKNECHT, Research Geologist, US  Geological Survey                                                               
(USGS),  said  he  would  summarize  the  work  it  has  done  to                                                               
characterize the resource base of  the entire state of Alaska and                                                               
the  North  Slope, in  particular.  Part  of the  USGS's  mission                                                               
responsibility nationwide  is to  do assessments  of undiscovered                                                               
and  other resources  that may  be added  to the  nation's energy                                                               
base  in the  future.  The USGS  systematically  work across  the                                                               
entire nation  with a particular  emphasis on federal  lands. The                                                               
work is  restricted to  the on-shore and  state waters  areas and                                                               
his   colleagues  in   the  Department   of  Interior,   Minerals                                                               
Management  Service,  work  in the  OCS,  the  federal  off-shore                                                               
division. Their work compliments each other.                                                                                    
                                                                                                                                
MR. HOUSEKNECHT  emphasized that  their assessments  are reported                                                               
in  terms of  probabilities.  In frontier  areas  like the  North                                                               
Slope  Foothills,  relatively  few exploration  wells  have  been                                                               
drilled  and there  is  a range  of  uncertainty associated  with                                                               
their estimates.                                                                                                                
                                                                                                                                
Associated versus  non-associated gas is an  important concept on                                                               
the   North  Slope,   especially.   Associated   gas  occurs   in                                                               
association  with   oil,  such  as   a  gas  cap  above   an  oil                                                               
accumulation. Prudhoe Bay has a  huge gas cap. Non-associated gas                                                               
occurs in  the absence of  oil and that's  what is in  the Brooks                                                               
Range Foothills.                                                                                                                
                                                                                                                                
     Worldwide,  the  largest  gas  resources  and  reserves                                                                    
     typically  occur in  those geologic  provinces of  non-                                                                    
     associated gas rather than  associated. So, it's really                                                                    
     important to understand that we  really don't know very                                                                    
     much about  the non-associated gas on  the North Slope,                                                                    
     because as  wells were  drilled and  non-associated gas                                                                    
     encountered, the  companies simply moved on  and didn't                                                                    
     delineate   those  accumulations   because  they   were                                                                    
     looking for oil. I'll come back  to that point as we go                                                                    
     along.                                                                                                                     
                                                                                                                                
MR. HOUSEKNECHT next presented a map  of the State of Alaska that                                                               
summarized  the estimates  of  undiscovered conventional  natural                                                               
gas that  was prepared  by the USGS  for onshore  in-state waters                                                               
and by  the Minerals Management  Service (MMS) for  offshore. The                                                               
point  to  be made  is  that  first he  shows  a  range for  each                                                               
province. For example,  in northern Alaska NPRA he  shows a range                                                               
of 40  - 85 TCF, which  represents a range of  95% probability to                                                               
5% probability.                                                                                                                 
                                                                                                                                
     In  other  words,   the  USGS  says  there   is  a  95%                                                                    
     probability  of 40  TCF of  conventional, undiscovered,                                                                    
     technically  recoverable natural  gas resources  in the                                                                    
     National  Petroleum Reserve  in Alaska  (NPRA). On  the                                                                    
     upside, there's a 5% chance  of 85 TCF. So, again, that                                                                    
     range is  quite large because  of the lack  of drilling                                                                    
     data that exists in those  gas prone areas of the North                                                                    
     Slope and other basins of Alaska.                                                                                          
                                                                                                                                
     The  single  number  listed  behind  the  mean  is  the                                                                    
     statistical   average   or   expected  value   of   our                                                                    
     probabilistic  distribution. So,  if you  must use  one                                                                    
     number, and  certainly legislators  and the  media tend                                                                    
     to use  one number  whenever they  can, we  estimate 61                                                                    
     TCF of  conventional natural  gas that  is undiscovered                                                                    
     and technically recoverable in the NPRA, alone.                                                                            
                                                                                                                                
MR. HOUSEKNECHT  summarized that in  southern Alaska there  are 2                                                               
TCF of known reserves in the  Cook Inlet and the USGC onshore and                                                               
MMS  offshore  mean   estimates  add  up  to  about   20  TCF  of                                                               
undiscovered  conventional resources.  In  central Alaska,  there                                                               
are no  known reserves  to date  and a mean  estimate of  about 9                                                               
TCF. In northern  Alaska, there are more than 33  TCF of existing                                                               
reserves  and   a  mean  estimate   of  more  than  150   TCF  of                                                               
undiscovered resources.  This shows  the importance of  the North                                                               
Slope in  the natural gas  resource base  of the state  of Alaska                                                               
and why  northern Alaska  is really  the driver  in terms  of the                                                               
undiscovered resource base under discussion.                                                                                    
                                                                                                                                
He  emphasized  that the  estimates  in  northern Alaska  do  not                                                               
include the Native  lands. That study is under way  right now and                                                               
will be released later this year.                                                                                               
                                                                                                                                
MR.  HOUSEKNECHT  said he  would  give  a  mini overview  of  the                                                               
geology and  exploration history  on the  North Slope.  The white                                                               
dots that are clustered along  the coastline near the Barrow Arch                                                               
are  the over  400 exploration  wells that  have been  drilled to                                                               
date. That's  where the industry  has found oil and  that's where                                                               
exploration has been focused. He  also showed the pipeline system                                                               
and a  subsurface regional feature  indicating oil  migration and                                                               
accumulation during  geologic history. Areas where  the state and                                                               
USGS  would  agree   are  more  favorable  for   oil  versus  gas                                                               
exploration are on the northern part  of the  North Slope. In the                                                               
southern half  of the  North Slope, or  the Foothills,  there's a                                                               
greater probability  of encountering gas than  oil. The Foothills                                                               
province  is  where  the  oil  industry in  the  early  years  of                                                               
exploration drilled wells, encountered  gas, and said oh, shucks,                                                               
this  isn't what  we're looking  for  and moved  north. For  that                                                               
reason, there  is a  lack of  drilling data  in the  Alaska North                                                               
Slope Foothills  that increase the  uncertainty of  the estimates                                                               
that are made. That's why there  is such a wide range between the                                                               
95% and 5% probabilities in the numbers he quoted on the NPRA.                                                                  
                                                                                                                                
The next  slide focuses on the  nature of the gas  resources that                                                               
are  present. The  big red  bubbles are  known gas  accumulations                                                               
that have  been discovered  as a  by-product of  oil exploration.                                                               
Some of  the red bubbles  have green  rims around them  and those                                                               
represent associated natural  gas, occurring either as  a gas cap                                                               
above an  oil accumulation  or as dissolved  gas within  the oil.                                                               
The red  bubbles with white  circles are non-associated  gas, gas                                                               
accumulations  that have  been discovered  where the  exploration                                                               
tested gas at  significant rates that signify  an accumulation is                                                               
probably present,  but where delineation  of those  resources did                                                               
not  take  place  because  the industry  was  not  interested  in                                                               
natural  gas. The  only non-associated  gas  resources that  have                                                               
been delineated  are the relatively  small resources  or reserves                                                               
that  have been  developed around  Barrow for  local consumption.                                                               
All  of those  accumulations  that have  been  discovered in  the                                                               
Foothills  have not  been delineated  in any  substantial fashion                                                               
and their size is not known.                                                                                                    
                                                                                                                                
SENATOR FRED DYSON asked what DST and RFT mean.                                                                                 
                                                                                                                                
MR. HOUSEKNECHT  replied that DST  means drill stem test  and RFT                                                               
means repeat formation tester.                                                                                                  
                                                                                                                                
     As  a well  is  drilled, when  the  well encounters  an                                                                    
     interval of rocks  in the subsurface and  either oil or                                                                    
     gas shows are detected in  the cuttings that are coming                                                                    
     up, the well  is sealed off and  actually a measurement                                                                    
     of  the oil  or gas  flowing out  of the  formations in                                                                    
     that interval  is measured. So,  the DST and  RFT tests                                                                    
     are  the most  direct  indication that  we have  during                                                                    
     exploration  drilling  of  a  significant  gas  or  oil                                                                    
     accumulation that may be present.                                                                                          
                                                                                                                                
     The other  thing I  will point out  here is  that among                                                                    
     the exploration wells, I've assigned  a color code with                                                                    
     yellow  being the  most significant  test,  DST or  RFT                                                                    
     indications.  A  glance  across  the  Slope  notices  a                                                                    
     significant   number   of    the   exploration   wells,                                                                    
     especially in  the Foothills, have  encountered natural                                                                    
     gas shows during drilling,  either significant shows in                                                                    
     the tests that  we just discussed, or  moderate or weak                                                                    
     gas  shows indicating  more  diffuse gas  accumulations                                                                    
     that may be  present. So, the bottom line  here is that                                                                    
     most  accumulations of  associated  gas are  up on  the                                                                    
     coastal  plane  near the  Barrow  Arch  and most  known                                                                    
     accumulations  of the  non-associated  gas  are in  the                                                                    
     Foothills farther south, but  significant gas shows are                                                                    
     pervasive  in   the  wells  that  have   been  drilled,                                                                    
     especially  in the  Foothills. What  the USGS  believes                                                                    
     that  this really  defines is  what  we refer  to as  a                                                                    
     natural gas  province that has  great potential  in the                                                                    
     Brooks Range  Foothills. I have outlined  that province                                                                    
     in yellow on this map.                                                                                                     
                                                                                                                                
Data on sizes of accumulations that  are known on the North Slope                                                               
is  taken from  the  DNR  annual report.  Prudhoe  Bay and  Point                                                               
Thompson  are the  largest known  reserves at  24 TCF  and 8  TCF                                                               
respectively.  The sizes  of the  other  known accumulations  are                                                               
also shown.  The table on the  right shows the possible  sizes of                                                               
some  of   the  non-associated   accumulations  that   have  been                                                               
discovered  in  the  Foothills  and   a  couple  in  the  federal                                                               
offshore. Size  is difficult to  estimate, because in  most cases                                                               
the accumulations have  been encountered by a single  well or one                                                               
or two delineations wells - because industry was focused on oil.                                                                
                                                                                                                                
Finally,  in  terms  of  known  resources,  he  pointed  out  new                                                               
discoveries in  the NPRA. The Alpine  play represents exploration                                                               
for the  type of geology that  exists in that field.  Lease sales                                                               
in the  NPRA during  the last five  years indicate  that industry                                                               
believes  there  are  significant  potential  reserves  extending                                                               
westward across  NPRA. The blue areas  of the map show  where the                                                               
USGS  has mapped  the  extent of  the  Alpine-type geology  using                                                               
seismic and well data.                                                                                                          
                                                                                                                                
Results  from   new  discoveries  in  that   area  indicate  that                                                               
approximately 500 million  barrels of oil will be  recovered at a                                                               
40 degree  API gravity (American Petroleum  Institute measure for                                                               
the  lightness or  heaviness of  oil). Forty-degree  oil is  very                                                               
light or watery as opposed to a  thick oil. GOR is simply gas oil                                                               
ratio per cubic  foot of gas per barrel. Eight  hundred is a very                                                               
low value. Westward,  a test of the discovery  at Spark indicated                                                               
55 degree  oil, a  much lighter  oil than  at Alpine,  probably a                                                               
condensate (a petroleum  compound that is a gas  in the reservoir                                                               
and  precipitates to  a  liquid  at the  surface)  and  a GOR  of                                                               
10,000. The Rendezvous Discovery  reports 60-degree gravity and a                                                               
GOR of almost 17,000.                                                                                                           
                                                                                                                                
     This is  an astoundingly rapid increase  in the gravity                                                                    
     of oil and the GOR  over a very short lateral distance,                                                                    
     and   frankly,  our   scientists   are  struggling   to                                                                    
     understand this....  This does  lead to the  question -                                                                    
     is the big play, or plays,  in the NPRA really going to                                                                    
     be  predominately   oil  or   will  there  be   a  very                                                                    
     substantial gas resource  that...industry been treating                                                                    
     primarily  as  an  oil play....  So,  what  I'm  really                                                                    
     saying  here is  that there  are lots  of unknowns  and                                                                    
     every  well that  is drilled  and the  data from  every                                                                    
     well that  is released gives us  additional information                                                                    
     to  help us  constrain  how  much oil  and  gas may  be                                                                    
     present on the North  Slope and these results certainly                                                                    
     indicate that  there may  be more  gas present  in NPRA                                                                    
     than we estimated just two years ago.                                                                                      
                                                                                                                                
     The  estimates we've  made over  the last  five or  six                                                                    
     years are  limited to federal  lands. What  I'm showing                                                                    
     here  are  the  gas  volumes that  we  estimate  to  be                                                                    
     present   as   technically   recoverable   conventional                                                                    
     resources in  NPRA and  in ANWR. Bear  in mind  that we                                                                    
     have not yet  released our estimates for  the state and                                                                    
     Native  lands that  are adjacent  to  the pipeline  and                                                                    
     those results will be released later this year.                                                                            
                                                                                                                                
     In addition to the range  of numbers listed there, 40 -                                                                    
     80  TCF  in  NPRA  and  0  -  11  TCF  in  ANWR,  these                                                                    
     histograms  show you  the  sizes  of gas  accumulations                                                                    
     that  we estimate  to be  present.... So,  what we  are                                                                    
     saying  is  that  the  largest  accumulations  that  we                                                                    
     expect in NPRA  are approximately the same  size as the                                                                    
     known  gas reserve  in Point  Thompson  field -  pretty                                                                    
     substantial accumulations....                                                                                              
                                                                                                                                
     I want to  emphasize in red in those  little inset maps                                                                    
     in  NPRA  are  the  areas we  expect  the  largest  gas                                                                    
     resources to  exist and  the point  here is  that every                                                                    
     one  of those  gas  plays extends  eastward across  the                                                                    
     Coleville  River  and  extends  all  the  way  eastward                                                                    
     across  the   stated  Native  lands  to   the  pipeline                                                                    
     corridor.... So,  although I can't give  you specifics,                                                                    
     the geology  is essentially  identical to the  NPRA and                                                                    
     it would  not surprise me if  a few months from  now we                                                                    
     are releasing  numbers that  are in  the same  order of                                                                    
     magnitude as  the NPRA estimates  we've made  and those                                                                    
     would be in  addition to the numbers  that I've already                                                                    
     reported to you here this morning.                                                                                         
                                                                                                                                
MR.  HOUSEKNECHT  summarized  that northern  Alaska  already  has                                                               
significant reserves  that are already  known, more than  30 TCF,                                                               
and  an undiscovered  resource  base  of at  least  150 TCF  when                                                               
combining  onshore and  offshore estimates.  The onshore  numbers                                                               
will grow  significantly when they  are released for  state lands                                                               
later this year.  There is also a  huge non-conventional resource                                                               
base  that is  not  being discussed  because  of the  engineering                                                               
uncertainties  in  its  development.  A certain  portion  of  the                                                               
resources   is   located   within   easy   access   to   existing                                                               
infrastructures.                                                                                                                
                                                                                                                                
Central and southern Alaska, in  contrast, have relatively modest                                                               
accumulations, but resources that could  add icing on the cake to                                                               
the resource base in the state.                                                                                                 
                                                                                                                                
CO-CHAIR SAMUELS  thanked him for  his presentation and  said the                                                               
next  question  to  be  addressed   was  original  and  expansion                                                               
capacity.                                                                                                                       
                                                                                                                                
MR.   JOE   MARUSHACK,   Vice  President,   ConocoPhillips,   Gas                                                               
Development,  said his  sole objective  today is  to establish  a                                                               
common link between  the Alaska efforts here  and pipeline access                                                               
and  expansion.  He  introduced   Pete  Frost,  an  engineer  for                                                               
ConocoPhillips, who  knows that mechanical and  technical reality                                                               
must fit into regulatory and  political policy. He has also spent                                                               
many  years   working  gas  from  development   to  marketing  to                                                               
regulation; so,  he has  a broad background  into all  the issues                                                               
inherent   in   this   business.   Finally,   he   is   part   of                                                               
ConocoPhillips'  core  Alaska  gas  team  and  is  familiar  with                                                               
federal legislation and  the challenges this project  faces - and                                                               
is trying to help them overcome.                                                                                                
                                                                                                                                
MR.  PETE  FROST, Director,  Regulatory  Affairs,  Gas and  Power                                                               
Marketing   Corporation,   ConocoPhillips   on  behalf   of   BP,                                                               
ConocoPhillips  and  ExxonMobil  (referred   to  as  the  sponsor                                                               
group), offered a  brief overview of the  FERC's policies dealing                                                               
with access to initial capacity,  how expansion capacity might be                                                               
offered  and  a  summary  of   the  sponsor  group's  preliminary                                                               
estimate and  toll estimates.  He would  also address  how FERC's                                                               
policies  and procedures  work to  insure that  all parties  have                                                               
equal  and   fair  access  to  pipeline   capacity.  His  primary                                                               
background is in interstate gas  pipeline procedures, rate making                                                               
and  tariffs and  the  role of  the FERC  and  his comments  were                                                               
designed   to   provide   insights  into   FERC's   approach   in                                                               
establishing  gas  pipeline tariffs  and  rates  as well  as  its                                                               
procedures  for obtaining  access both  for initial  capacity and                                                               
expansions  that  will be  required  of  the Alaska  natural  gas                                                               
pipeline.                                                                                                                       
                                                                                                                                
     Interstate  gas pipelines  are required  to operate  as                                                                    
     open-access contract  carriers. Capacity on  the Alaska                                                                    
     pipeline  will  be  offered and  allocated  based  upon                                                                    
     long-established   FERC  regulations   and  precedence.                                                                    
     Access to pipeline capacity needs  to be viewed in four                                                                    
     contexts:                                                                                                                  
        1. Initial access to a proposed new pipeline                                                                            
        2. Initial access to pipeline expansions                                                                                
        3. Access to pipeline capacity that may become                                                                          
          available because of contract termination or                                                                          
          exploration and                                                                                                       
        4. Access as a result of temporary or permanent                                                                         
          capacity release                                                                                                      
                                                                                                                                
     In  each of  these  contexts,  any credit-worthy  party                                                                    
     that  is  willing  to   make  the  necessary  long-term                                                                    
     shipping  commitment   has  an  equal   opportunity  to                                                                    
     acquire  pipeline capacity.  For those  of you  who are                                                                    
     primarily  familiar  with  the Trans  Alaskan  Pipeline                                                                    
     System  (TAPS) it  is important  to  remember that  the                                                                    
     procedures  for allocation  of  capacity are  different                                                                    
     for  gas  pipelines  than for  oil  pipelines.  On  gas                                                                    
     pipelines,  gas is  allocated  through  an open  season                                                                    
     process that allows all  perspective shippers to review                                                                    
     the preliminary rates, terms and  conditions and to bid                                                                    
     for capacity on the pipeline.                                                                                              
                                                                                                                                
     The  open   season  process  is  instrumental   to  the                                                                    
     pipeline's ability to  establish the economic viability                                                                    
     for the  project and to  determine the optimum  size of                                                                    
     the pipeline.  The open season  process is  designed to                                                                    
     insure   nondiscriminatory   allocation   of   pipeline                                                                    
     capacity and significant case  law and precedent exists                                                                    
     to insure that no shipper  that is prepared to make the                                                                    
     long-term  shipping  commitment  has any  advantage  in                                                                    
     taking   pipeline  capacity   from  another   similarly                                                                    
     situated  shipper.  In  the  United  States,  the  FERC                                                                    
     oversees  this   process,  which   must  be   open  and                                                                    
     transparent.                                                                                                               
                                                                                                                                
     Although the FERC allows  reasonable flexibility in the                                                                    
     design of  open seasons, significant  precedent defines                                                                    
     the  open   season  process.  Typically,   open  season                                                                    
     processes are conducted as follows:                                                                                        
                                                                                                                                
        1. The pipeline will often engage in preliminary                                                                        
          discussions   with   the  marketplace   and   will                                                                    
          sometimes   use   non-binding  open   seasons   or                                                                    
          solicitations of interest.  This process helps the                                                                    
          pipeline  to  judge  the   extent  of  the  market                                                                    
          support  and  to  insure   that  the  pipeline  is                                                                    
          neither too  large nor too small  for the apparent                                                                    
          demand for the transportation services.                                                                               
        2. The pipeline then issues a public notice to                                                                          
          announce its open season. The  open season must be                                                                    
          of  sufficient duration  to  allow all  interested                                                                    
          shippers  an  opportunity  to  respond.  The  open                                                                    
          season documentation  will also outline  the rules                                                                    
          under which  the pipeline will evaluate  its bids.                                                                    
          The  pipeline's  open   season  package  typically                                                                    
          includes   significant   information   about   the                                                                    
          project  including  receipt and  delivery  points,                                                                    
          route, timing,  services, pro-forma  agreements, a                                                                    
          proposed precedent agreement and estimated rates.                                                                     
                                                                                                                              
TAPE 04-13, SIDE B                                                                                                            
                                                                                                                                
        3. If there's insufficient capacity to satisfy all                                                                      
          the bids, the pipeline's  open season package will                                                                    
          specify  the  type  of tie-breaker  that  will  be                                                                    
          employed to allocate the available capacity.                                                                          
        4. Once capacity has been allocated through the open                                                                    
          season process,  the shippers will  normally enter                                                                    
          into   binding  precedent   agreements  with   the                                                                    
          pipeline, which  demonstrate the need  and support                                                                    
          for the  project. The pipeline company  uses these                                                                    
          agreements to justify the project  at the FERC and                                                                    
          to underpin  the financing of the  construction of                                                                    
          the  pipeline.   Pipeline  owners   and  financial                                                                    
          lenders  require  these  long-term  contracts  for                                                                    
          firm capacity  to ensure repayment of  the capital                                                                    
          cost  of  building  the  pipeline.  without  these                                                                    
          commitments,  gas  pipeline   projects,  which  by                                                                    
          their nature involve a  longer payout than typical                                                                    
          oil  pipeline  projects,  could not  be  financed.                                                                    
          Shippers  need a  contractual commitment  from the                                                                    
          pipeline  to  ensure   capacity  is  available  to                                                                    
          support their own needs.                                                                                              
                                                                                                                                
     Once capacity  is awarded through  the open  season and                                                                    
     binding precedent agreements  are executed, a shipper's                                                                    
     contractual   right  to   the   reserved  capacity   is                                                                    
     protected.  A shipper's  economics are  founded on  the                                                                    
     availability of  this contracted capacity.  In exchange                                                                    
     for the  pipeline's commitment  to reserve  a specified                                                                    
     quantity of capacity for a  shipper, the shipper agrees                                                                    
     to  pay  a  monthly  reservation  charge  that  is  due                                                                    
     regardless  of  whether  gas  is  actually  shipped.  A                                                                    
     pipeline   must  have   sufficient  binding   precedent                                                                    
     agreements or  executed transportation  contracts prior                                                                    
     to  filing  its  FERC   application.  If  the  pipeline                                                                    
     overbuilds,  it   is  at  risk  for   all  unsubscribed                                                                    
     capacity  and  cannot  recover  those  costs  from  the                                                                    
     contracted shippers.                                                                                                       
                                                                                                                                
     The open season process  is critical to determining the                                                                    
     ultimate capacity of the  pipeline. When additional gas                                                                    
     is  committed   to  the  project,  a   larger  physical                                                                    
     pipeline may be  justified (if operationally feasible),                                                                    
     which  may yield  economies of  scale that  benefit all                                                                    
     shippers.                                                                                                                  
                                                                                                                                
     In some  unique cases in  the offshore Gulf  of Mexico,                                                                    
     pipelines have  offered a pre-subscription  open season                                                                    
     to  attract sufficient  base  volumes  to underpin  the                                                                    
     pipeline.  In these  cases,  the  anchor shippers  were                                                                    
     pre-assured access  to some of the  pipeline's capacity                                                                    
     in the open season  consistent with the risk associated                                                                    
     with  their   large  capital  investments   in  related                                                                    
     production  facilities. It  should  be noted,  however,                                                                    
     that  in  all  of  these distinctive  cases  any  party                                                                    
     meeting  the  base  requirements  could  be  an  anchor                                                                    
     shipper and a meaningful  portion of the total pipeline                                                                    
     capacity  was still  made available  to any  interested                                                                    
     shipper in  a non-discriminatory open season.  FERC has                                                                    
     approved  this  anchor  shipper  concept  in  order  to                                                                    
     facilitate   types  of   unusual  project   development                                                                    
     requirements.                                                                                                              
                                                                                                                                
     As  proposed, the  Alaska pipeline  can be  expanded to                                                                    
     allow  substantial  additional   capacity.  Under  FERC                                                                    
     precedent, potential  shippers are assured of  fair and                                                                    
     equal  access   to  the  pipeline   expansion  capacity                                                                    
     without undue discrimination through an open season.                                                                       
                                                                                                                                
     The  current process  for the  allocation of  expansion                                                                    
     capacity is very similar to  that described earlier for                                                                    
     the allocation  of initial pipeline  capacity. However,                                                                    
     prior  to  the  expansion   open  season,  FERC  policy                                                                    
     requires  that  the   pipeline  poll  current  shippers                                                                    
     regarding  their willingness  to  turn  back their  own                                                                    
     capacity prior to the binding  open season. An existing                                                                    
     shipper  does  not  have priority  or  right  of  first                                                                    
     refusal  for expansion  capacity,  but  is treated  the                                                                    
     same  as   anyone  else  trying  to   obtain  expansion                                                                    
     capacity. All potential shippers  must bid on expansion                                                                    
     capacity during the open  season and similarly situated                                                                    
     shippers  must be  afforded the  same rates,  terms and                                                                    
     conditions.   When  a   project  is   economically  and                                                                    
     technically viable,  this process allows a  pipeline to                                                                    
     efficiently  identify  customer   requirements  and  to                                                                    
     implement cost-effective expansions.                                                                                       
                                                                                                                                
     It  should  also  be  noted  that  the  FERC  has  very                                                                    
     specific  regulations that  deal with  the relationship                                                                    
     between interstate  pipelines and  all of  their energy                                                                    
     related affiliates.  Under these regulations,  known as                                                                    
     Order 2004,  pipelines may  not treat  their affiliates                                                                    
     in  a preferential  manner.  These regulations  include                                                                    
     strict   limitations   on  information   flow,   shared                                                                    
     employees  and  corporate  structure.  Virtually  every                                                                    
     pipeline employee  must now be specifically  trained in                                                                    
     these   affiliate   regulations.  The   penalties   for                                                                    
     violation are severe.                                                                                                      
                                                                                                                                
     If  a   pipeline  is   expanded,  the   resulting  rate                                                                    
     treatment is  dictated by established FERC  policy. The                                                                    
     expansion   rates  are   determined   based  upon   the                                                                    
     incremental costs  of the  expansion. If  the resulting                                                                    
     expansion  results in  a lower  overall rate,  then the                                                                    
     cost is  rolled in  or basically  included in  the rate                                                                    
     base of  the pre-expansion pipeline. In  this case, the                                                                    
     existing shippers and the expansion  shippers all pay a                                                                    
     lower  rate.  If  the  expansion  would  result  in  an                                                                    
     increase  in rates  to the  existing shippers  who hold                                                                    
     the initial  capacity, then the expansion  rate will be                                                                    
     incrementally  priced.  In   this  case,  the  existing                                                                    
     shipper continues  to pay their  previous rate  and the                                                                    
     expansion  shippers  pay a  rate  based  on the  higher                                                                    
     incremental  costs to  expand  the  system. The  actual                                                                    
     costs of  an expansion will  depend upon the  design of                                                                    
     the pre  existing facilities and  the specifics  of the                                                                    
     proposed expansion.                                                                                                        
                                                                                                                                
     It  should  also be  noted  that  the proposed  federal                                                                    
     enabling  legislation  has   unique  and  unprecedented                                                                    
     language  allowing FERC  to require  an expansion  upon                                                                    
     request if  the shipper  requesting this  service meets                                                                    
     the  requirement  outlined  in the  legislation.  These                                                                    
     requirements include:                                                                                                      
                                                                                                                                
        1. No subsidization of expansion shippers by                                                                            
          existing shippers;                                                                                                    
        2. No adverse effect on the financial viability,                                                                        
          economic viability or operations of the pipeline                                                                      
          and                                                                                                                   
        3. No diminution of the contract rights of existing                                                                     
          shippers to previously subscribed certificated                                                                        
          capacity.                                                                                                             
                                                                                                                                
     There  are other  methods of  allocating capacity.  Any                                                                    
     shipper  who  is  paying the  pipeline's  maximum  rate                                                                    
     under a firm transportation  contract that is 12 months                                                                    
     or longer is granted a  conditional right to extend its                                                                    
     contract at the  expiration of the primary  terms. As a                                                                    
     matter  of FERC  policy,  this right  of first  refusal                                                                    
     (ROFR) exists only  at the end of  the primary contract                                                                    
     term and allows  the shipper the ability  to retain all                                                                    
     or a  portion of its  contract subject to  the expiring                                                                    
     capacity  if  he  is  willing  to  pay  the  pipeline's                                                                    
     maximum filed rate  for the greater of one  year or the                                                                    
     term offered by  a third party. This  contract right of                                                                    
     first  refusal is  not a  right to  obtain capacity  in                                                                    
     either  an initial  open season  or  an expansion  open                                                                    
     season.                                                                                                                    
                                                                                                                                
     The  pipeline is  also  required  to allocate  capacity                                                                    
     that   comes  available   as  a   result  of   contract                                                                    
     expiration on  a nondiscriminatory  basis. This  can be                                                                    
     done through an open season  or by posting the capacity                                                                    
     on the pipeline's public bulletin  board. In any event,                                                                    
     the FERC  approved tariff  will provide  the procedures                                                                    
     consistent with FERC precedent  and regulations for the                                                                    
     nondiscriminatory   allocation    of   such   available                                                                    
     pipeline capacity.                                                                                                         
                                                                                                                                
     Any method by which a  shipper can obtain firm capacity                                                                    
     is by  obtaining capacity released  by a  firm shipper.                                                                    
     This release  can be for a  temporary term or can  be a                                                                    
     permanent  release. The  FERC has  established criteria                                                                    
     that  ensure such  capacity is  allocated to  the party                                                                    
     who values the  capacity the most (subject  to the FERC                                                                    
     approved maximum recourse rate).                                                                                           
                                                                                                                                
     As has been previously  communicated in other forums by                                                                    
     the  sponsor  group,  the total  capital  cost  of  the                                                                    
     Alaska   gas    pipeline   has   been    estimated   at                                                                    
     approximately $20 billion in  2001 dollars. This figure                                                                    
     would be somewhat higher  in today's dollars accounting                                                                    
     for  inflation since  2001. The  figures  that I'll  be                                                                    
     sharing  with  you  will  be  quoted  in  2001  dollars                                                                    
     because  they  refer back  to  the  joint $125  million                                                                    
     feasibility  study that  was completed  by the  sponsor                                                                    
     group  in  the  2011   -  2002  timeframe.  That  study                                                                    
     evaluated  the feasibility  of constructing  a pipeline                                                                    
     from Alaska's North  Slope to Lower 48  U.S. markets by                                                                    
     way  of either  a northern  route or  a southern  route                                                                    
     with the  conclusion that  the project  was technically                                                                    
     feasible, but that the  commercial risks outweighed the                                                                    
     potential rewards. Because  current state law prohibits                                                                    
     the state  from issuing  a right-of-way for  a northern                                                                    
     route  until  a  southern  route  is  built,  the  cost                                                                    
     estimates have focused on the southern route.                                                                              
                                                                                                                                
     The  southern  route  project  was  estimated  to  cost                                                                    
     approximately  $19.4 billion  with an  accuracy of  +/-                                                                    
     20%.  This   capital  cost  estimate  resulted   in  an                                                                    
     estimated toll  to the market  of $2.39/MCF.  This toll                                                                    
     is merely a  preliminary estimate of a  toll that might                                                                    
     ultimately   be  approved   by  FERC   [Federal  Energy                                                                    
     Regulatory  Commission] and  the  NEB [National  Energy                                                                    
     Board] for  an Alaska  gas pipeline. The  ultimate toll                                                                    
     will not be known for  some considerable time, that is,                                                                    
     until the  pipeline is completed  and the  actual costs                                                                    
     are known  and better estimates will  require more work                                                                    
     as the project is further developed.                                                                                       
                                                                                                                                
     The  process  of   developing  and  gaining  regulatory                                                                    
     approval of  this toll  and having  it approved  by the                                                                    
     necessary  regulatory  authorities is  well-established                                                                    
     in both the U.S. and  Canada. Pipeline tariff rates are                                                                    
     a  direct  result  of  the  cost  of  constructing  and                                                                    
     operating the  pipeline. The actual formulation  of the                                                                    
     toll, indeed the entire tariff  structure, of which the                                                                    
     toll is  one component, is subject  to well-established                                                                    
     regulatory  standards with  oversight  provided by  the                                                                    
     FERC in the U.S. and the NEB in Canada.                                                                                    
                                                                                                                                
     The   rate  that   gas   pipelines   will  charge   for                                                                    
     transporting gas  is based  on what  is referred  to as                                                                    
     the  cost of  service.  This cost  of service  includes                                                                    
     components  such  as  operating  expense,  maintenance,                                                                    
     taxes, depreciation  and a  fair and  reasonable return                                                                    
     on  capital  investment  consistent with  the  specific                                                                    
     risks of the project.                                                                                                      
                                                                                                                                
     The FERC and NEB processes  offer an opportunity to all                                                                    
     interested and  affected parties, such as  the State of                                                                    
     Alaska,  to actively  participate in  the establishment                                                                    
     of  just and  reasonable  rates on  pipelines in  which                                                                    
     they  have an  interest for  both initial  capacity and                                                                    
     for expansion  capacity. All  parties have  the ability                                                                    
     to intervene  in this process and  have the opportunity                                                                    
     to comment on the  proposed pipeline's tariffs prior to                                                                    
     regulatory approval.  The FERC  will consider  all such                                                                    
     comments  before it  approves the  pipeline's rates  or                                                                    
     specific tariff language. Once  these tariffs have been                                                                    
     approved by  the FERC,  the provisions  would generally                                                                    
     be applicable to all  shippers. Furthermore, FERC staff                                                                    
     is  charged  with  representing  consumer  interest  to                                                                    
     ensure that  these rates are  just and  reasonable. The                                                                    
     FERC  has  outstanding   resources  and  expertise  and                                                                    
     furthermore, is also permitted to  audit the records of                                                                    
     all regulated pipelines.                                                                                                   
                                                                                                                                
     All  parties   including  the  State  of   Alaska,  the                                                                    
     pipeline, gas  producers and other shippers  benefit by                                                                    
     ensuring that  all gas  has access  to the  pipeline on                                                                    
     reasonable   terms.   Existing    FERC   policies   and                                                                    
     procedures  ensure that  all parties  have  a fair  and                                                                    
     equal   opportunity   to  access   pipeline   capacity.                                                                    
     Moreover, these policies and  procedures help to ensure                                                                    
     that  no  one  class  of shipper  can  be  required  to                                                                    
     directly subsidize or guarantee  access for another. In                                                                    
     fact, this  approach advances the national  interest in                                                                    
     encouraging   future   investment    in   natural   gas                                                                    
     pipelines. FERC  recognizes that  parties who  have the                                                                    
     potential   to  accept   significant  risks   and  make                                                                    
     substantial investments  in natural  gas transportation                                                                    
     systems  will  not  do  so   if  the  benefits  can  be                                                                    
     transferred to other third parties.                                                                                        
                                                                                                                                
     And so, to  summarize, I'd like to  offer these closing                                                                    
     comments. First,  unlike oil pipelines,  interstate gas                                                                    
     pipelines  operate as  open  access contract  carriers.                                                                    
     This means  capacity must be  awarded to shippers  in a                                                                    
     fair,  equal   and  non-discriminatory   manner.  These                                                                    
     shippers,  however, must  be willing  and able  to make                                                                    
     the necessary  contractual commitments  to pay  for the                                                                    
     capacity. This open access requirement  is met on a new                                                                    
     pipeline  through  an  open season.  Once  capacity  is                                                                    
     awarded, a shipper's contractual  right to the reserved                                                                    
     capacity  is  protected.  Existing  shippers,  however,                                                                    
     have  no   preferential  rights   to  capacity   on  an                                                                    
     expansion.  Further  expansion  capacity  is  allocated                                                                    
     under a non-discriminatory  open season process similar                                                                    
     to  that  which  is  used to  allocate  the  pipeline's                                                                    
     initial capacity.  All parties, including the  State of                                                                    
     Alaska,  the  pipeline,  gas  producers  and  consumers                                                                    
     benefit  by ensuring  that all  gas has  access to  the                                                                    
     pipeline on reasonable terms.  Among other things, this                                                                    
     means pipelines generally  are prohibited from allowing                                                                    
     one  class of  shippers to  directly subsidize  another                                                                    
     class  or  from  guaranteeing one  class  of  shipper's                                                                    
     preferential  access over  another class.  In addition,                                                                    
     FERC  has  regulations  that ensure  a  pipeline  owner                                                                    
     operates   independently   from    its   other   energy                                                                    
     affiliates.  FERC Order  2004  recently expanded  these                                                                    
     regulations   to   include   all   energy   affiliates,                                                                    
     including  producer   affiliates.  This   concludes  my                                                                    
     prepared remarks.  I'd be happy  to try and  answer any                                                                    
     questions you might have.                                                                                                  
                                                                                                                                
CO-CHAIR  OGAN said  he quoted  figures  from 2001  and that  the                                                               
benefits outweighed the risks at that  time, but this is 2004 and                                                               
he has  heard projections at  different conferences that  the gas                                                               
market  has changed.  He assumed  the producers  were recrunching                                                               
their numbers.                                                                                                                  
                                                                                                                                
MR.  FROST responded  that the  sponsor group  is continuing  the                                                               
analysis and  efforts are under  way to define the  parameters of                                                               
the project and the cost.                                                                                                       
                                                                                                                                
REPRESENTATIVE LES  GARA said he  understands that FERC  allows a                                                               
fair amount  of flexibility in  the rules for access.  The amount                                                               
of revenue the state takes  in is dependent on the transportation                                                               
costs for  the particular amount  of gas that gets  deducted. So,                                                               
gas that is  400 miles away from the main  pipeline stem may make                                                               
the state less revenue than gas  that is five miles away from the                                                               
pipeline  stem. If  there is  an  open season  and two  competing                                                               
proposals for the same amount of  gas are coming from one company                                                               
that owns  gas 300 miles  away and  another company whose  gas is                                                               
much closer  and would make the  state much more money,  he asked                                                               
if the  state would have  some sort  of discretion to  choose the                                                               
access so that  legislators could uphold the  state's interest in                                                               
getting the maximum revenue possible.                                                                                           
                                                                                                                                
MR. FROST replied  that the proposed pipeline  would be regulated                                                               
by the FERC, a federal  agency. The enabling legislation includes                                                               
a specific  provision that requires  the FERC within 120  days of                                                               
signing the  act to promulgate  specific open  season regulations                                                               
that would  define how the  particular open season  process would                                                               
be conducted by the Alaska  gas pipeline. During the promulgation                                                               
of the rule-making all interested parties would participate.                                                                    
                                                                                                                                
REPRESENTATIVE GARA  focused Mr.  Frost back  to his  question of                                                               
how the state  would choose the company with gas  located 5 miles                                                               
away  rather than  300 miles,  because it  would make  more money                                                               
that way.                                                                                                                       
                                                                                                                                
MR.  FROST replied  that the  open season  process by  FERC would                                                               
have to  be conducted  in context with  existing case  law, which                                                               
require  that   all  open   seasons  be   conducted  on   a  non-                                                               
discriminatory,  open access  basis. The  FERC wouldn't  view any                                                               
party with  a preference in  that process. The parties  would bid                                                               
on the section that's available.  No particular source or shipper                                                               
has any preference to capacity.                                                                                                 
                                                                                                                                
SENATOR  KIM  ELTON said  it  seemed  that  for an  initial  open                                                               
season,  the  producers  would have  somewhat  of  an  advantage,                                                               
because  they  have  knowledge   of  where  reserves  are  versus                                                               
independents who  would make a  bid on undiscovered  reserves. He                                                               
asked him to comment on that situation.                                                                                         
                                                                                                                                
MR. FROST  replied that FERC  regulations have no  requirement on                                                               
when an  open season is to  be conducted. A number  of precedents                                                               
define how it should be structured  - how long it should be open,                                                               
how long prior  to the opening should the notice  occur, etc. The                                                               
decision for  when the  open season takes  place is  a commercial                                                               
decision about when the pipeline  feels it has sufficient support                                                               
from  potential   shippers  to  move  a   project  forward.  FERC                                                               
regulations and  precedents dictate  that certain things  have to                                                               
happen before the application is submitted to it.                                                                               
                                                                                                                                
When the  open season is made,  all parties who have  an interest                                                               
in participating  in a open  season have an equal  opportunity to                                                               
bid at the  time it is conducted. Different parties  will be in a                                                               
different position to participate in  an open season to develop a                                                               
pipeline. To the extent that  parties are not able to participate                                                               
in  one  open  season,  the project  sponsors  could  expand  the                                                               
pipeline and  have an  expansion open  season. An  explorer could                                                               
force an  expansion under  FERC rules  at a  time later  than the                                                               
initial  open  season.  The  pipeline   always  has  an  economic                                                               
incentive to  expand and many  expansions result in a  lower rate                                                               
for all parties.                                                                                                                
                                                                                                                                
SENATOR  ELTON asked  if it  is very  likely that  an independent                                                               
could become  an anchor shipper  under an  undiscovered resources                                                               
scenario.                                                                                                                       
                                                                                                                                
MR. FROST replied:                                                                                                              
                                                                                                                                
     Maybe. If any shipper has reserves that are known and                                                                      
    confirmed   enough   to   support   their   desire   to                                                                     
     participate in  an open season, they  could participate                                                                    
     as an  anchor shipper.  The anchor  process is  open to                                                                    
     all parties....                                                                                                            
                                                                                                                                
SENATOR RALPH  SEEKINS asked  what he meant  by the  pipeline, as                                                               
proposed.                                                                                                                       
                                                                                                                                
MR.  FROST answered  that  he was  speaking  generically. He  was                                                               
referring to any pipeline with an open season.                                                                                  
                                                                                                                                
SENATOR SEEKINS  asked if a  gasline from  Alaska to Canada  to a                                                               
hub versus one that went all  the way through Canada to the Lower                                                               
48 would be treated the same.                                                                                                   
                                                                                                                                
MR. FROST replied  yes. "The Alaska pipeline  will be constructed                                                               
under federal regulation and will be subject FERC regulation.                                                                   
                                                                                                                                
SENATOR SEEKINS  said if  the sponsor  group built  the pipeline,                                                               
the only advantage for them would  be based on making a profit on                                                               
the construction and operation of the pipeline.                                                                                 
                                                                                                                                
MR.  FROST replied  that construction  of the  pipeline would  be                                                               
first  and foremost  to  move gas  from the  North  Slope to  the                                                               
marketplace - to access the  market. There is also an expectation                                                               
that  there will  be a  separate pipeline  corporate entity.  "In                                                               
that sense it has a profit center of its own."                                                                                  
                                                                                                                                
SENATOR  SEEKINS mused  if a  person owned  the pipe  himself, he                                                               
could see  an advantage in  keeping construction prices  a little                                                               
high to keep other people out.                                                                                                  
                                                                                                                                
REPRESENTATIVE MIKE  CHENAULT asked if  it was true that  one had                                                               
to be  an owner  to be  able to  sit at  the table  and negotiate                                                               
rates and if  Alaska is not an owner of  the project, where would                                                               
it be able to negotiate tariff rates, including in the future.                                                                  
                                                                                                                                
MR.  FROST  answered  the  FERC  regulatory  process  allows  all                                                               
interested parties to participate.                                                                                              
                                                                                                                                
     It is the norm for  the individual state public utility                                                                    
     commissions  and their  staff to  regularly participate                                                                    
     in  these types  of  proceedings, because  of the  fact                                                                    
     that the outcome of these  proceedings impact the state                                                                    
     and  the state  consumers.  The state  of Alaska  would                                                                    
     very  much have  an opportunity  to participate  in all                                                                    
     regulatory proceedings  at the FERC, both  initial open                                                                    
     season,   initial  application,   and  any   subsequent                                                                    
     regulatory proceedings at the FERC.                                                                                        
                                                                                                                                
REPRESENTATIVE CHENAULT  asked if  it would  be in  Alaska's best                                                               
interest to have more say at  these meetings if it was part-owner                                                               
of the project versus not being an owner.                                                                                       
                                                                                                                                
MR. FROST  replied, "If the  State of Alaska  is an owner  in the                                                               
pipeline, then they have a  slightly different role. They are not                                                               
a user  of the pipeline; they  are part of the  pipeline, itself.                                                               
The pipeline, of course, does  represent its own interests at the                                                               
FERC. And  so, the State  of Alaska, conceivably, would  have two                                                               
roles  - one  role as  an owner  of the  pipelines that  would be                                                               
proposing  applications at  the  FERC  and one  in  your role  as                                                               
representing the consumers within the State of Alaska, itself.                                                                  
                                                                                                                                
CO-CHAIR  SAMUELS asked  if  who builds  the  pipeline should  be                                                               
irrelevant to the producers.                                                                                                    
                                                                                                                                
MR. FROST answered:                                                                                                             
                                                                                                                                
     From a regulatory perspective at  the FERC, the FERC is                                                                    
     going to  view the  pipeline as  a corporate  entity in                                                                    
     and of  itself. The FERC doesn't  particularly care who                                                                    
     owns this pipeline.  All of the procedures,  all of the                                                                    
     regulations,  all of  the case  precedent,  all of  the                                                                    
     judicial  case law  that has  been  developed over  the                                                                    
     last 80 years  in the natural gas industry  is going to                                                                    
     apply to that pipeline regardless of who the owner is.                                                                     
                                                                                                                                
REPRESENTATIVE BETH  KERTTULA said  that tariffs are  affected by                                                               
the  costs.  "If you  control  the  costs,  you can  control  the                                                               
tariff."                                                                                                                        
                                                                                                                                
MR. FROST responded:                                                                                                            
                                                                                                                                
     There  are  various  aspects of  the  cost.  There  are                                                                    
     operating costs and capital  costs. Speaking of capital                                                                    
     costs,  when the  pipeline files  its application,  the                                                                    
     capital cost will  be a major component  of the tariffs                                                                    
     that are ultimately reviewed and  approved by the FERC.                                                                    
     The FERC has a statutory  obligation to insure that the                                                                    
     rates  that come  out of  the  application process  are                                                                    
     just  and  reasonable and  they  take  their role  very                                                                    
     seriously. There is a whole  host of people at the FERC                                                                    
     in Washington, D.C. who tear  those costs apart line by                                                                    
     line and argue over  literally dollars and cents. Their                                                                    
     role is to insure those  costs, all costs, are just and                                                                    
     reasonable.  One of  the guidelines  is to  insure that                                                                    
     the costs have not been imprudently incurred.                                                                              
                                                                                                                                
SENATOR SEEKINS  asked if all  costs are reasonable, what  is the                                                               
percentage of  return on  capital that FERC  allows the  owner of                                                               
the pipeline.                                                                                                                   
                                                                                                                                
MR. FROST answered that there is no specific number.                                                                            
                                                                                                                                
     It depends on a number of  factors, one of which is the                                                                    
     risk  associated  with  the   pipeline.  The  FERC  has                                                                    
     recognized a  direct link between the  riskiness of the                                                                    
     project and the return on equity....                                                                                       
                                                                                                                                
SENATOR SEEKINS asked if he could guess for this pipeline.                                                                      
                                                                                                                                
MR. FROST replied that it would be  within a range of about 12 to                                                               
14.5 percent.                                                                                                                   
                                                                                                                                
CO-CHAIR OGAN  observed that one  penny's difference cost  in the                                                               
tariff,  if it's  higher, lowers  the value  of the  project $155                                                               
million over its life.                                                                                                          
                                                                                                                                
     If that's  an accurate figure, based  on throughput and                                                                    
     a 30-year life of the project,  it equates to - our tax                                                                    
     a royalty  on that  is roughly  20 percent.  Some quick                                                                    
     figuring  - that  equals  a little  bit  more than  $30                                                                    
     million the state will not  get for every penny of cost                                                                    
     the  tariff goes  up.... We  obviously have  an intense                                                                    
     interest in what  those costs are going to  be and what                                                                    
     the alignments are  going to be, who owns  what and who                                                                    
     is shipping what....                                                                                                       
                                                                                                                                
MR.  FROST  replied, "Pipeline  rates  and  associated costs  are                                                               
always the  subject of  great debate and  scrutiny at  FERC. It's                                                               
what they do."                                                                                                                  
                                                                                                                                
CO-CHAIR  SAMUELS  thanked  Mr.  Frost and  announced  that  Mark                                                               
Hanley  would  give the  next  presentation  regarding access  to                                                               
capacity  for  producers  and   explorers  without  an  ownership                                                               
interest in or effective control of the pipeline.                                                                               
                                                                                                                                
MR.  MARK HANLEY,  Manager, Public  Affairs for  Alaska, Anadarko                                                               
Petroleum,  said  Anadarko  is   an  explorer  with  an  interest                                                               
position, being  partners with  ConocoPhillips, and  owns acreage                                                               
at  Alpine,  NPRA   and  in  the  Foothills.   Anadarko  is  very                                                               
supportive of getting a gas  pipeline built. He would focus today                                                               
on areas of differences and concerns.                                                                                           
                                                                                                                                
     You've heard  a few things  here and one of  the issues                                                                    
     you've  heard is  that FERC  will guarantee  - FERC  is                                                                    
     your protector.  I would only  say that we all  look at                                                                    
     what are the  exceptions to the rules and  where can we                                                                    
     be disadvantaged  potentially. Part  of the  problem in                                                                    
     this process  is it's all  speculation. So, we  have to                                                                    
     speculate things that many times  they won't all occur.                                                                    
     But, if  we don't  look at  what possibly  could occur,                                                                    
     we're  not being  responsible  to  our shareholders.  I                                                                    
     would  say for  you folks  one  of the  things is  that                                                                    
     you've got to listen to  all the parties, but you ought                                                                    
     to have  your independent folks. Because  I would agree                                                                    
     that  generally, the  FERC is  going  to regulate  this                                                                    
     pipe; they are going to be  the ones that make a lot of                                                                    
     the determinations. So, understanding  the rules of the                                                                    
     game...and  looking  at  it from,  maybe,  the  state's                                                                    
     perspective,  as  well,  and   saying  how  can  we  be                                                                    
     disadvantaged....                                                                                                          
                                                                                                                                
MR. HANLEY reminded the committee that  a few years ago the state                                                               
chose its  royalty in  kind and  actually put out  a bid  for its                                                               
royalty gas.  Anadarko bid on  it successfully - wanting  the gas                                                               
so  it could  go to  an  initial open  season. However,  Anadarko                                                               
doesn't have  reserves right now  and is not  likely to go  to an                                                               
initial open season. The three  producers really didn't like what                                                               
Anadarko  did a  few years  ago  - because  in the  terms of  its                                                               
contract, it could  get capacity and then go out  and explore for                                                               
the gas. When  it found the gas, it could  return the state's gas                                                               
with certain notice provisions. The  state gas would then have to                                                               
be carried by the other folks.  So, they would get pro-rated even                                                               
though they have a contractual right to that capacity.                                                                          
                                                                                                                                
Anadarko was told from the  beginning to not worry about capacity                                                               
because the pipeline could be expanded,  but when the shoe was on                                                               
the other foot,  the producers were reluctant  to expand capacity                                                               
saying that would increase risk to the pipeline.                                                                                
                                                                                                                                
     That sends a message to  us. Maybe when they're telling                                                                    
     us it isn't  a problem to get it, maybe  it is. I don't                                                                    
     know what, but that gives you  an example of one of the                                                                    
     concerns that we have about  this process when they say                                                                    
     its fair for expansion....                                                                                                 
                                                                                                                                
MR.  HANLEY   moved  to   the  subject   of  producer   owned  or                                                               
independently owned  pipelines and  which is better.  His general                                                               
testimony in  the March  meeting was  that Anadarko  doesn't care                                                               
who  owns the  pipe as  long as  there is  fair access  terms and                                                               
conditions at a  reasonable price. But, there's  always a natural                                                               
tension between  the shipper,  whose goal is  to have  the lowest                                                               
rate, and a pipeline owner, whose  actual goal is to make as much                                                               
money as  they can.  "This is  what all  the protections  are out                                                               
there for."                                                                                                                     
                                                                                                                                
                                                                                                                                
MR. HANLEY read Bob Loeffler's comments in Petroleum News:                                                                      
                                                                                                                                
     What  determines how  high  the rate  of  return is  on                                                                    
     equity  is how  risky the  pipeline is.  Pipelines will                                                                    
     argue I'm not an average  pipeline. I'm more risky than                                                                    
     anyone else, so I deserve  more. Of course, shippers on                                                                    
     the pipeline argue they're not risky at all.                                                                               
                                                                                                                                
MR. HANLEY reflected:                                                                                                           
                                                                                                                                
     That's  that natural  tension.... If  the shippers  are                                                                    
     largely the  owners, as well, you've  heard the natural                                                                    
     tendency there  - there's an  incentive there  to shift                                                                    
     your  profit  as  much  as  possible  to  the  pipeline                                                                    
     system. That's a concern for most of us.                                                                                   
                                                                                                                                
     For  the  state  it  should be  a  concern  because  it                                                                    
     decreases  the  wellhead  value and  it  decreases  the                                                                    
     state's revenue if the profit  is taken out of the pipe                                                                    
     instead of out of the  gas. For explorers, it means our                                                                    
     costs are higher.  So, it's a concern for  us. When you                                                                    
     get into a natural system  and you're going before FERC                                                                    
     arguing  what is  that rate  of return  - should  it be                                                                    
     12%, 14.5% -  everybody is arguing that this  is a huge                                                                    
     risky pipeline. I'm  not going to argue  that it isn't.                                                                    
     But  the tension  isn't necessarily  there, because  if                                                                    
     the  big  shippers  didn't  own  the  pipe,  they'd  be                                                                    
     pushing as hard as they can  to have it closer to a 12%                                                                    
     rate  of  return,  because that's  going  to  mean  the                                                                    
     pipeline tariff is lower.                                                                                                  
                                                                                                                                
     In this  case, if the  pipeline owners own it,  I'm not                                                                    
     sure that  the big  shippers are not  likely to  be out                                                                    
     there  arguing. In  fact, they  won't  be opposing  the                                                                    
     higher rate of return  on the pipeline, itself, because                                                                    
     they  know that  it  also helps  both competitively  as                                                                    
     well as  through their overall rate  of return, because                                                                    
     the state's picking up about  20% of any increased cost                                                                    
     in that. That's something that  doesn't have to do with                                                                    
     the  pipeline  costs....  I  think  anybody  who  is  a                                                                    
     shipper would want the pipeline  operated at the lowest                                                                    
     cost  and not  built over  cost to  try and  capitalize                                                                    
     that.                                                                                                                      
                                                                                                                                
TAPE 04-14, SIDE A                                                                                                            
                                                                                                                                
MR. HANLEY related also that the Natural Gas Policy Council                                                                     
said:                                                                                                                           
                                                                                                                                
     The  state  must  develop  a  clear  and  sophisticated                                                                    
     understanding of open season  rules governing access to                                                                    
     a contract  carrier pipeline  and devise  strategies to                                                                    
     facilitate access  to the pipeline for  firms exploring                                                                    
     for  or developing  new gas  discoveries  on the  North                                                                    
     Slope or Interior basins.                                                                                                  
                                                                                                                                
The Legislature also passed a resolution in 2002 that said:                                                                     
                                                                                                                                
     Provisions for  access to the pipeline  by explorers on                                                                    
     a  fair and  reasonable basis  including a  proper open                                                                    
     season with fair and  reasonable tariffs and...they and                                                                    
     the state have  the ability to obtain  expansion of the                                                                    
     pipeline  if  it's   economically  and  technologically                                                                    
     feasible.                                                                                                                  
                                                                                                                                
A letter from Governor Knowles to Senator Bingham also states:                                                                  
                                                                                                                                
     Access for  new discoveries  - is necessary  to mandate                                                                    
     that in the  event of new discoveries on  or around the                                                                    
     North  Slope  or  Interior   Alaska.  And,  whether  on                                                                    
     federal   or  state   lands,   the   owners  of   these                                                                    
     discoveries will  have access to the  pipeline in order                                                                    
     to market their gas.  It is estimated that undiscovered                                                                    
     gas reserves  may be in the  order of 100 TCF  or more.                                                                    
     Legislation  should give  the FERC  clear authority  to                                                                    
     require the owners of the  Alaska portion of the Alaska                                                                    
     Highway project to expand the  capacity of the pipeline                                                                    
     in  order to  accommodate all  new discoveries.  Absent                                                                    
     such a provision, new gas  discoveries could be left at                                                                    
     the back of  a long [line] of gas  awaiting shipment or                                                                    
     worse, indefinitely stranded  in place, because, unlike                                                                    
     most areas  in the Lower  48 states, one  pipeline will                                                                    
     be the sole source of available transportation.                                                                            
                                                                                                                                
MR. HANLEY  emphasized that Alaska  is different in that  it will                                                               
have  only one  pipeline.  Nan  Thompson, who  was  chair of  the                                                               
Regulatory Commission of Alaska (RCA), said:                                                                                    
                                                                                                                                
     A  pipeline  owned  by  producers   will  not  have  an                                                                    
     incentive   to  transport   gas   developed  by   their                                                                    
     competitors  to  market....  If   the  state  wants  to                                                                    
     encourage  competition   amongst  producers   and  full                                                                    
     development of  its gas resources, we  need legislative                                                                    
     authorization  for our  regulatory  agency to  evaluate                                                                    
     the  economics of  the proposed  expansion and  require                                                                    
     support for  an application  for expansion at  the FERC                                                                    
     when expansion promotes the state's best interest.                                                                         
                                                                                                                                
A letter from Governor Murkowski said:                                                                                          
                                                                                                                                
     We  also believe  it is  in the  best interests  of the                                                                    
     state for the pipelines to  be owned and operated by an                                                                    
     unaffiliated  pipeline  company  assuming that  such  a                                                                    
     company is able to provide the lowest possible tariff.                                                                     
                                                                                                                                
MR.  HANLEY suggested  that there's  enough people  with concerns                                                               
about ownership of  the pipeline to urge the  Legislature to look                                                               
at the  issue closely. Alaska  is different than the  Gulf Coast,                                                               
which  has   competition,  because  it  has   a  monopoly.  Three                                                               
producers control  90% of the gas  on the North Slope.  They have                                                               
spent many years jointly working on the project.                                                                                
                                                                                                                                
     To be  honest with you, there  really isn't competition                                                                    
     for that gas getting into it,  nor can there be and I'm                                                                    
     not  saying  it's  their fault.  But,  when  you're  at                                                                    
     Prudhoe Bay,  BP can't just  produce its gas  and leave                                                                    
     every  body else's  in  the ground.  There's  a lot  of                                                                    
     legal precedence about overlift,  underlift and lots of                                                                    
     problems  with  that.  So,  there's   going  to  be  an                                                                    
     agreement  from Prudhoe  Bay owners  about what  is the                                                                    
     optimal off-take of  gas from that field.  There has to                                                                    
     be. The  same thing  at Point Thompson  - they  have to                                                                    
     come to  an agreement  among the  owners on  what's the                                                                    
     optimal amount coming out. When  they know that... they                                                                    
     know how  much they need to  go to the open  season and                                                                    
     nominate capacity.  It's not a negative  thing; it just                                                                    
     shows   you  they've   worked  together   building  the                                                                    
     pipe.... There is one group  out there doing this thing                                                                    
     and when you get to  the open season, they will say....                                                                    
     typically...it's  conducted to  determine  how big  the                                                                    
     pipeline needs to  be, what interest there  is going to                                                                    
     be out there,  are there other people  that are willing                                                                    
     to commit so they can size  the pipe. To be honest with                                                                    
     you,  that's  all done.  I  think  they would  be  very                                                                    
     surprised if  anybody other than Prudhoe  Bay and Point                                                                    
     Thompson  owners...if  significant  gas  came  in  from                                                                    
     somewhere else.                                                                                                            
                                                                                                                                
     Whether or not there is  an anchor shipper agreement or                                                                    
     whether  they  can set  aside  capacity  that isn't  in                                                                    
     there really isn't the huge  issue, particularly in the                                                                    
     initial  open season,  because  frankly,  they are  the                                                                    
     only ones  that have  expansion capacity. I  think I've                                                                    
     explained  to  you  before,  as  an  explorer,  without                                                                    
     identified reserves, and that's us  or any of the other                                                                    
     people  out there,  we  can't go  to  the open  season,                                                                    
     nominate .5  BCF a  day and make  a commitment  of $300                                                                    
     million  a year,  in that  range,  for 20  or 30  years                                                                    
     without  knowing we  actually have  the gas  to put  in                                                                    
     there. It's a chicken or egg thing.                                                                                        
                                                                                                                                
     The  explorers   are  going  to   be  focused   on  the                                                                    
     expansion, what  the terms and  conditions are,  if the                                                                    
     pipe is actually built so  it can be easily expandable,                                                                    
     how  much it  can  be expanded.  What  those terms  and                                                                    
     conditions  are are  going to  rely a  lot on  FERC and                                                                    
     others to make sure that we do have that ability.                                                                          
                                                                                                                                
     Again, who is going to  look out for our interests? The                                                                    
     FERC is  out there looking  at this stuff, but  I would                                                                    
     say the  state has  some ability.  There is  a Stranded                                                                    
     Gas Act  where the  state can include  provisions; they                                                                    
     do have some leverage. I  would say our RIK (royalty in                                                                    
     kind)  process has  not been  finalized and  we haven't                                                                    
     been actually  granted, but I  would say don't  give up                                                                    
     your right to take your gas  in kind. That's one of the                                                                    
     few leverage points you have.  I suspect they would ask                                                                    
     you to not do that, but  I think as a state, you should                                                                    
     not do that.                                                                                                               
                                                                                                                                
     When you  go back  to the  ownership of  the pipe  by a                                                                    
     producer,  where is  the tension  in the  system? Let's                                                                    
     just say  that the  producers own a  third each  of the                                                                    
     pipe and I  don't know what the interests  are going to                                                                    
     be,  and they  control 90%  of  the gas.  If you  don't                                                                    
     count  the  state's  gas,  it's   less,  but  they  are                                                                    
     probably going  to carry  it in  value, well  they're a                                                                    
     net  owner. Their  interests are  largely  going to  be                                                                    
     100% ownership of the pipe,  so their interest is going                                                                    
     to be as a pipeline owner. That's the concern.                                                                             
                                                                                                                                
MR. HANLEY explained that Order 2004  (a) tries to put a firewall                                                               
between  the  pipeline owner  and  the  affiliates. There  is  an                                                               
attempt  to not  share  information,  but one  must  look at  the                                                               
exceptions. He  tried giving  the committee an  idea of  how FERC                                                               
balances this.                                                                                                                  
                                                                                                                                
     Order 2004(a) - The  commission (FERC) is balancing its                                                                    
     concerns  that a  transmission provider  (the pipeline)                                                                    
     will abuse its relationship  with a marketing or energy                                                                    
     affiliate  by providing  it unduly  preferential access                                                                    
     to information  about potential expansion plans  or new                                                                    
     production  areas   against  the  need   to  facilitate                                                                    
     infrastructure    development     by    allowing    the                                                                    
     transmission  provider to  coordinate construction  and                                                                    
     planning with  an interconnecting gatherer  pipeline or                                                                    
     producers....                                                                                                              
                                                                                                                                
     Therefore, the  commission clarifies  that transmission                                                                    
     also  includes  an  interconnection to  facilitate  gas                                                                    
     transportation  service.  Thus, discussions  between  a                                                                    
     natural  gas   transmission  provider  and   an  energy                                                                    
     affiliate  to provide  an interconnection  or expansion                                                                    
     for  the  energy  affiliate would  be  covered  by  the                                                                    
     transaction-specific exception.                                                                                            
                                                                                                                                
MR. HANLEY  translated that to  mean that there is  a transaction                                                               
specific  exception  to  the  rule   that  says  you  can't  have                                                               
conversations out  there. They say that  interconnecting entities                                                               
may  discuss the  location, practicality  and  cost of  potential                                                               
interconnections  with an  affiliated transmission  provider. The                                                               
purpose   is  to   encourage   the   transmission  provider   and                                                               
interconnecting  energy affiliate  to  work  together to  develop                                                               
additional   infrastructure   to    facilitate   development   of                                                               
production.                                                                                                                     
                                                                                                                                
     There are exceptions to the  rules.... If they do that,                                                                    
     they have  to record the  meeting, they have to  keep a                                                                    
     transcript of it, they have  to keep it for three years                                                                    
     and they  have to  make it available  to FERC.  This is                                                                    
     all intended to make sure that nothing goes wrong.                                                                         
                                                                                                                                
The Order of 2004 had a  discussion about whether a non affiliate                                                               
could  voluntarily consent  in writing  to  allow a  transmission                                                               
provider   of  the   pipeline  to   share  the   non  affiliate's                                                               
information  with the  pipeline owner's  marketing affiliate.  He                                                               
didn't know why  he would want to get them  information that they                                                               
could  share with  their own  affiliate, but  it was  allowed and                                                               
says:                                                                                                                           
                                                                                                                                
     Several   commenters,  including   indicated  shippers,                                                                    
     urged  the  commission  not   to  adopt  the  voluntary                                                                    
     consent  provision.  They  argued   that  it  is  anti-                                                                    
     competitive,  because  even  if  a  shipper  agreed  to                                                                    
     disclose the information, the consent  may not truly be                                                                    
     voluntary, because  the transmission provider  could be                                                                    
     exercising market  power.... That's the  normal tension                                                                    
     that occurs in these things....                                                                                            
                                                                                                                                
     BP  argues that  the  commission  should eliminate  the                                                                    
     voluntary consent  exemption in  the natural  gas area.                                                                    
     There is no business reason  why a customer would allow                                                                    
     the  transmission  provider  to share  that  customer's                                                                    
     information  with a  transmission provider's  marketing                                                                    
     or energy affiliate.                                                                                                       
                                                                                                                                
     According to BP, transmission  providers could coerce a                                                                    
     customer  to consent.  Therefore,  the  consent is  not                                                                    
     truly voluntary.  So, these are the  comments. So, when                                                                    
     people say am  I being paranoid, I would  just point to                                                                    
     an example like this and say....                                                                                           
                                                                                                                                
     This is a very complex  field. There are lots of things                                                                    
     that  are  out  there.  There  are  companies  who  are                                                                    
     shippers who  have very  legitimate concerns  about the                                                                    
     pipeline companies and the power that goes with both.                                                                      
                                                                                                                                
MR.  HANLEY concluded  by  urging the  Legislature  to watch  the                                                               
terms and conditions closely.                                                                                                   
                                                                                                                                
REPRESENTATIVE LES GARA  said he also had  concerns about letting                                                               
FERC control  the state's destiny,  but asked assuming  the state                                                               
is  skeptical  that   FERC  will  get  us  the   best  price  for                                                               
transporting  gas, what  can the  state do  to ensure  the lowest                                                               
possible transportation price.                                                                                                  
                                                                                                                                
MR. HANLEY  again pointed out  leverage in the Stranded  Gas Act,                                                               
but he  didn't know  if it  was significant.  The state  needs to                                                               
understand and participate in the FERC process.                                                                                 
                                                                                                                                
REPRESENTATIVE MIKE HAWKER asked if  he had any immediate concern                                                               
that the  state is abrogating  its responsibility or is  he being                                                               
cautious.                                                                                                                       
                                                                                                                                
MR. HANLEY  replied that he  is being cautious. One  provision in                                                               
the Federal  Energy Bill  says within 120  days of  its enactment                                                               
the  commission   shall  promulgate  regulations   governing  the                                                               
conduct  of open  seasons for  Alaska natural  gas transportation                                                               
projects, including  procedures for  the allocation  for capacity                                                               
and the  regulations shall  include the  criteria and  timing for                                                               
any  open  seasons,  promote   competition  in  the  exploration,                                                               
development  and production  of Alaska  natural gas  and for  any                                                               
open season  for capacity exceeding the  initial capacity provide                                                               
the opportunity for the transportation  of natural gas other than                                                               
from Prudhoe Bay  and Point Thompson. That's part  of the federal                                                               
package  that  includes  preliminary judicial  review,  expedited                                                               
permitting, etc.  It also has  a provision  specifically allowing                                                               
FERC to force an expansion of a pipe.                                                                                           
                                                                                                                                
CO-CHAIR SAMUELS announced a recess.                                                                                            
                                                                                                                                
CO-CHAIR OGAN  called the meeting back  to order at 1:15  p.m. He                                                               
said  that he  would be  chairing  the afternoon  portion of  the                                                               
meeting and the  next subject to be discussed would  be access to                                                               
capacity for Alaskan communities by Charlie Cole.                                                                               
                                                                                                                                
MR.  CHARLIE  COLE,  Board  of  Directors,  Alaska  Gas  Pipeline                                                               
Authority, said he wanted to  talk about the Gas Act's provisions                                                               
at Fairbanks.                                                                                                                   
                                                                                                                                
     I  have   to  say   preliminarily  that  I   have  some                                                                    
     hesitation  about speaking  critically, you  might say,                                                                    
     about   an  item   of  legislation   that  passed   the                                                                    
     legislature by a vote of 20 -  0 in the Senate and 38 -                                                                    
     0 in  the House.  Obviously, any  bill that  passes the                                                                    
     Alaska  Legislature with  votes  like  that has  strong                                                                    
     support and  is viewed by informed  legislators as good                                                                    
     legislation for  this state. So,  with that  caveat and                                                                    
     that reservation,  I want to  speak a little  bit today                                                                    
     about the effect of that bill  as I see it on Fairbanks                                                                    
     and  other   Interior  communities  and  in   a  sense,                                                                    
     communities down river.                                                                                                    
                                                                                                                                
     One,  Alaska is  cold and  Fairbanks is,  on occasions,                                                                    
     very cold. It  is one of the restraints  on growth that                                                                    
     we have in Alaska and we'll  always have in Alaska - is                                                                    
     the cold  weather. With that  given, low  cost economic                                                                    
     energy  is  vital  for  the  economic  development  of,                                                                    
     certainly, Interior  Alaska and,  as we have  seen, how                                                                    
     vital  and   how  beneficial  that  has   been  to  the                                                                    
     Anchorage  area.  But,  Fairbanks   has  not  had  that                                                                    
     benefit   and    Fairbanks   continues    to   struggle                                                                    
     economically as  respects quality of life  for the high                                                                    
     cost of energy there.                                                                                                      
                                                                                                                                
     So,  if  one  looks  to the  future  of  Fairbanks,  if                                                                    
     Fairbanks is  going to have  any economic  growth... it                                                                    
     must have cheap economic energy  to offset the costs of                                                                    
     living there.                                                                                                              
                                                                                                                                
     The second given is that  these Alaska resources should                                                                    
     be primarily  for the benefit  of Alaskans.  Isn't that                                                                    
     what  Governor  Murkowski  said?  He said  one  of  the                                                                    
     fundamental purposes  of the use of  these resources of                                                                    
     Alaska should be to benefit Alaskans.                                                                                      
                                                                                                                                
     Senator Seekins  would know at times  in Fairbanks when                                                                    
     it's 50  degrees below zero,  we have people  there who                                                                    
     buy  50 gallons  of fuel  oil to  heat their  house, to                                                                    
     keep  it from  freezing,  because that's  all they  can                                                                    
     afford, if you can believe  that. One of the givens for                                                                    
     the Fairbanks community is we  really need gas. There's                                                                    
     only one place  we're going to get that  gas and that's                                                                    
     off this gasline, if it's  ever built. Presumably, it's                                                                    
     going to be built.                                                                                                         
                                                                                                                                
     Also,  if  we  want  to  keep  the  military  bases  in                                                                    
     Fairbanks  - you  know those  base closure  proceedings                                                                    
     come up  every once in  a while. One of  the criticisms                                                                    
     we  talk  about  keeping Eielson  and  Fort  Wainwright                                                                    
     there is  how much it  costs to keep those  bases open.                                                                    
     If  we're trying  to reduce  the defense  budget, maybe                                                                    
     we're trying to,  I'm not really sure that  we are, but                                                                    
     if we  are, we've got to  reduce the cost of  power and                                                                    
     heating at  those bases. So,  that should, in  my view,                                                                    
     be given as a policy.                                                                                                      
                                                                                                                                
     So, what did  the Stranded Gas Act do  for Fairbanks in                                                                    
     that regard?  Given I think those  unanimous policies -                                                                    
     lets  just   read  what  AS  42.06.240   says  in  that                                                                    
     regard.... starting with section (f).                                                                                      
                                                                                                                                
     In addition  to the  other requirements of  (a) through                                                                    
     (e)  of this  section, the  provisions of  this section                                                                    
     shall apply to a  certificate of public convenience and                                                                    
     necessity  for  a  North  Slope  natural  gas  pipeline                                                                    
     carrier or a person that  will be a North Slope natural                                                                    
     gas pipeline carrier under this chapter.                                                                                   
                                                                                                                                
     (1) The person making  the application shall dedicate a                                                                    
     portion of  the pipeline's initial  capacity sufficient                                                                    
     to transport  the total volume  of North  Slope natural                                                                    
     gas  that  has  been  committed by  the  producers  and                                                                    
     shippers of  North Slope natural  gas to  tendering for                                                                    
     intrastate  firm  transportation  service at  the  time                                                                    
     that  the  operation of  the  North  Slope natural  gas                                                                    
     pipeline commences.                                                                                                        
     (2) Upon  receipt of the certificate  application under                                                                    
     this subsection, the [RCA] shall  issue a public notice                                                                    
     inviting  prospective  intrastate   shippers  of  North                                                                    
     Slope  natural gas  to file  a request  for service.  A                                                                    
     request for service submitted by  a shipper in response                                                                    
     to the notice issued  under this paragraph must include                                                                    
     a proof  of the  shippers commitment  to use  the North                                                                    
     Slope   natural  gas   pipeline  for   intrastate  firm                                                                    
     transportation service, specifying  the volume of North                                                                    
     Slope  natural gas  that the  shipper  will tender  for                                                                    
     initial intrastate firm transportation service.                                                                            
     (3)  In its  review of  an application  submitted under                                                                    
     this subsection:                                                                                                           
     (A) For the  purpose of evaluating the  total volume of                                                                    
     intrastate  transportation of  North Slope  natural gas                                                                    
     to be  accepted for initial  intrastate transportation,                                                                    
     the [RCA]  commission shall determine the  total volume                                                                    
     based upon  written commitments  to tender  North Slope                                                                    
     natural gas for  intrastate firm transportation service                                                                    
     continuously for a period of  not less than three years                                                                    
     after  the operation  of the  North  Slope natural  gas                                                                    
     pipeline  commences   as  follows   (the  RCA   has  to                                                                    
     determine   the  total   volume   based  upon   written                                                                    
     commitments   (before   the  certificates   of   public                                                                    
     convenience  and   necessity  are  issued   and  before                                                                    
     pipeline construction begins - day one):                                                                                   
                                                                                                                                
     (i) Each  request for service by  an intrastate shipper                                                                    
     that is  a public utility,  as that term is  defined by                                                                    
     statute, for the purpose of  furnishing natural gas for                                                                    
     ultimate consumption within the  state by its customers                                                                    
     that individually  consume an average annual  volume of                                                                    
     less than  20 million  standard cubic  feet of  gas per                                                                    
     day shall be  supported by a written  commitment by the                                                                    
     public  utility  that  sets   out  the  utility's  best                                                                    
     current estimate of the average  annual volume that the                                                                    
     utility will require during the three-years period.                                                                        
                                                                                                                                
MR. COLE emphasized that a  written commitment gives the sense of                                                               
something that is  binding and obligatory, but  after reading the                                                               
next sentence, it may not mean contract.                                                                                        
                                                                                                                                
     (ii) Each request for service  by an intrastate shipper                                                                    
     that is not  a public utility, as that  term is defined                                                                    
     by  law,  and each  request  for  service by  a  public                                                                    
     utility for  the purpose of furnishing  natural gas for                                                                    
     ultimate  consumption within  the state  by a  customer                                                                    
     that individually consumes an  average annual volume of                                                                    
     20  million or  more standard  cubic feet  a day,  that                                                                    
     purchases North  Slope natural gas  from a  North Slope                                                                    
     natural gas producer  must be supported by  one or more                                                                    
     contracts for  the purchase of the  North Slope natural                                                                    
     gas on  a take or pay  basis that extends for  a period                                                                    
     of not  less than  three years  after the  operation of                                                                    
     the North Slope natural gas pipeline commences.                                                                            
                                                                                                                                
MR.  COLE  explained  that  means that  anybody  who  wants  this                                                               
natural gas,  if it  is not a  public utility or  it is  a public                                                               
utility with  more than 20  million standard cubic feet  per day,                                                               
you have  to reach  a contract  now to buy  natural gas  from the                                                               
carrier on  a take  or pay  basis. Fairbanks  has no  natural gas                                                               
distribution system  or facilities for converting  natural gas to                                                               
electrical  energy;  so, who  in  Fairbanks  would enter  into  a                                                               
contract like this,  he asked. He didn't know how  such a project                                                               
would be financed and supposed that it would be impossible.                                                                     
                                                                                                                                
CO-CHAIR OGAN interrupted  to say that LNG is  being shipped from                                                               
the Matanuska  Valley to Fairbanks at  $7 per thousand CF  and it                                                               
wouldn't take  too much to set  up a turbine to  turn the natural                                                               
gas into electricity.                                                                                                           
                                                                                                                                
MR. COLE  responded that it  wouldn't be very practical  to enter                                                               
into a contract  now without knowing what rates the  RCA will set                                                               
and  approve as  just  and reasonable.  Fairbanks  needs a  whole                                                               
distribution system for homes to be  heated and no one knows what                                                               
that would  cost and no one  would finance it. However,  he noted                                                               
that was only part of the dilemma. The next section says:                                                                       
                                                                                                                                
     (iii)  The RCA  may consider  peak volume  specified in                                                                    
     written  commitments of  the  North  Slope natural  gas                                                                    
     producers and purchase contracts; and                                                                                      
                                                                                                                                
     (B) The commission shall set  out in its order granting                                                                    
     a certificate  of public convenience and  necessity the                                                                    
     total  volume of  intrastate  North  Slope natural  gas                                                                    
     that  the  North  Slope natural  gas  pipeline  carrier                                                                    
     shall accept for intrastate transportation.                                                                                
                                                                                                                                
MR. COLE said  that means the certificates  of public convenience                                                               
and necessity  shall say the  total volume of intrastate  gas may                                                               
not exceed  the volume substantiated  by written  commitments and                                                               
contracts  that  comply with  the  requirements  of the  chapter.                                                               
Commitments have to be in place,  then the RCA in the certificate                                                               
of public  convenience and  necessity says,  "You've got  to send                                                               
out   X,   but  you   can't   ship   any  more   for   intrastate                                                               
transportation."                                                                                                                
                                                                                                                                
He emphasized that it gets worse:                                                                                               
                                                                                                                                
     If the  North Slope natural gas  pipeline carrier wants                                                                    
     to transport gas  in excess of the amount  set forth in                                                                    
     the  statement   of  total   volume  of   the  pipeline                                                                    
     carrier's   certificate  of   public  convenience   and                                                                    
     necessity,   the  pipeline   carrier   may  apply   for                                                                    
     authority to transport more.                                                                                               
                                                                                                                                
MR. COLE  explained that means the  carrier has to see  if it can                                                               
get authority to do that.                                                                                                       
                                                                                                                                
     We're looking at a gasline  that's going to potentially                                                                    
     be running by Fairbanks for  the next 30 years. How are                                                                    
     we ever  going to, for  example, entice anyone  else to                                                                    
     come to Fairbanks  and utilized this natural  gas for a                                                                    
     petrochemical  facility? What  about supplying  natural                                                                    
     gas  to Fort  Wainwright? Converting  those bases?  And                                                                    
     how are we  going to furnish natural gas  to Eilson Air                                                                    
     Force  Base? Once,  ten years  down the  road, it  then                                                                    
     becomes up to  the gasline to decide  whether they want                                                                    
     to increase the intrastate  capacity for Fairbanks. And                                                                    
     I'm  not talking  just about  Fairbanks and  Eilson and                                                                    
     Fort  Wainwright, I'm  talking about  Tok, I'm  talking                                                                    
     about Delta Junction  on the way down  the Highway, but                                                                    
     I'm  also  talking  about the  development  of  propane                                                                    
     facilities to  be able  to ship  propane down  river to                                                                    
     these  other communities.  I mean,  once  you do  this,                                                                    
     [it]  is  locked in.  Then  it's  up to  the  pipeline,                                                                    
     itself,  to decide  whether it  wants  to increase  the                                                                    
     capacity - and that's over the  next 10, 20 or 30 years                                                                    
     or maybe 50 years.                                                                                                         
                                                                                                                                
     This is  legislation, which I think  is ill-advised, if                                                                    
     I may say. That's a  little strong for people who voted                                                                    
     58 -  0; I realize that.  But, I think for  the reasons                                                                    
     I've given you, this Legislature  should take a look at                                                                    
     it and decide whether it  needs to be revised. Probably                                                                    
     90 percent of what you  hear in these hearings you have                                                                    
     no control over.  It's under the control  of FERC. This                                                                    
     is something you can do  something about - to encourage                                                                    
     economic development,  to improve  the quality  of life                                                                    
     in  the Interior,  the Interior  villages and  down the                                                                    
     highway and down river.                                                                                                    
                                                                                                                                
SENATOR  BUNDE asked  if he  anticipated that  the gas  the state                                                               
would sell  in-state, because it's  in the state's  best interest                                                               
to get the highest return, would be  at the same price as the gas                                                               
sold out  of state,  less the cost  of transportation.  He didn't                                                               
see any incentive  to not increase capacity for  Fairbanks if the                                                               
state would get the same net return.                                                                                            
                                                                                                                                
MR. COLE responded:                                                                                                             
                                                                                                                                
     Why would  you allow  that decision to  be made  by the                                                                    
     pipeline, itself? I  think one of the vices  of this is                                                                    
     for the  next 30  or 40  or 50 years,  as long  as this                                                                    
     gasline  is there,  it is  the  pipeline, itself  which                                                                    
     makes the  decision. Does it  want to apply to  the RCA                                                                    
     to increase  the intrastate capacity? We  shouldn't, in                                                                    
     my  view,  allow  that  decision  to  be  made  by  the                                                                    
     carrier. The decision should be  made by either the RCA                                                                    
     or  by  others and  not  grant  it exclusively  to  the                                                                    
     pipeline.   They  can   stifle   the  developments   of                                                                    
     Fairbanks and  the Interior and  the villages  and down                                                                    
     river for  the next  50 years by  simply saying  if the                                                                    
     North  Slope  natural  gas pipeline  carrier  wants  to                                                                    
     transport more, it can file  the application? Why do we                                                                    
     give them that exclusive right?                                                                                            
                                                                                                                                
                                                                                                                                
SENATOR  BUNDE  responded  that a  phrase  comes  from  Fairbanks                                                               
legislators fairly  often - "A  stranded gas tax  would encourage                                                               
them to be friendly to Fairbanks."                                                                                              
                                                                                                                                
TAPE 04-14, SIDE B                                                                                                            
                                                                                                                                
MR. COLE responded that he would  like to talk to the people from                                                               
Fairbanks who voted on this.                                                                                                    
                                                                                                                                
SENATOR SEEKINS  said he wasn't  there during  that conversation,                                                               
but he wants  to talk to Mr. Cole before  the legislation passes.                                                               
He also  said that take or  pay contracts are pretty  standard in                                                               
the natural gas industry and you  generally need some of those on                                                               
hand to show banks that you can borrow the money and repay it.                                                                  
                                                                                                                                
MR. COLE replied:                                                                                                               
                                                                                                                                
     Senator,  this  is  a  small  infinitesimal  amount  of                                                                    
     capacity  of that  line  [BREAK  IN THE  RECORDING]....                                                                    
     It's not a major  accommodation to the pipeline carrier                                                                    
     when  you consider  the  consequences  to Fairbanks.  I                                                                    
     tell you,  Fairbanks is going  to dry up and  blow away                                                                    
     over  the next  30  or  40 years  if  somehow we  don't                                                                    
     reduce the cost  of energy there. This is  a barrier to                                                                    
     that - plain and simple.                                                                                                   
                                                                                                                                
SENATOR  SEEKINS   noted  for  the   record  that  all   the  new                                                               
construction in  his area  is being  heated by  Fairbanks natural                                                               
gas  and their  distribution  system continues  to expand  there,                                                               
even though they are bringing in LNG.                                                                                           
                                                                                                                                
MR. COLE said  his statement proves his point of  the crying need                                                               
for cheap gas in Fairbanks. He repeated:                                                                                        
                                                                                                                                
     It's a crying  need and why do we want  to initiate, by                                                                    
     legislation, barriers  to that development,  our policy                                                                    
     should  be  the  opposite.  We should  enhance  it  and                                                                    
     further.                                                                                                                   
                                                                                                                                
     Let me  talk take  or pay  contracts. The  problem with                                                                    
     take or  pay contracts is  when you have  the situation                                                                    
     you have in Fairbanks. Sure,  I can see Enstar taking a                                                                    
     take or  pay contract. It has  the distribution system,                                                                    
     it  has the  industrial development  here to  do it;  I                                                                    
     mean  that's a  no-brainer.  But,  we're talking  about                                                                    
     Fairbanks, which has none of  that. We're starting from                                                                    
     scratch. We shouldn't put that  burden on the people of                                                                    
     Fairbanks  to have  a take  or pay  contract when  they                                                                    
     don't know  the price of  it; they don't know  how much                                                                    
     it's going  to cost to develop  the distribution system                                                                    
     in  Fairbanks; they  know  nothing....  The problem  is                                                                    
     that  it's  going  into the  unknown.  The  problem  is                                                                    
     peculiar to Fairbanks.                                                                                                     
                                                                                                                                
REPRESENTATIVE  HAWKER said  he  wasn't in  the Legislature  when                                                               
this bill  was adopted and  said, if Mr. Cole's  suggested remedy                                                               
of repealing  the Act would  happen, there would be  no statutory                                                               
requirement for capacity dedicated to intrastate transportation.                                                                
                                                                                                                                
MR. COLE replied:                                                                                                               
                                                                                                                                
     Not to  totally repeal it,  of course - to  repeal this                                                                    
     particular  section  and  revise it  with  something  a                                                                    
     little  more  balanced for  the  need  we have  in  the                                                                    
     Interior. There  could be,  with expert  testimony, the                                                                    
     amount  of   intrastate  capacity  that  needs   to  be                                                                    
     reserved and then, within a  given period of time or in                                                                    
     segments  over  a period  of  time,  if it's  not  used                                                                    
     within that period  of time, then it  reverts. You see,                                                                    
     I'm looking  for 30 and 40  and 50 years. We  look, too                                                                    
     often,  I think,  to today  and tomorrow  and the  next                                                                    
     three years,  but I'm looking for  three generations of                                                                    
     Alaskans.                                                                                                                  
                                                                                                                                
REPRESENTATIVE HAWKER asked if he  had this conversation with any                                                               
of  the major  players  who are  proposing  pipelines to  solicit                                                               
their support.                                                                                                                  
                                                                                                                                
MR. COLE replied emphatically, "No."                                                                                            
                                                                                                                                
REPRESENTATIVE  GARA  said  he   was  trying  to  understand  the                                                               
disincentive for  the pipeline owner  to let gas be  delivered in                                                               
Fairbanks.                                                                                                                      
                                                                                                                                
     Is it,  if they are going  to carry a full  load of gas                                                                    
     from the North Slope down  to Fairbanks, they make more                                                                    
     money  by bringing  it all  the way  down the  pipeline                                                                    
     than  they  do in  just  charging  to  drop it  off  at                                                                    
     Fairbanks  and that's  the disincentive  you're worried                                                                    
     about?                                                                                                                     
                                                                                                                                
MR. COLE  replied that he  hadn't spoken to  prospective pipeline                                                               
owners on what they are worried about.                                                                                          
                                                                                                                                
     I  would imagine  they would  want to  make commitments                                                                    
     down-line and they  don't want to have  to be monkeying                                                                    
     around   with  this   relatively  minute   capacity  in                                                                    
     Fairbanks. I can understand  their incentives and their                                                                    
     needs. I just think that we  need to tinker with this a                                                                    
     little  bit   to  allow  Fairbanks  and   the  Interior                                                                    
     communities to have the incentives.                                                                                        
                                                                                                                                
     I went down to  Tok a couple of years ago  and we had a                                                                    
     hearing there.  They said, 'What's  in this for  us? We                                                                    
     want  gas here,  too.' This  gives them  essentially no                                                                    
     opportunity to  ever have gas.  Not today  or tomorrow,                                                                    
     but to ever  have gas. That's one of  the problems that                                                                    
     I see. It's  sort of shortsighted and I  think it's not                                                                    
     unreasonable to  ask the producers, the  owners of this                                                                    
     gas,  to   make  these  accommodations  for   the  best                                                                    
     interest of Alaskans.                                                                                                      
                                                                                                                                
SENATOR THOMAS  WAGONER said Ninilchik  has some  new discoveries                                                               
and it has  the same scenario - a small  community and the people                                                               
want  the gas,  but the  problem is  do they  want to  pay for  a                                                               
station to  depressurize that  gas down to  a lower  pressure and                                                               
pay for the infrastructure that  it takes to distribute that gas.                                                               
Do they  want to do  an LID  (local improvement district)  for 10                                                               
years?                                                                                                                          
                                                                                                                                
MR. COLE responded  that his sense is to give  the people of this                                                               
state  the benefit  of warm  houses and  a quality  of life  that                                                               
other people in the Lower 48 enjoy.                                                                                             
                                                                                                                                
     We're  right there  on the  line and  we can't  get it?                                                                    
     Now, what are we missing?  I mean, we're right there on                                                                    
     the line  - and we can't  get it because we  can't tell                                                                    
     the  owners  of   this  gas  you  have   to  make  some                                                                    
     accommodations  to  these  Alaskans whose  natural  gas                                                                    
     you're piping out to the east coast. I don't get it!                                                                       
                                                                                                                                
CO-CHAIR  OGAN said  that the  gas  in Cook  Inlet has  a lot  of                                                               
liquids and  those have to  be stripped  out to process  the gas.                                                               
"Hopefully  we'll  have  a thriving  petro-chemical  industry  in                                                               
Fairbanks to  get some  of those liquids  before Alberta  gets it                                                               
all."                                                                                                                           
                                                                                                                                
CO-CHAIR OGAN  thanked Mr.  Cole for  his testimony  and directed                                                               
that  a letter  from Representative  Whitaker be  typed into  the                                                               
record before  testimony from Mr. Persily,  Department of Revenue                                                               
was taken. The letter follows:                                                                                                  
                                                                                                                                
     July 27, 2004                                                                                                              
                                                                                                                                
     Senator Scott Ogan                                                                                                         
     Chair, Senate Resources Committee                                                                                          
     Alaska State Legislature                                                                                                   
                                                                                                                                
     Senator:                                                                                                                   
                                                                                                                                
     Senator  Ogan,  the  request from  Bonnie  Robson,  the                                                                    
     consultant   to  the   Legislative  Budget   and  Audit                                                                    
     Committee for  Alaska Natural  Gas Pipeline  Issues, is                                                                    
     very  clear. The  subject matter  for discussion  is to                                                                    
     be: "What  is your company  willing to offer  on access                                                                    
     beyond what is required by law?"                                                                                           
                                                                                                                                
     My testimony was going to be and still is as follows:                                                                      
                                                                                                                                
         Current Alaska law provides for a broad policy                                                                         
     directive:                                                                                                                 
                                                                                                                                
        · The Alaska constitution, Article 8, sections 1                                                                        
          and  2 that  directs:  "It is  the  policy of  the                                                                    
          state  to  encourage...  the  development  of  its                                                                    
          resources  by making  them  available for  maximum                                                                  
          use  consistent  with  the public  interest."  And                                                                  
          that,  "The  Legislature  shall  provide  for  the                                                                    
          utilization, development  and conservation  of all                                                                    
          natural resources belonging to  the state, ... for                                                                  
          the maximum benefit of its people."                                                                                 
        · AS 38.35 The Right of Way Leasing Act - "The                                                                          
          natural  resources  of  this state,...and  in  its                                                                    
          land      for     transportation      of     these                                                                    
          resources...toward markets both in  and out of the                                                                    
          state   are  capable   of  making   a  significant                                                                    
          contribution to the general  welfare of the people                                                                    
          of  this state.  It is  the policy  of this  state                                                                    
          that  the  development,  use   and  control  of  a                                                                    
          pipeline  transportation  system  be  directed  to                                                                    
          make the  maximum contribution to  the development                                                                    
          of  the   human  resources  of  this   state,  the                                                                    
          increase in the standard of  living for all of its                                                                    
          residents,   the  advancement   of  existing   and                                                                    
          potential    sectors   of    its   economy,    the                                                                    
          strengthening of  free competition in  its private                                                                    
          enterprise  system and  the careful  protection of                                                                    
          its incomparable natural environment."                                                                                
        · AS 43.82 Stranded Gas Development Act - "maximize                                                                     
          the  benefit to  the people  of the  state of  the                                                                    
          development   of   the    state's   stranded   gas                                                                    
          resources"                                                                                                            
                                                                                                                                
     Unfortunately,  with  the  passage  of HB  290  by  the                                                                    
     twenty-first  Alaska Legislature  in  2000, that  broad                                                                    
     policy directive is  precluded in that the  law puts an                                                                    
     overwhelming burden on  local utilities and communities                                                                    
     to  commit  to  purchase   for  firm  transportation  a                                                                    
     definitive amount  of natural gas without  knowing what                                                                    
     their future demands will be,  without knowing what the                                                                    
     tariff  rate  will  be  or   the  methodology  for  gas                                                                    
     valuation will be  or from whom they  will purchase gas                                                                    
     or even if it will be available.                                                                                           
                                                                                                                                
     Further,  HB  290 exempts  a  North  Slope natural  gas                                                                    
     pipeline  from  a requirement  to  serve  as a  "common                                                                    
     carrier" for  anything other than  instate use  of gas.                                                                    
     There is  no realistic  provision in law  that requires                                                                    
     the owners of a gas  pipeline to provide access for out                                                                    
     of  state  shipping  capacity to  any  other  would  be                                                                    
     competitor.                                                                                                                
                                                                                                                                
     Simply  put, despite  a broad  policy directive  to the                                                                    
     contrary,  it  is  probably that  under  existing  law,                                                                    
     Alaska's communities will have  limited access to North                                                                    
     Slope natural gas. Further, it  is probably that would-                                                                    
     be competitors will be  precluded from shipping natural                                                                    
     gas,   thereby   eliminating   the  potential   for   a                                                                    
     competitive  free  enterprise  market  from  which  all                                                                    
     Alaska benefits.                                                                                                           
                                                                                                                                
     Fortunately,  timely solutions  do exist.  When HB  290                                                                    
     passed,  it was  clear  that a  time  of reckoning  lay                                                                    
     beyond; when the legislation would  have to be reviewed                                                                    
     and changed.  We knew  that because,  while HB  290 was                                                                    
     the best  we could  do at the  time, ultimately  it did                                                                    
     not meet  our constitutional  obligation. That  time is                                                                    
     now. The first  set of solutions will  require that the                                                                    
     law be  changed to provide a  more probable opportunity                                                                    
     for community access and competitive access for would-                                                                     
     be gas  explorers and producers.  A second  solution is                                                                    
     public  ownership   of  a   North  Slope   natural  gas                                                                    
     transportation   system.   The  Alaska   gasline   Port                                                                    
     Authority,  a municipal  entity created  in 2000  by an                                                                    
     overwhelming majority of voters  and the Alaska Natural                                                                    
     Gas Development  Authority, a  state entity  created by                                                                    
     initiative  in  2002,  and approved  by  a  significant                                                                    
     majority  of voters,  are  both  committed to  ensuring                                                                    
     access to  any would-be producer and  also committed to                                                                    
     providing access  to supply for all  Alaskan consumers;                                                                    
     be they utilities, industrial or other user groups.                                                                        
                                                                                                                                
     Ready  markets  exist  for  Alaskan  natural  gas.  The                                                                    
     supply/demand dynamic  is such that the  economics of a                                                                    
     project are predictable and positive.  Supply at a fair                                                                    
     value must be  made available to the  project that most                                                                    
     benefits Alaska  and Alaskans. It is  the Legislature's                                                                    
     constitutional responsibility to  ensure that supply at                                                                    
     fair value  be made available. That  responsibility and                                                                    
     subsequent  action  may from  time  to  time require  a                                                                    
     reasonable  legal   and  commercial   confrontation  or                                                                    
     negotiation  between  the  Legislature  and  the  major                                                                    
     leaseholders  of  Alaska's  North  Slope  natural  gas:                                                                    
     British   Petroleum,  Exxon   and  Conoco-Phillips.   A                                                                    
     negotiation  or confrontation  of  this nature  between                                                                    
     the  state  as  the   owner  and  the  leaseholders  is                                                                    
     necessary and  healthy. After all,  much can  be gained                                                                    
     or    lost   on    both   sides.    The   Legislature's                                                                    
     responsibility is to fairly gain  a maximum benefit for                                                                    
     the people of Alaska.                                                                                                      
                                                                                                                                
     N. Jim Whitaker, Mayor                                                                                                     
                                                                                                                                
MR.  LARRY  PERSILY,  Special   Assistant  to  the  Commissioner,                                                               
Department of Revenue  (DOR), said he wasn't at  the meeting when                                                               
he got volunteered  for this subject. His comments  are not meant                                                               
to depress anyone or contradict earlier comments.                                                                               
                                                                                                                                
     All  things  being  equal,  collecting  state  revenues                                                                    
     sooner  is better  than getting  them later.  You never                                                                    
     know what  the future will  bring and, if you  need the                                                                    
     cash, you might  say that a royalty or a  tax dollar in                                                                    
     hand is worth more than  two in the ground - especially                                                                    
     for  a  state  that  is so  dependent  on  each  year's                                                                    
     revenues to pay its bills.                                                                                                 
                                                                                                                                
     But, on the other hand -  the one without the dollar in                                                                    
     its grip - Alaska needs  the gasline money even more so                                                                    
     in  the future,  if  declining oil  and gas  production                                                                    
     continues  to cut  into our  state revenues.  A steady,                                                                    
     even longer-term,  stream of  cash to the  treasury may                                                                    
     be better  than producing more  gas in the  early years                                                                    
     and then less gas later on.                                                                                                
                                                                                                                                
     Just as the Alaska  Oil and Gas Conservation Commission                                                                    
     (AOGCC)  is   charged  with  managing   reservoirs  for                                                                    
     optimal,  long-term   production,  shouldn't   we  also                                                                    
     consider the  optimal term for maintaining  the gasline                                                                    
     revenue stream? That's something  to consider, since at                                                                    
     this  time  no  one  really   knows  how  much  gas  is                                                                    
     economically  recoverable  or  if  and  when  companies                                                                    
     would  be  willing to  invest  in  new exploration  and                                                                    
     production to prove  up those reserves and  put them in                                                                    
     the line.                                                                                                                  
                                                                                                                                
     The  proposal on  most  tables is  for  a gasline  that                                                                    
     would move  4.5 BCF  per day.  With the  current proven                                                                    
     reserves from  Prudhoe Bay  and Point  Thompson, that's                                                                    
     about 34 TCF.  A full 4.5 BCF a day  line would run out                                                                    
     of gas  in 21 years.  The truth  is it wouldn't  run at                                                                    
                                                           st                                                                   
     full speed and then  hit empty one day late in  the 21                                                                     
     year. The  decline would start soon  after the half-way                                                                    
     point after  which the decreased  flow would  be steep.                                                                    
     The  major North  Slope producers  testified this  past                                                                    
     legislative  session  that the  gas  flow  from 34  TCF                                                                    
     would  start to  decline after  about 12  to 14  years,                                                                    
     leaving plenty  of available capacity for  new supplies                                                                    
     to move down the pipe.                                                                                                     
                                                                                                                                
     Looking  at  projections  at   Prudhoe  Bay  and  Point                                                                    
     Thompson, a 4.5  BCF project would be down to  4 BCF by                                                                    
     year 15,  dropping quickly  to under 3  BCF by  year 18                                                                    
     without new discoveries to feed the line.                                                                                  
                                                                                                                                
     And, yes,  there are some additional  known reserves on                                                                    
     the North  Slope, but not  nearly enough to keep  a 4.5                                                                    
     BCF  line full  for 30  years  or more,  which is  what                                                                    
     we've  already  gotten  out  of  the  trans-Alaska  oil                                                                    
     pipeline.                                                                                                                  
                                                                                                                                
     It would  take closer to 60  TCF of reserves to  keep a                                                                    
     4.5 BCF  gas pipeline  full for  30 years,  after which                                                                    
     the  flow  would  turn  sharply  lower.  Consider  that                                                                    
     explorers  would need  to find  and  develop those  new                                                                    
     fields  just to  keep the  line full,  much less  worry                                                                    
     about expansion.                                                                                                           
                                                                                                                                
     Notwithstanding  all  the  estimates of  how  much  gas                                                                    
     might be out  there, 30 additional TCF is a  lot of gas                                                                    
     to find. By  comparison, that is more  than three times                                                                    
     as much  gas as  has been  discovered in  the Mackenzie                                                                    
     Delta.  At $4  an MCF,  that is  $120 billion  worth of                                                                    
     gas.                                                                                                                       
                                                                                                                                
     Assuming explorers find  that 30 TCF of gas  or more on                                                                    
     the  North Slope  and in  the Foothills,  does it  make                                                                    
     sense to expand the line to  move that gas to market as                                                                    
     soon as  the engineers and  welders can do the  work to                                                                    
     boost  the pipe's  capacity? Or  is it  better to  pace                                                                    
     ourselves  for   the  long  term,  thinking   of  those                                                                    
     additional  reserves to  extend  the life  of the  line                                                                    
     rather  than expand  its  short-term  flow? Should  the                                                                    
     market decide if and when more gas is needed?                                                                              
                                                                                                                                
     We should keep  our eyes on what's  important, which is                                                                    
     getting the gasline built sooner  rather than later and                                                                    
     do whatever we can to ensure  that the gas flows for as                                                                    
     many years as possible.  That seems more important than                                                                    
     deliberating expansion requirements  now, especially if                                                                    
     it affects the commerciality of the line.                                                                                  
                                                                                                                                
     It is  natural to assume  that as  soon as the  line is                                                                    
     built, there will be an  incentive to explore. No doubt                                                                    
     explorers will find more gas  on the Slope. The state's                                                                    
     interest  is to  encourage exploration  to always  keep                                                                    
     that line  as full  as possible. More  gas in  the line                                                                    
     means lower  tariffs, which means more  royalty and tax                                                                    
     revenue to the  state from a higher  wellhead value and                                                                    
     more  years of  tax  and royalty  checks. However,  too                                                                    
     much   expansion  early   on   could   lead  to   lower                                                                    
     utilization  of  the  line  later  on,  meaning  higher                                                                    
     tariffs and less  revenue to the state  in those years.                                                                    
     The pipe should be  sized for the long-term efficiency,                                                                    
     not short-term gains.                                                                                                      
                                                                                                                                
     It also  is natural  to assume that  some of  the major                                                                    
     North Slope  producers might  be motivated  to explore,                                                                    
     just as independents  will want to find  gas once there                                                                    
     is a line  to carry it to market.  Therefore, the state                                                                    
     should be  very careful  about creating  any mechanisms                                                                    
     to  direct  expansion  capacity to  any  parties  in  a                                                                    
     discriminating fashion  - while  being just  as careful                                                                    
     to  ensure that  the independents  are treated  fairly,                                                                    
     with  full and  realistic opportunities  to access  the                                                                    
     line.                                                                                                                      
                                                                                                                                
     But, in impersonal  dollars and cents, as  far as state                                                                    
     revenue is  concerned, a dollar  from a  major producer                                                                    
     is as good as one  from a smaller independent player as                                                                    
     long as the majors remember where we are.                                                                                  
                                                                                                                                
     Having said that, I want  to stress that competition at                                                                    
     lease  sales  is  good  for the  state  and,  for  that                                                                    
     reason, the  state should take all  reasonable steps to                                                                    
     encourage and promote independents  on the North Slope.                                                                    
     It's  clear   that  the   independents  will   play  an                                                                    
     increasingly  larger role  in the  state's oil  and gas                                                                    
     industry and  without access  to move  their production                                                                    
     to  market  they and  the  state  would lose.  That  is                                                                    
     unacceptable.                                                                                                              
                                                                                                                                
     But getting back to the  issue of gasline expansion, we                                                                    
     believe  companies' willingness  to commit  exploration                                                                    
     and production  dollars and the market's  need for more                                                                    
     gas  should control  expansion of  the  line. Let's  be                                                                    
     careful not  to let any dreams  of expansion jeopardize                                                                    
     what we really want, which is the gasline.                                                                                 
                                                                                                                                
     The  line's  tariff  structure could  also  affect  the                                                                    
     timing of any expansion.  By adopting different methods                                                                    
     for  calculating the  tariff, the  recovery of  capital                                                                    
     costs over  time, gasline charges can  be decreasing or                                                                    
     levelized.   Each   has    its   own   advantages   and                                                                    
     disadvantage  for   different  players   and  different                                                                    
     times. There  are good reasons  for each and  the state                                                                    
     needs  to think  carefully  about the  options and  the                                                                    
     effect.                                                                                                                    
                                                                                                                                
     Through a  decreasing tariff, where it  starts high and                                                                    
     decreases each year as  depreciation reduces the line's                                                                    
     cost  basis,  the  project's equity  investors  recover                                                                    
     their  money   sooner  and,  over  time,   the  tariffs                                                                    
     decrease as there is less  cost recovery built into the                                                                    
     transportation  charge. Lower  tariffs could  encourage                                                                    
     independent exploration,  but not until those  years of                                                                    
     the higher  initial tariff have  passed. Also,  under a                                                                    
     decreasing  tariff  the state's  take  is  less in  the                                                                    
     early  years   because  of  the  higher   tariff  as  a                                                                    
     deduction  against  royalties   and  production  taxes.                                                                    
     That's  a trade-off  for the  lower  tariff and  higher                                                                    
     state revenues in later years.                                                                                             
                                                                                                                                
     A declining  tariff also lowers the  owners' production                                                                    
     tax  bills  early-on  assuming the  producers  are  the                                                                    
     owners, which back-end loads the  fiscal system, a goal                                                                    
     of  the Stranded  Gas Development  Act. Because  of the                                                                    
     time-value of  money, this could help  the economics of                                                                    
     building the  project. The owners would  pay less taxes                                                                    
     early on, because of the  higher tariffs, but would pay                                                                    
     heavier taxes as  the tariff drops in  the later years.                                                                    
     So,  you could  say  a decreasing  tariff with  heavier                                                                    
     upfront  depreciation might  be  good  for a  producer-                                                                    
     owned line and could be  good for new producers if they                                                                    
     come on line in the  project's later years, but bad for                                                                    
     those independents  if they want access  in the earlier                                                                    
     years.                                                                                                                     
                                                                                                                                
     If  a  third  party  owns the  pipeline,  a  decreasing                                                                    
     tariff would  put a burden  on the majors as  the early                                                                    
     gas pays higher  tariffs to pay off  the pipeline. This                                                                    
     could hurt their economics.                                                                                                
                                                                                                                                
     A levelized tariff, which is  the other option, spreads                                                                    
     out  the burden  of paying  off the  pipeline equitably                                                                    
     over time among all  parties. Regardless of the project                                                                    
     owners'  tax depreciation  schedule, the  cost recovery                                                                    
     is levelized for  the life of the  project, meaning the                                                                    
     tariff is the same in year  1 as in year 20. This would                                                                    
     eliminate  any  burden  on early  producers  to  pay  a                                                                    
     higher tariff, but also would  mean the later producers                                                                    
     would not  see any tariff  benefit from a  more heavily                                                                    
     depreciated line.                                                                                                          
                                                                                                                                
     Independent producers  that come  on board at  any time                                                                    
     in a  levelized tariff  project would  pay the  same as                                                                    
     the  majors. This  would be  better  than a  decreasing                                                                    
     tariff for independents that feed  gas into the line in                                                                    
     the earlier years of the project.                                                                                          
                                                                                                                                
     And, as you  heard at last months'  hearing, there also                                                                    
     is the  issue of  rolled-in or incremental  tariffs for                                                                    
     any  expansion capacity.  What's important  to remember                                                                    
     is that  the entire  issue of  tariff structure  may be                                                                    
     subject   to   negotiations   under  a   Stranded   Gas                                                                    
     Development Act contract where  the state can negotiate                                                                    
     fair access  for all parties  and help ensure  that the                                                                    
     line stays full for a long time.                                                                                           
                                                                                                                                
SENATOR BUNDE asked if he recommended one of the three options                                                                  
he just presented on tariffs.                                                                                                   
                                                                                                                                
MR. PERSILY said he was sure tariffs were being discussed in                                                                    
Stranded Gas Act negotiations and he had only been on the job                                                                   
for  five weeks  and didn't  want to  pronounce what  the state's                                                               
recommendation is.                                                                                                              
                                                                                                                                
CO-CHAIR  OGAN said  one of  his  concerns about  revenue is  the                                                               
effect of  the draw down  on gas  on oil revenues.  Currently the                                                               
AOGCC  can  regulate  the  waste of  hydrocarbons,  but  not  the                                                               
economic waste  of drawing down  a large  amount of gas  in units                                                               
that would affect oil production and, ultimately, revenues.                                                                     
                                                                                                                                
MR. PERSILY said he knows that the AOGCC is looking at that.                                                                    
                                                                                                                                
CO-CHAIR OGAN  noted that there  were no more questions  and that                                                               
the  next  subject for  discussion  was  access to  capacity  for                                                               
Alaskan  utilities by  Anthony Izzo,  Enstar Natural  Gas Company                                                               
saying  that it  is the  sole gas  distributor to  Anchorage, the                                                               
Mat-Su Valley  and Kenai  Peninsula. He  said there  is a  lot of                                                               
discussion in  his area  about whether  there will  be a  spur to                                                               
service the Valley.                                                                                                             
                                                                                                                                
MR. ANTHONY IZZO, President, Enstar  Natural Gas Company, said it                                                               
has  been serving  its Alaskan  customers for  over 40  years. He                                                               
accompanies  his comments  with a  slide presentation.  The first                                                               
slide showed  a fuel cost  comparison. Gas was the  cheapest. The                                                               
second slide  showed Enstar's pipeline infrastructure;  the third                                                               
slide showed  a graph of  the Cook Inlet  gas supply from  1958 -                                                               
2002 and projects  out to 2022, when it  drops off significantly.                                                               
A fourth  slide showed a  graph of  consumer's use of  Cook Inlet                                                               
gas.                                                                                                                            
                                                                                                                                
MR.  IZZO explained  that Enstar's  supply strategy,  as it  sees                                                               
production dropping off  at the end of the decade,  has been two-                                                               
fold.                                                                                                                           
                                                                                                                                
     We need  to contract for additional  supply. The reason                                                                    
     it's significant  is that we've  moved clearly  from an                                                                    
     excess  supply  market.  Back  decades  ago  -  in  our                                                                    
     business we call  it overhang - there was a  lot of gas                                                                    
     available  and the  demand was  much lower  and so  the                                                                    
     contracts at  the time were all  indexed against prices                                                                    
     of  oil. It  made  sense  if oil  prices  were up,  the                                                                    
     economy was doing well, your  natural gas bill went up.                                                                    
     If oil  prices were  down, the  economy was  down, your                                                                    
     natural gas  prices for home  heating and  business use                                                                    
     were  down.  We  were  not able  to  secure  additional                                                                    
     supply using that  model - going back just  a couple of                                                                    
     years ago. So,  what we clearly identified  is the fact                                                                    
     that we've gone  from an excess supply to  a supply and                                                                    
     demand market.                                                                                                             
                                                                                                                                
     The  second  strategy  was  to  clearly  identify  what                                                                    
     really is left  in the Cook Inlet -  is there potential                                                                    
     for additional discovery and  can the existing reserves                                                                    
     be  expanded?  What  is the  real  situation  from  our                                                                    
     perspective in terms of North Slope gas?                                                                                   
                                                                                                                                
MR. IZZO presented more slides that graphed Enstar's gas supply                                                                 
from different fields and explained:                                                                                            
                                                                                                                                
     With  the new  strategy,  understanding  that this  was                                                                    
     going to be a supply and  demand market, we had to look                                                                    
     at how  we contracted for supply  very differently. The                                                                    
     good news  you'll see on  the chart here is  that we're                                                                    
     now filled  up to  2007 and  what you  see in  green is                                                                    
     what  we refer  to  as the  Unocal  contract. It's  not                                                                    
     indexed  against  the price  of  oil;  we couldn't  get                                                                    
     anybody to go  and look for that.  It's indexed against                                                                    
     a trailing  average of  the Henry  Hub. I  guess simply                                                                    
     put, it  is indexed  on Lower 48  prices. What  we were                                                                    
     able to do was to use a trailing 36-month average.                                                                         
                                                                                                                                
     We did  not want  to subject  Alaskans to  the volatile                                                                    
     price swings in the Lower  48. There have been times in                                                                    
     California where  natural gas  prices would be  $20 and                                                                    
     then it's $6 and then it's  $10. We didn't want that to                                                                    
     happen because  on a monthly or  quarterly basis, bills                                                                    
     would be changing; you couldn't  plan or budget. It was                                                                    
     just  not  something  we   found  acceptable.  So,  the                                                                    
     average allows us to, once  a year, make the adjustment                                                                    
     to  the Regulatory  Commission of  Alaska  and then  it                                                                    
     gets  passed right  through. The  consumer pays  for it                                                                    
     and  it  gets passed  through  Enstar  directly to  the                                                                    
     producer.                                                                                                                  
                                                                                                                                
     So, the  good news  is that  we've got  some investment                                                                    
     going;  we've spurred  some  exploration.  That gas  in                                                                    
     green right now  costs $4.39. Our weighted  cost to the                                                                    
     consumer is $3.11  and in the Lower  48, they're paying                                                                    
     about $6. So, we're less,  but prices will increase. As                                                                    
     the  Unocal  gas   makes  up  more  and   more  of  our                                                                    
     portfolio...we move away from  most of the supply being                                                                    
     indexed against  oil prices, which  are up by  the way,                                                                    
     which means that gas prices  will go up next year. But,                                                                    
     we will  be more  and more connected  to that  Lower 48                                                                    
     pricing mechanism. Unocal has  spent about $110 million                                                                    
     in  looking for  new  supply and  there  has been  some                                                                    
     success we're very pleased about.                                                                                          
                                                                                                                                
     Step number two  is to determine what is  really in the                                                                    
     Inlet  and what  are  the options...to  serve half  the                                                                    
     state's  population in  this region.  The final  report                                                                    
     was released  July 6; this  was done by  the Department                                                                    
     of Energy  as a  result of  a federal  appropriation to                                                                    
     the DOE's  Arctic Energy Office  in Fairbanks.  A local                                                                    
     firm  in Anchorage  actually did  the work,  brought in                                                                    
     outside expertise when needed,  and worked with all the                                                                    
     various utilities and producers.                                                                                           
                                                                                                                                
     There  are three  observations...in the  report that  I                                                                    
     think are  relevant. One is potential  reserves growth,                                                                    
     two is  new exploration and  what is the  potential and                                                                    
     three, North Slope gas to Cook Inlet.                                                                                      
                                                                                                                                
MR. IZZO explained some of the  graphs that showed the gas supply                                                               
line  dipping below  the  demand for  power  generation and  home                                                               
heating in 2012. His real concern  is, looking at fields that are                                                               
dedicated for just  power generation and home  heating, that line                                                               
intersects in 2009.                                                                                                             
                                                                                                                                
     In terms of  reserves growth now, DOE looked  at it and                                                                    
     said  well,  we  have  these existing  fields  in  Cook                                                                    
     Inlet.  What's  the  potential  if  those  were  to  be                                                                    
     expanded - if modern technology  was used and you enter                                                                    
     those  fields? So,  this  is  highly speculative.  They                                                                    
     just  used models  from other  fields around  the world                                                                    
     that were just  as mature.... You might be  able to get                                                                    
     another 1.5  TCF out of  there. Applying some  of their                                                                    
     information,  they came  up with  a cost  of about  $.5                                                                    
     billion...to expand those reserves....                                                                                     
                                                                                                                                
     What  that   would  look  like   is  a   slightly  more                                                                    
     optimistic  slide on  the next  page. If  1.5 TCF  were                                                                    
     found  in those  fields at  $500 million,  we could  be                                                                    
     looking at  a line  that doesn't  dip down  below until                                                                    
     the end  of the next  decade. And  so, it's not  a sure                                                                    
     thing  by  any  means  and there's  no  guarantee  that                                                                    
     trying to increase those  reserves will actually result                                                                    
     in this, but  a best case scenario is  for $.5 billion,                                                                    
     that it might  buy us some time to get  us through most                                                                    
     of the next decade.                                                                                                        
                                                                                                                                
     In  terms  of new  exploration,  they  found some  good                                                                    
     news. I thought it was some  good and some not so good.                                                                    
     They  believe   that  based  on  the   profile  of  the                                                                    
     endowment in  the Cook Inlet, the  Department of Energy                                                                    
     thinks that  there could be  13 - 17 TCF  additional in                                                                    
     the Inlet and that's great.  The concern I have is that                                                                    
     once they put  some analysis to the cost  and we looked                                                                    
     at the protected  lands, we looked at  the cost onshore                                                                    
     versus offshore, they  found that if you  could find 50                                                                    
     percent of that potential  gas - again, you're throwing                                                                    
     the dice,  in my view.... if  you found half of  it and                                                                    
     if it were on land,  then the investment required there                                                                    
     would  be   $5  billion  to  $6   billion.  That  would                                                                    
     certainly buy us  a decade or two. The  concern I have,                                                                    
     again,  is  the  economics....  It  would  have  to  be                                                                    
     competitive and be passed through to the consumer.                                                                         
                                                                                                                                
     Now, out  of my  own business  interests, what  are the                                                                    
     alternatives?  The alternatives,  if  it isn't  natural                                                                    
     gas,  there's  fuel  oil,  there's  propane,  there  is                                                                    
     electric, but  you're talking  about three,  four, five                                                                    
     and six  times as much.  You're talking about  half the                                                                    
     state's  population in  terms of  the economic  impact.                                                                    
     That does  not include what  it would cost  to convert,                                                                    
     what  it  would  cost  to  put  in  tanks,  to  convert                                                                    
     furnaces, etc.                                                                                                             
                                                                                                                                
     The  last  observation  I'll share  with  you  from  my                                                                    
     perspective was  the North  Slope pipeline  ideally did                                                                    
     have the  potential to moderate prices  in Southcentral                                                                    
     Alaska. One thing  that Enstar knows and  that I'm here                                                                    
     to  share  with  you  is   that  prices  are  going  to                                                                    
     increase. That's a conclusion. I  know they will go up,                                                                    
     because I couldn't  get anybody to go and  look for gas                                                                    
     unless it was  economic to go and look for  it. So, the                                                                    
     traditional model of all this  extra gas and we'll sell                                                                    
     it  to you  at a  stranded gas  prices. It  just didn't                                                                    
     work any  more. So, they'll  go and look, but  we could                                                                    
     end up by  the end of the decade paying  more than they                                                                    
     do in  the Lower 48.  It still  might be less  than the                                                                    
     next alternative, but it's not a good situation.                                                                           
                                                                                                                                
     I was  very encouraged that  the DOE found that  a spur                                                                    
     could provide a $1 per  MCF advantage over the Lower 48                                                                    
     pricing  and  that that  could  result  in some  energy                                                                    
     intensive  industry and  some economic  development....                                                                    
     What  we're showing  here is  that gas  from the  Slope                                                                    
     down into the  Lower 48, if it cost $2.58  - $3.00 MCF,                                                                    
     that using  the various models, conservatively  the DOE                                                                    
     believed that  it could be,  in comparison,  $1.50. So,                                                                    
     we  could  enjoy $1  MCF  reduction  or a  lower  price                                                                    
     compared to  the Lower  48, which  could mean  with our                                                                    
     deep  water access  and logistical  advantages here  in                                                                    
     Alaska, that we could  have an economic advantage. It's                                                                    
     not a  choice of  paying whatever  the tariff  might be                                                                    
     from the Slope  to Anchorage versus paying  the $2 that                                                                    
     we've been paying  for years for gas  over the decades,                                                                    
     because those days  are gone. It's going to  be at some                                                                    
     point in the  next few years, we're going  to be paying                                                                    
     more than  the Lower 48, because  we're technically not                                                                    
     connected to  them. But, for producers  to economically                                                                    
     go  after the  additional  supply,  it's the  over-ripe                                                                    
     fruit story. The low ripe stuff has been picked....                                                                        
                                                                                                                                
     The  conclusions  are  that  I  believe  from  Enstar's                                                                    
     perspective  that access  to  Slope  gas is  absolutely                                                                    
     critical.  As  I stated,  I  believe  that prices  will                                                                    
     continue  to  rise because  we're  in  this supply  and                                                                    
     demand market.  That has clearly  shifted in  my world.                                                                    
     We could enjoy  a 20 - 25 percent  price advantage over                                                                    
     the  Lower  48,  which,  I   think,  instead  of  being                                                                    
     concerned  about an  economic  decline associated  with                                                                    
     declining  reserves,  we  could   be  looking  at  some                                                                    
     potential economic  boom in  terms of  energy intensive                                                                    
     industry. To determine what that  is, we have requested                                                                    
     a  phase-two appropriation  to  study energy  intensive                                                                    
     industry, what that  might be and to also  look at some                                                                    
     conceptual engineering for  a connection from Anchorage                                                                    
     up  to  Fairbanks  or  Delta   Junction.  I've  got  my                                                                    
     commercial blurb at the end  and now it's time to focus                                                                    
     and  I'm  preaching to  the  choir.  That concludes  my                                                                    
     presentation.                                                                                                              
                                                                                                                                
SENATOR WAGONER asked if Enstar is still considering a spur                                                                     
line.                                                                                                                           
                                                                                                                                
MR. IZZO replied that it is.                                                                                                    
                                                                                                                                
     That is very real and is  in the forefront of our radar                                                                    
     screen in the  future. We believe that  we have obvious                                                                    
     interest in wanting to stay  in business and wanting to                                                                    
     be  profitable,  wanting to  earn  our  rate of  return                                                                    
     that's  allowed,  but  we  have  found  that  with  the                                                                    
     declining  reserves in  Cook Inlet  that our  interests                                                                    
     are similar  and parallel  with the  economic interests                                                                    
     of  this  region.  So,  I  would  use  the  example  of                                                                    
     building a house.  I don't think any of us,  if we were                                                                    
     building a  home, would wait  until the framing  was up                                                                    
     to pull  out the yellow  pages and find  an electrician                                                                    
     or a  plumber. We'd have  the estimates; we  would know                                                                    
     what  it would  cost.  We'd  have it  ready  to go  and                                                                    
     that's how we  view the spur line - is  that we need to                                                                    
     know what  that is  and we  are currently  working such                                                                    
     that we can do the responsible thing and be prepared.                                                                      
                                                                                                                                
REPRESENTATIVE GARA  asked of the gas  pipeline owner's incentive                                                               
not to allow a spur to Cook Inlet:                                                                                              
                                                                                                                                
     If they fill up the  pipeline from the North Slope down                                                                    
     to Tok,  and then dump off  a certain amount of  gas in                                                                    
     Tok,  then  that  they're carrying  a  less  than  full                                                                    
     pipeline  from Tok  all  the way  down  to Chicago  and                                                                    
     therefore it makes the  transportation in the remainder                                                                    
     of   the  line   less   efficient?  Do   they  have   a                                                                    
     disincentive  to allow  the spur  because  of that  and                                                                    
     also because  it eats into  the amount of gas  they get                                                                    
     to charge  to pipe  from Tok down  to Chicago?  Is that                                                                    
     the  disincentive or  does the  pipeline not  work that                                                                    
     way? Two, do you agree  with Attorney General Cole that                                                                    
     we have  to take another look  at the law to  make sure                                                                    
     that we  guarantee our ability  to have the  spur lines                                                                    
     in the state?                                                                                                              
                                                                                                                                
MR. IZZO  agreed on his  first point. Various  interested parties                                                               
have  expressed  concern  to him  directly  that  constructing  a                                                               
pipeline  with  X  capacity  and then  finding  themselves  in  a                                                               
situation where  only 75 percent  or so  of that capacity  can be                                                               
met from Tok or Delta Junction  on south. My response to that has                                                               
been more around  what the needs of this community  are as I know                                                               
them.                                                                                                                           
                                                                                                                              
TAPE 04-15, SIDE A                                                                                                            
                                                                                                                                
MR. IZZO explained  that when the interested parties  hear of the                                                               
need for  power generation and, potentially,  some industrial use                                                               
and home  heating, which  is much  less than 1  BCF per  day, the                                                               
reaction has  been one of  reassurance. To  Representative Gara's                                                               
second point,  he said he  did not hear Mr.  Cole's presentation,                                                               
but, "The  legal nature and  critical need of  a spur line  in my                                                               
view is  something that we should  do every bit of  due diligence                                                               
possible. So,  if there's any  doubt that  we may have  access, I                                                               
would encourage the legislature or  any responsible party to look                                                               
at that."                                                                                                                       
                                                                                                                                
CO-CHAIR  OGAN   suggested  that  Mr.  Izzo   review  Mr.  Cole's                                                               
presentation, which  has some very  good points  about Fairbanks'                                                               
                                                                st                                                              
concerns with  the take  and pay  concept in  HB 290  of the  21                                                                
Legislature.                                                                                                                    
                                                                                                                                
REPRESENTATIVE CHENAULT said  Mr. Izzo talked about  the price of                                                               
new gas from  Unocal being $4.39, which is based  on some sort of                                                               
sliding scale  at the Henry Hub,  and he projects the  price will                                                               
go up because of  the price of oil. He asked him  how he is tying                                                               
the price of oil  back to the price of gas when it  is based on a                                                               
sliding scale at the Henry Hub.                                                                                                 
                                                                                                                                
MR. IZZO  referred to  the slide  of the gas  supply in  2003 and                                                               
said  he refers  to those  contracts as  legacy contracts.  Those                                                               
have been indexed, for some time  now, on the price of West Texas                                                               
sweet crude  between May  1 and  June every  year. Based  on that                                                               
index,  prices will  change in  the following  calendar year.  He                                                               
continued:                                                                                                                      
                                                                                                                                
     So as  we've moved into where  we are here in  2004, 24                                                                    
     percent  of  my supply  is  with  the Unocal  contract.                                                                    
     That's indexed  against the  trailing average  of Henry                                                                    
     Hub. The  remainder is  still indexed  on the  price of                                                                    
     oil  so  what's  happening  currently  is  within  this                                                                    
     transitionary period, is  the price of oil  is up. That                                                                    
     is putting upward pressure on  rates. As the prices are                                                                    
     sustained at high  levels in the Lower  48, that drives                                                                    
     that average up over the 36 month trailing period....                                                                      
                                                                                                                                
CO-CHAIR OGAN responded:                                                                                                        
                                                                                                                                
     Once we indexed  to the Henry Hub,  the consumer prices                                                                    
     went up quite a bit based  on that - is what's going to                                                                    
     have to  happen to have  people looking for  gas, which                                                                    
     we do have finally for  the first time ever. People are                                                                    
     leasing for  the sole  purposes of  looking for  gas in                                                                    
     Cook Inlet  and that  was just something  that happened                                                                    
     with oil before that.                                                                                                      
                                                                                                                                
REPRESENTATIVE  HARRY CRAWFORD  said  that he  and Senator  Bunde                                                               
attended  a  NCSL conference  and  heard  a presentation  by  the                                                               
producers, during which they talked  about the energy supplies in                                                               
the country  over the next  25 years.  They said they  don't even                                                               
book the  North Slope gas  supplies in because they  expect those                                                               
supplies to be  stranded for another 25 years. He  asked Mr. Izzo                                                               
what will happen  to Enstar if that gas supply  does not come off                                                               
of the North Slope.                                                                                                             
                                                                                                                                
MR.  IZZO  said Enstar  has  been  undergoing a  very  aggressive                                                               
program.  It has  and  continues  to meet  with  producers on  an                                                               
ongoing  basis. Enstar  believes it  is responsible  to determine                                                               
what it  will take to spur  exploration. It would continue  as it                                                               
has and, although there is  a certain amount of uncertainty about                                                               
the future  compared to 20  years ago. He  then said he  does not                                                               
subscribe  to the  25-year  theory. He  believes  that with  free                                                               
market  forces,  this  is  something  that  can  happen.  He  has                                                               
discussed  that question  with his  peers throughout  the country                                                               
and has  asked, at Western  Energy Institute Board  meetings, how                                                               
many of  them would  have a  difficult time  getting a  long term                                                               
supply approved at $4 or  $4.50 by their commissions and everyone                                                               
had jumped up.  He said he sees the need  for some reassurance of                                                               
supply and, to  some degree, it is a national  security issue. He                                                               
said  because of  the volatility  his  cohorts are  experiencing,                                                               
they would embrace  the ability to reserve capacity.  He said the                                                               
true test would be the number that  would line up if there was an                                                               
open season.                                                                                                                    
                                                                                                                                
MR. IZZO said this has been  discussed for almost 35 years and he                                                               
is  asked what  is different  now.  As he  looks at  half of  the                                                               
state's  population that  could see  declining reserves,  he sees                                                               
how that  is directly associated  with Alaska's economy  and yet,                                                               
Alaska  is the  richest resource  state in  the Union.  He thinks                                                               
with  the confluence  of those  factors and  free market  forces,                                                               
this is a very viable project.                                                                                                  
                                                                                                                                
CO-CHAIR  OGAN  noted that  every  expert  on energy  supply  and                                                               
demand trends  who spoke to the  Energy Council in the  last year                                                               
and a  half factored in the  availability of Alaska gas  and that                                                               
beyond the  year 2020, the United  States will have to  import 20                                                               
percent of  its gas from  foreign LNG  sources even with  4.5 BCF                                                               
from Alaska.   He asked Mr. Izzo to visit  the Mat-Su Borough and                                                               
relay his views on the gas supply.                                                                                              
                                                                                                                                
Co-CHAIR OGAN  announced an at-ease  from 2:30 p.m. to  2:45 p.m.                                                               
Upon reconvening, he  asked Mr. Loeffler to  testify. He informed                                                               
members  Mr.  Loeffler  is  a  senior  partner  of  Morrison  and                                                               
Foerster LLP  specializing in energy matters  and has represented                                                               
clients before FERC for more than  30 years. He has been advising                                                               
the State of Alaska on oil  and gas pipeline issues since the mid                                                               
1970s.                                                                                                                          
                                                                                                                                
MR. ROBERT H. LOEFFLER, Morrison and Foerster LLP, gave the                                                                     
following testimony.                                                                                                            
                                                                                                                                
     In  my   June  2004  testimony  to   the  committee,  I                                                                    
     discussed  the general  methodology and  standards that                                                                    
     the FERC utilizes  to set gas pipeline  rates. Mr. Ives                                                                    
     of the Lukens Group  discussed access issues associated                                                                    
     with  initial pipeline  capacity, in  particular FERC's                                                                    
     open season  process. Today I  want to  address another                                                                    
     pipeline  issue   that  looms  potentially   large  and                                                                    
     important, namely,  the law that governs  expansions of                                                                    
     an Alaska Gas Pipeline after  it is initially sized and                                                                    
     built. I will first address  the law on expansion as it                                                                    
     stands today  and then  turn to  the provisions  of the                                                                    
     Energy Act  of 2003  that for the  first time  gave the                                                                    
     FERC the power to order expansion.                                                                                         
                                                                                                                                
     Based on  information provided in the  various Stranded                                                                    
     Gas Act applications, the Alaska  Gas Pipeline could be                                                                    
     sized  to carry  anything from  2.6 to  5 BCF  per day,                                                                    
     with expansion capability  designed in of up  to 6 BCF.                                                                    
     Any expansion  would be  accomplished not  by replacing                                                                    
     the  original  pipe  with  larger  diameter  pipe,  but                                                                    
     rather  by  adding  additional compression  -  that  is                                                                    
     additional   compressors   at  existing   stations   or                                                                    
     building  new  compressor  stations -  and/or  looping.                                                                    
     That is  adding smaller  diameter pipe parallel  to the                                                                    
     main  pipe  in  particular  places.   The  question  is                                                                    
     whether the  Alaska Gas Pipeline  owners can  be forced                                                                    
     to  expand  the  pipeline  in the  event  they  do  not                                                                    
     voluntarily  agree to  do so.  Under  current law,  the                                                                    
     short answer is no. Let me explain that.                                                                                   
                                                                                                                                
     We have  to turn to  the Natural  Gas Act [NGA]  and it                                                                    
     does  not   use  the   word  expansions.   Instead,  it                                                                    
     prohibits   enlargements  but   gives   the  FERC   the                                                                    
     authority  to order  extensions.  Simply stated,  while                                                                    
     the  FERC   has  the  power  to   order  extensions  or                                                                    
     improvements,  it  does not  have  the  power to  order                                                                    
     enlargements to pipeline facilities.                                                                                       
                                                                                                                                
     What's the  difference? It turns out  there's no bright                                                                    
     line,  but the  courts  and the  FERC have  interpreted                                                                    
     this  language in  a manner  that treats  expansions as                                                                    
     prohibited enlargements.  It took awhile after  the act                                                                    
     was passed  in 1938 for the  courts to get to  this and                                                                    
     by  1949 the  courts  were saying,  literally, the  act                                                                    
     nowhere defines these terms  and it's somewhat baffling                                                                    
     to  determine  when  and under  what  circumstances  an                                                                    
     extension  or improvement  of facilities  ceases to  be                                                                    
     such and becomes enlargement.                                                                                              
                                                                                                                                
     The  commission could  see that  in court  way back  in                                                                    
     1949  that it  does not  have the  authority to  compel                                                                    
     enlargement  by a  natural gas  company of  a pipeline.                                                                    
     Yet I think  the language of the  court is instructive.                                                                    
     It says in  light of section 7(a), we  are compelled to                                                                    
     conclude  that Congress  meant  to  leave the  question                                                                    
     whether  to employ  additional  capital enlargement  of                                                                    
     its pipeline  facilities to the unfettered  judgment of                                                                    
     the  stockholders and  directors  of  each natural  gas                                                                    
     company  involved.  So,  what you're  dealing  with  is                                                                    
     really the  belief that private  people are  building a                                                                    
     project and  you cannot  force them  to put  more money                                                                    
     into a project  if they don't want to.  And that really                                                                    
     is the standard under existing law.                                                                                        
                                                                                                                                
     Very recently  the commission reaffirmed  this position                                                                    
     and said  it has the  authority to order a  pipeline to                                                                    
     construct  new interconnects  or [indisc.]  connections                                                                    
     are  made,  but it  also  said  that it  cannot  compel                                                                    
     pipelines   to  expand   capacity  on   their  systems.                                                                    
     Interconnects  are  literally the  physical  connection                                                                    
     between two pipelines - if  you wanted a lateral coming                                                                    
     in or  a lateral  going off  - that's  an interconnect.                                                                    
     And even  there where it  does have authority  to order                                                                    
     interconnects, the  commission said in  this particular                                                                    
     case, 'The Commission emphasizes  that this new policy,                                                                    
     which  relates   only  to   the  construction   of  new                                                                    
     interconnections,  does  not   require  a  pipeline  to                                                                    
     expand  its  facilities,  to construct  any  facilities                                                                    
     leading up to an  interconnection, or even to construct                                                                    
     the    interconnection   itself....'    This   modified                                                                    
     interconnection policy  seeks only to ensure  that when                                                                    
     pipelines  respond  to requests  for  interconnections,                                                                    
     they  do   so  in  a   manner  that  causes   no  undue                                                                    
     discrimination and  furthers the  commission's policies                                                                    
     favoring  competition  across   the  national  pipeline                                                                    
     grid.                                                                                                                      
                                                                                                                                
     Well,  in short,  a  state and  any  private party  who                                                                    
     wanted expansion would  be in a tough  position to rely                                                                    
     on  the existing  law  to get  an  Alaska gas  pipeline                                                                    
     expanded by  the FERC.  The good  news is  that Section                                                                    
     375 of  the so-called Alaska Natural  Gas Pipeline Act,                                                                    
     which  is the  subtitle  of the  Energy  Policy Act  of                                                                    
     2003,  would  grant the  FERC  the  authority to  order                                                                    
     expansions  subject  to  certain  conditions.  The  bad                                                                    
     news, of  course, is the legislation  is languishing in                                                                    
     Congress.                                                                                                                  
                                                                                                                                
     Section  375, if  it becomes  law, would  be the  first                                                                    
     time  the  FERC  has  been given  the  power  to  order                                                                    
     expansion  for   any  pipeline.  This   represents  the                                                                    
     recognition by Congress of  the unique circumstances of                                                                    
     an Alaska  gas pipeline, and  namely that it  is likely                                                                    
     to  be  the  only  road   to  market  for  North  Slope                                                                    
     resources.  This  provision  was fashioned  after  much                                                                    
     discussion and  compromise of present and  future North                                                                    
     Slope  producers,  pipeline  owners in  the  Lower  48,                                                                    
     would-be  pipeline owners  of Alaska  and the  State of                                                                    
     Alaska.  Some  urged that  the  FERC  be given  greater                                                                    
     powers  for expansion;  others urged  that there  be no                                                                    
     change  at  all.  As  you   will  see  by  reading  the                                                                    
     language,   FERC's  new   powers  do   not  extend   to                                                                    
     interstate gas  pipelines in  the Lower  48. This  is a                                                                    
     solution for an  Alaska gas pipeline and  only for that                                                                    
     pipeline.                                                                                                                  
                                                                                                                                
     I'm  going to  quickly go  through critical  terms. The                                                                    
     way it works  is that one or more people  would have to                                                                    
     request  the  FERC  to  order   the  expansion  of  the                                                                    
     pipeline.  Before it  could  do so,  it  would have  to                                                                    
     satisfy eight  conditions and they're stated  at page 8                                                                    
     of  my testimony.  The first  condition deals  with the                                                                    
     rates - will they be  rolled in or incrementally priced                                                                    
     for  expansion  -  make  sure   rates  do  not  require                                                                    
     existing shippers to subsidize  expansion - find that a                                                                    
     proposed  shipper  will  comply with  the  tariff  that                                                                    
     exists as of the date of  the expansion - find that the                                                                    
     proposed  facilities  will  not  adversely  affect  the                                                                    
     financial  viability of  the project  -  find that  the                                                                    
     proposed  facilities  will  not  adversely  affect  the                                                                    
     overall operations - find  that the proposed facilities                                                                    
     will  not  diminish  the contract  rights  of  existing                                                                    
     shippers  to previously  subscribed  capacity -  ensure                                                                    
     that  all  necessary  environmental reviews  have  been                                                                    
     completed   -  and   find   that  adequate   downstream                                                                    
     facilities  exist  outside  of Alaska  to  deliver  the                                                                    
     Alaska natural gas.                                                                                                        
                                                                                                                                
     Now I want  to comment on some of the  details of these                                                                    
     provisions that could affect  the issues the committees                                                                    
     are concerned with. The language  of this new provision                                                                    
     does not mandate how expansion  capacity will be priced                                                                    
     by  the FERC.  It gives  the FERC  power to  use either                                                                    
     rolled   in  price   treatment  or   incremental  price                                                                    
     treatment.  This   is  an   issue  of   consequence  to                                                                    
     unaffiliated explorers  because they want to  know what                                                                    
     the  cost of  transportation  on  an expanded  pipeline                                                                    
     would be.                                                                                                                  
                                                                                                                                
     A  parallel  provision  requires  that  the  rates  for                                                                    
     expansion capacity  not require that  existing shippers                                                                    
     subsidize  expansion  shippers.  Of  course,  what's  a                                                                    
     subsidy  rise  in the  eye  of  the beholder?  In  some                                                                    
     circles  what  is called  a  subsidy  is viewed  as  an                                                                    
     entitlement or a natural right by others.                                                                                  
                                                                                                                                
     Today, under existing law, the  FERC has a clear policy                                                                    
     on  how expansion  should be  priced. It's  changed its                                                                    
     policy a  number of times  but its most  current policy                                                                    
     is  that  an expansion  should  be  paid for  by  those                                                                    
     demanding the  expansion unless there is  a system-wide                                                                    
     benefit.  A system-wide  benefit would  mean that  when                                                                    
     the  costs  of  the   expansion  are  rolled  into  the                                                                    
     existing   costs    of   operation,   the    costs   of                                                                    
     transportation for all is  lowered. This is technically                                                                    
     possible   in    some   circumstances    depending   on                                                                    
     engineering  and throughput  matters. If,  however, the                                                                    
     average  transportation  cost   increases  due  to  the                                                                    
     expansion, then  the expansion shippers,  under current                                                                    
     policy, would pay  a different and higher  rate to ship                                                                    
     on expansion space. The rationale,  simply put, is that                                                                    
     those  who  cause  the expansion  should  pay  for  it.                                                                    
     Informed observers have noted that  there is a 'heads I                                                                    
     win,  tails  you  lose'  aspect   to  this  policy.  If                                                                    
     expansion lowers  the cost per unit  for everyone, then                                                                    
     those  causing an  expansion lose  that benefit  to the                                                                    
     system as  a whole.  If, on  the other  hand, expansion                                                                    
     costs are  higher per unit  than they were  before, the                                                                    
     expansion shippers are forced  to bear the higher cost.                                                                    
     Time  will tell  how this  works out  on an  Alaska gas                                                                    
     pipeline and I repeat  that the legislation tosses that                                                                    
     issue  back  to  the  FERC saying  it  can  use  either                                                                    
     incremental or rolled in pricing.                                                                                          
                                                                                                                                
     There are  other limitations in  Section 375  worthy of                                                                    
     mention.  Parties  in   the  legislative  process  were                                                                    
     concerned  that  expansion  not  affect  the  financial                                                                    
     underpinnings  of the  project. Certainly  the language                                                                    
     in    Section    375(b)(4)   would    give    financial                                                                    
     institutions, who  presumably will  loan vast  sums for                                                                    
     this project,  a voice in any  expansion proceedings at                                                                    
     the  FERC.  Similarly, the  rights  of  those who  have                                                                    
     already contracted to  ship on the pipeline  are not to                                                                    
     be  diminished by  any  mandated  expansion. I  suspect                                                                    
     that this  means, at  least, that  there cannot  be any                                                                    
     reduction  in  existing  shippers'  shares  of  initial                                                                    
     capacity.                                                                                                                  
                                                                                                                                
     Two  other  aspects  of  Section   375  are  worthy  of                                                                    
     comment.  First,  the  FERC   is  required  to  examine                                                                    
     whether  there  are   adequate  downstream  facilities,                                                                    
     mainly outside  of Alaska,  for new  gas that  would be                                                                    
     shipped  through the  expanded facilities.  This stands                                                                    
     in  marked  contrast to  the  process  spelled out  for                                                                    
     certificating  the pipeline  in the  first place  under                                                                    
     this new  statute. There Congress directs  the FERC not                                                                    
     to  look   at  whether  adequate   downstream  capacity                                                                    
     exists, but  to presume  it. Second,  subsection 375(c)                                                                    
     requires that  the party who  requests an  expansion at                                                                    
     FERC execute  a firm transportation agreement  within a                                                                    
     time to  be set  by FERC, a  reasonable time,  after an                                                                    
     expansion order  issues or  lose the  expansion rights.                                                                    
     This,  in  plain language,  is  a  put  up or  shut  up                                                                    
     clause.  The expansion  order becomes  void unless  the                                                                    
     parties who  sought the order  sign a  binding contract                                                                    
     to ship on the expanded capacity.                                                                                          
                                                                                                                                
     There   are   other   requirements  in   the   proposed                                                                    
     legislation   concerning    non-adverse   findings   on                                                                    
     financial, economic, and  operational grounds. On their                                                                    
     face,  these  provisions   appear  to  provide  fertile                                                                    
     ground  for an  opponent of  expansion. They  certainly                                                                    
     invite litigation.                                                                                                         
                                                                                                                                
     In the  end, the proposed legislation  allows, but does                                                                    
     not  mandate or  require  FERC to  order an  expansion.                                                                    
     That's a better situation than  the status quo but it's                                                                    
     not perfect. I do not have  to be a prophet to make the                                                                    
     observation that  in granting  expansion rights  to the                                                                    
     FERC for,  and only  for, an  Alaska Gas  Pipeline, the                                                                    
     legislation  would  lay  a careful  path  with  several                                                                    
     potential  hurdles to  clear.  How  high those  hurdles                                                                    
     will be  is left  to the  informed discretion  of FERC.                                                                    
     Based on  everything else connected with  this project,                                                                    
     the  first  time around  and  again  now, I  would  not                                                                    
     expect   the   expansion   proceeding  to   be   short,                                                                    
     uncomplicated, and uncostly.  Nonetheless, the power to                                                                    
     order expansion  would exist for  the first  time. That                                                                    
     alone will influence how  parties approach expansion on                                                                    
     a voluntary  basis because the prospect  of involuntary                                                                    
     expansion lurks in the background.                                                                                         
                                                                                                                                
     I'm going to add a couple  of points that are not in my                                                                    
     prepared testimony that I thought  would be of interest                                                                    
     to the  committee. If you  recall, in June  I commented                                                                    
     on how the legislation would  require the FERC to adopt                                                                    
     quickly to  situations that  would govern  open seasons                                                                    
     on an Alaska Gas  Pipeline. These regulations would not                                                                    
     apply, that  is they would  not apply to  any mandatory                                                                    
     expansion  of  the   pipeline.  For  reference,  that's                                                                    
     Section   373(e)(3).   They   would   apply   only   to                                                                    
     involuntary  expansion of  the pipeline.  The rationale                                                                    
     of  Congress, I  suspect,  is that  an expansion  order                                                                    
     would  be sought  by  a specific  shipper  or group  of                                                                    
     shippers that had been unable  to convince the pipeline                                                                    
     to  expand voluntarily.  In those  circumstances, those                                                                    
     seeking expansion  would have  to convince the  FERC to                                                                    
     order this  one-of-a-kind expansion  and they  would be                                                                    
     responsible  for  signing  binding  contracts  for  the                                                                    
     expanded capacity. Thus this  appears to be a different                                                                    
     kettle of  fish than the normal  allocation of capacity                                                                    
     and open season process. FERC  still might want to hold                                                                    
     some kind of open season  to see if anyone behind those                                                                    
     seeking  expansion also  desire capacity  in the  event                                                                    
     this pipeline  is expanded. But  it's not  required to.                                                                    
     It's   [indisc.]   from    the   normal   open   season                                                                    
     requirements and we  have to wait and see  how the FERC                                                                    
     interprets these provisions.                                                                                               
                                                                                                                                
     Second, the  legislation also addresses access  for in-                                                                    
     state users. In Sections  375(g), Congress requires the                                                                    
     applicant for FERC authorization  under the Natural Gas                                                                    
     Act,  to demonstrate  that the  holder has  conducted a                                                                    
     study  of  Alaska's  in-state needs,  including  tie-in                                                                    
     points  along  the  Alaska natural  gas  transportation                                                                    
     project for in-state access. I  believe the state would                                                                    
     expect the study to cover  access at least two to three                                                                    
     points  along   the  pipeline  route   in  Southcentral                                                                    
     Alaska. Second,  the special  provision in  Section 373                                                                    
     uses language  that addresses  access for  royalty gas.                                                                    
     That provision  requires the FERC, after  a hearing, to                                                                    
     provide reasonable  access to  the State of  Alaska for                                                                    
     shipment of the state's royalty  gas for the purpose of                                                                    
     meeting  local  consumption  needs within  Alaska.  The                                                                    
     language is  specially designed  to ensure  that Alaska                                                                    
     royalty  gas  could be  used  for  in-state needs.  The                                                                    
     absence   of   new   federal   legislation   does   not                                                                    
     necessarily   mean   there   will   be   no   expansion                                                                    
     requirements  for   an  Alaska   gas  pipeline.   As  I                                                                    
     indicated a few moments  ago, the expansion language in                                                                    
     the pending  federal legislation reflected  a consensus                                                                    
     that  was  reached   among  interested  parties.  These                                                                    
     parties  thought they  could  live  with the  expansion                                                                    
     concept in specific conditions  attached there, too. It                                                                    
     would appear there would  be no insurmountable obstacle                                                                    
     to  interested parties  contracting  to  the very  same                                                                    
     terms contained  in the  proposed legislation,  or even                                                                    
     different  ones. It  is  a  fair bet  to  say that  the                                                                    
     existence of  the compromise language,  whether adopted                                                                    
     or  not, will  also provide  a framework  for voluntary                                                                    
     expansion negotiations.                                                                                                    
                                                                                                                                
     The  ongoing Stranded  Gas Development  Act contracting                                                                    
     process could serve as one  vehicle to ink an expansion                                                                    
     agreement. Another  contracting opportunity  will arise                                                                    
     in the negotiations attendant  to the various ownership                                                                    
     agreements. If the  state is not a  pipeline owner, its                                                                    
     interests will probably not  be directly represented in                                                                    
     those ownership negotiations.                                                                                              
                                                                                                                                
     Would FERC honor such contractual  agreements? I see no                                                                    
     reason  why the  FERC  would reject  an agreement  that                                                                    
     required  the owners  to  seek expansion  authorization                                                                    
     from  the FERC  after  negotiations in  the event  that                                                                    
     certain  agreed  upon  conditions  or  events  were  to                                                                    
     occur.  So  long as  FERC  remained  free to  make  its                                                                    
     normal certificate  inquiry about the  public interest,                                                                    
     I think it would  likely applaud rather than disapprove                                                                    
     a voluntarily reached expansion agreement.                                                                                 
                                                                                                                                
     That  concludes  my   presentation.  I  appreciate  the                                                                    
     ability to do  this by teleconference and  I'd be happy                                                                    
     to entertain any questions.                                                                                                
                                                                                                                                
SENATOR  WAGONER asked  if there  is any  chance of  action being                                                               
taken  on  the  Alaska  Gas  Pipeline  Act  before  the  November                                                               
election.                                                                                                                       
                                                                                                                                
MR. LOEFFLER  said there is a  slim chance it will  be brought up                                                               
as a rider or on a special basis, but only a slim chance.                                                                       
                                                                                                                                
SENATOR WAGONER asked his opinion of action after that time.                                                                    
                                                                                                                                
MR. LOEFFLER said  he believes it will come up  again in the same                                                               
exact  form because  a  lot of  people worked  long  and hard  to                                                               
compromise  and there  is  no known  opposition  to the  enabling                                                               
provisions that contain this expansion authority.                                                                               
                                                                                                                                
CO-CHAIR OGAN asked what the best-case scenario is.                                                                             
                                                                                                                                
MR. LOEFFLER  said the best  case would be if  something happened                                                               
before the November election. He  believes it is much more likely                                                               
that something will happen next Spring,  but no one knows who the                                                               
president will be or who will be in Congress.                                                                                   
                                                                                                                                
CO-CHAIR  SAMUELS  asked  Mr.  Watson  to  testify  and  informed                                                               
members that  Mr. Watson  is the Project  Manager for  Alaska Gas                                                               
Development for Enbridge. He is  actively involved in all aspects                                                               
of  project assessment  and currently  leads the  coordination of                                                               
market  participation  on  behalf   of  Enbridge.  Prior  to  his                                                               
employment at  Enbridge, he spent  10 years directly  involved in                                                               
the  Canadian   energy  industry,  most  recently   as  the  vice                                                               
president  of  corporate  development   for  a  leading  solution                                                               
provider to the North American energy industry.                                                                                 
                                                                                                                                
MR.  ERIC  WATSON,  Project   Manager,  Alaska  Gas  Development,                                                               
Enbridge, reminded members that  Enbridge has proposed a measured                                                               
approach in its  Stranded Gas Act application. It  includes a 36-                                                               
inch pipeline  design, which  contrasts with the  48 and  52 inch                                                               
pipelines proposed  by other parties. Enbridge  views the 36-inch                                                               
design  as a  better economic  alternative to  meet the  pipeline                                                               
needs. He asked to delve into  that topic today and describe some                                                               
of the  factors that  will drive  the volumes  and how  that will                                                               
impact  the   pipeline  design  and,  inevitably,   the  cost  of                                                               
delivery. He began:                                                                                                             
                                                                                                                                
     For the benefit of those  who could not attend the June                                                                    
     hearings,  I will  spend  30 seconds  just  as a  quick                                                                    
     overview of  who Enbridge  is, just  in case  you don't                                                                    
     know about the company.  We operate the world's longest                                                                    
     crude oil pipeline system. We  have assets in excess of                                                                    
     $13 billion, a stable A  credit rating, lots of cash in                                                                    
     the bank  and, as  it relates  to the  Alaskan project,                                                                    
     gas now makes  up 40 percent of  our earnings. Included                                                                    
     in  that is  a  50 percent  ownership  in the  Alliance                                                                    
     pipeline,  which is  one of  the major  transporters of                                                                    
     natural  gas and  liquids for  the  Chicago market  and                                                                    
     also the  owner and  operator of Canada's  largest LDC,                                                                    
     serving  over  1.7  million customers  in  Ontario  and                                                                    
     northern New  York State. So, we  also have a bit  of a                                                                    
     market perspective on the other end as well.                                                                               
                                                                                                                                
     As  you  may  be  aware, we're  pursuing  a  greenfield                                                                    
     project  through FERC  and  the NEB.  We  are the  only                                                                    
     pipeline   company   with   extensive   experience   in                                                                    
     continuous  and  discontinuous permafrost  construction                                                                    
     operations [indisc.] pipeline. We  have the most recent                                                                    
     cross-border,  large-diameter, high-pressure,  rich gas                                                                    
     pipeline experience, which is more  than likely to be a                                                                    
     similar   scenario  to   the  Alaska   pipeline.  We've                                                                    
     participated in  both study and field  trials in Alaska                                                                    
     to examine the practice  of trenching in permafrost ...                                                                    
     As  I  mentioned, we  also  have  a market  perspective                                                                    
     through ownership in Canada's largest LDC.                                                                                 
                                                                                                                                
     As  I  mentioned at  the  outset,  we're focused  on  a                                                                    
     measured approach that reduces  the risk of the project                                                                    
     and aligns  the interests  of the stakeholders.  I want                                                                    
     to   clarify   that   a   measured   approach   doesn't                                                                    
     necessarily mean a phased approach  and that we are not                                                                    
     stuck  or bent  on  36-inch as  the  only solution.  We                                                                    
     believe it is a  potentially viable solution, depending                                                                    
     on the volumes and timing  of the volumes that come out                                                                    
     of  Alaska and  that's really  what I  want to  look at                                                                    
     today.  Based on  what happens  with these  volumes and                                                                    
     these timings  is really going  to drive  the economics                                                                    
     of this  project and within  that 36-inch is  an option                                                                    
     that  we should  still  be looking  at.  So with  this,                                                                    
     we're  seeking  to  add value  within  the  project  by                                                                    
     working   closely   with   other  stakeholders   in   a                                                                    
     collaborative  and cooperative  manner. Given  the size                                                                    
     of the project, we believe  that not only the producers                                                                    
     will  have  a role  in  it,  but  there will  be  other                                                                    
     parties that  are needed  to also  make this  project a                                                                    
     success  and  take  on the  substantial  risk  that  it                                                                    
     presents.  We need  to maximize  economic opportunities                                                                    
     for Alaskans  and continental North  America - I  put a                                                                    
     couple examples, such as steel  supply and local labor.                                                                    
     We'll  get into  a little  bit of  perhaps some  of the                                                                    
     benefits  that  a  36-inch line  might  mean  to  North                                                                    
     America and  Alaska versus the  alternatives. Investing                                                                    
     resources  into  local  communities and  First  Nations                                                                    
     groups is something we've done  in the past with all of                                                                    
     our  projects.  The  last  point  is  fully  leveraging                                                                    
     existing  infrastructure only  to  the  extent that  it                                                                    
     reduces costs, minimizes  tolls, and maximizes netbacks                                                                    
     for Alaska gas.                                                                                                            
                                                                                                                                
     During  the last  hearing we  presented  on the  supply                                                                    
     outlook within  the Western  Canadian supply  basin and                                                                    
     how it  was starting to  ramp down after 2015  and what                                                                    
     the available ex-Alberta  hub take-away capacity looked                                                                    
     like. We  do want to  make sure that we  reiterate that                                                                    
     while generally  an existing pipeline could  be a cost-                                                                    
     effective alternative,  depending on  where the  gas is                                                                    
     delivered and  a number of  other factors that  may not                                                                    
     be the  most cost-effective,  it could  call for  a new                                                                    
     build as well.                                                                                                             
                                                                                                                                
     Ultimately, the state and shippers  are interested in a                                                                    
     pipeline that's  designed to offer  the lowest  cost of                                                                    
     delivery - whether that's 36  inch or 52 inch. In order                                                                    
     to  achieve this,  we need  to understand  a number  of                                                                    
     factors that impact the  design capacity and ultimately                                                                    
     the cost of  delivery. So we've heard a  fair bit today                                                                    
     about  open  season contract  commitments.  Inevitably,                                                                    
     the project needs to be  underpinned by these long-term                                                                    
     shipping contracts  and with  that, from  this process,                                                                    
     that's  going to  really decide  what the  volumes look                                                                    
     like  and what  the contract  length is  going to  look                                                                    
     like and where  the gas actually needs to  move to. And                                                                    
     from  that, we're  going to  be able  to tell  what the                                                                    
     best  design and  what the  most economic  design looks                                                                    
     like.  And  you've  heard lots  before  what  the  rest                                                                    
     includes.   Really,   it's   driving   out   what   the                                                                    
     expectation  level of  unproven reserves  are going  to                                                                    
     look like into the future,  what people believe the gas                                                                    
     price is going to look like....                                                                                            
                                                                                                                                
     One thing  we haven't talked  about a lot is  where the                                                                    
     market is  for the gas as  well. Is it all  in Chicago?                                                                    
     Is  it  in  the  Northeast   U.S.  or  is  it  even  in                                                                    
     California as  well? It's going  to play a  role. We've                                                                    
     also spent  a lot  of time  talking about  expansion as                                                                    
     well,  so  we  believe that  exploration  success  will                                                                    
     drive out  the expansion volumes and  the timing beyond                                                                    
     the initially accepted risk. So  whatever the market is                                                                    
     going  to accept  initially,  I think  is  going to  be                                                                    
     representative  of what  they believe  can actually  be                                                                    
     delivered and then expansion  beyond that, depending on                                                                    
     how successful,  how much investment  is made  into the                                                                    
     state  in refining  resources and  start to  drive that                                                                    
     expansion.  Obviously, as  an  independent party,  from                                                                    
     our own selfish perspective,  we'd always be looking at                                                                    
     trying to  add capacity  for shippers  as long  as it's                                                                    
     underpinned by a contract.                                                                                                 
                                                                                                                                
     And the other element that  goes with that is the take-                                                                    
     away capacity that is  actually available from Alberta.                                                                    
     Obviously  we  can  talk  about  moving  all  of  these                                                                    
     volumes  into  the Alberta  market,  but  Alberta is  a                                                                    
     large  net   export  market,  therefore  we   need  the                                                                    
     capacity to  actually move  the gas  out of  Alberta as                                                                    
     well. Based  on when we move  that gas and how  much of                                                                    
     it we move, it directly  impacts the economics as well,                                                                    
     whether  we're able  to  use  existing pipeline,  where                                                                    
     that gas  is going,  and how much  gas we  can actually                                                                    
     send out.                                                                                                                  
                                                                                                                                
     And   then  construction   factors  -   how  will   the                                                                    
     construction  costs be  impacted by  competitive supply                                                                    
     if this project  is, let's say, delayed  or it's really                                                                    
     the MacKenzie  Valley - what is  the labor availability                                                                    
     going to look like? Will there be competition?                                                                             
                                                                                                                                
     So let  me just mention,  the most important  note, and                                                                    
     we've   heard  it   several   times   today,  is   that                                                                    
     regardless, the  pipeline needs to be  underpinned by a                                                                    
     long  term  shipping  contract. Enbridge  is  currently                                                                    
     working  with   certain  parties  within   the  market,                                                                    
     including  our own  distribution. We  try to  align and                                                                    
     see  what the  feel is  for the  demand and  where that                                                                    
     demand might  be and what the  overall commitment might                                                                    
     be as  well. But,  once again,  that might  get fleshed                                                                    
     out until the open season occurs.                                                                                          
                                                                                                                                
     The  length and  volume of  the shipping  contracts, as                                                                    
     we've  discussed,  are  impacted   by  such  things  as                                                                    
     expected  wellhead  price,   tolls,  reserve  life  and                                                                    
     government relations.  Inevitably, if we get  into what                                                                    
     drives the  volume's timing and design  capacity has to                                                                    
     do with our expectation of the reserve...                                                                                  
                                                                                                                                
     What  I've done  is  taken three  different examples  -                                                                    
     practical examples  of the potential reserves  that the                                                                    
     market  may expect  and how  that  flushes out  volumes                                                                    
     over service life.  If you actually look  at what we're                                                                    
     getting or expect or the  proven out of Prudhoe Bay and                                                                    
     take the  volumes over the different  service lives, we                                                                    
     see that it ranges anywhere  from 2 to 3.3 [BCF]. Based                                                                    
     on  the economics  we've  run,  this drives  preferably                                                                    
     towards a dual 36-inch  pipeline would actually provide                                                                    
     you with  the lowest  toll. More reasonably,  we're not                                                                    
     going to be looking at just  the 24. We've talked a lot                                                                    
     about the  35 area and  here we've  got a range  of the                                                                    
     2.7  to  4.8  [BCF].  This  is where  you  get  into  a                                                                    
     situation  where   the  economics  actually   start  to                                                                    
     transition  as   you  move  up   anywhere  from   a  36                                                                    
     potentially to  the 52 inch  line. If you  actually get                                                                    
     beyond  the 35  TCF, and  how much  risk the  market is                                                                    
     willing to  take, beyond what's  proven into  the realm                                                                    
     of the probable, we're looking  at volumes in excess of                                                                    
     potentially 5.6 to 9.7, which  really goes back to what                                                                    
     was  said  earlier. If  we're  delivering  all that  up                                                                    
     front,  a  52-inch pipe  is  most  likely the  economic                                                                    
     solution.                                                                                                                  
                                                                                                                                
TAPE 04-15, SIDE B                                                                                                            
                                                                                                                                
MR. WATSON continued.                                                                                                           
                                                                                                                                
     If you've  got a ramp-up that  exceeds - and we  did it                                                                    
     on the  basis of 5.2 BCF  starting at 2.6 -  as per our                                                                    
     application, you  actually ramp  that up over  a course                                                                    
     of four  years or more  - once  again the dual  36 inch                                                                    
     pipeline  from  an   economic  perspective  looks  more                                                                    
     attractive  than the  52. So  it all  goes back  to the                                                                    
     same  things you've  been hearing  earlier. If  we send                                                                    
     bigger volumes  and we send them  earlier, economically                                                                    
     you're  looking at  a 48  or 52-inch  option. If  we're                                                                    
     going through  a phased ramp-up,  or if  we're starting                                                                    
     at   smaller   volumes,   the  36-inch   becomes   more                                                                    
     practical.                                                                                                                 
                                                                                                                                
CHAIR OGAN asked if Enbridge would build both pipelines                                                                         
simultaneously.                                                                                                                 
                                                                                                                                
MR. WATSON said if he is referring to dual 36-inch pipelines,                                                                   
the model Enbridge used had the [second pipeline] starting two                                                                  
years later but that will depend on the market commitment. He                                                                   
stated:                                                                                                                         
                                                                                                                                
     So when we actually modeled it,  let's say on the 52 or                                                                    
     48  inch basis,  you'd put  in all  the pipe  but you'd                                                                    
     only put in  enough compression that you  need to start                                                                    
     at 2.6 and then you  ramp the compression up. Obviously                                                                    
     you're not going to just -  with the line you've got to                                                                    
     put the whole  line in first. With  the 36-inch option,                                                                    
     you build  the first line  and then after  you're done,                                                                    
     the first  line you  actually start  to go  through the                                                                    
     construction of the next line  using the same right-of-                                                                    
     way.  What that  does...is it  actually enables  you to                                                                    
     actually get  gas to  market...about one  year earlier.                                                                    
     If  you  use the  36-inch,  you're  going to  get  less                                                                    
     volume to market earlier, but  you're actually going to                                                                    
     get gas to  market earlier and to the  extent that it's                                                                    
     a  benefit,  it's  going  to  potentially  prolong  the                                                                    
     construction period as well, which  is going to be more                                                                    
     revenue  for a  sustained  period  on the  construction                                                                    
     phase within the state of Alaska.                                                                                          
                                                                                                                                
     As  we talked  about  earlier, one  thing we  obviously                                                                    
     need to do is we need  to align it with not necessarily                                                                    
     available ex-Alberta  take away  capacity, but  we need                                                                    
     to understand what the actual  take away capacity looks                                                                    
     like and where  we're actually shipping the  gas to. If                                                                    
     you kind  of implant the supply  forecast versus what's                                                                    
     available out of the Alberta  market right now, and the                                                                    
     right  graph there  really extrapolates  from the  left                                                                    
     graph,  it  shows  us  when   and  how  much  take-away                                                                    
     capacity is  available within Alberta -  and you'll see                                                                    
     here that  up until around  2018, 2019, it's  less than                                                                    
     the 5  BCF we're talking  about. So what that  means is                                                                    
     we're going to need to  add new capacity out of Alberta                                                                    
     into specific markets  - Chicago, it could  be west. It                                                                    
     shows  us  when  and  how much  take-away  capacity  is                                                                    
     available within  Alberta and  you'll see here  that up                                                                    
     until  around 2018,  2019,  it's less  than  the 5  BCF                                                                    
     we're talking about.                                                                                                       
                                                                                                                                
     So what  that means is we're  going to need to  add new                                                                    
     capacity  out  of  Alberta into  specific  markets.  It                                                                    
     could be Chicago, it could  be west - it's either going                                                                    
     to go  one of two  ways but regardless, we're  going to                                                                    
     need  to  add  new  capacity if  we're  shipping  those                                                                    
     volumes when  we're expected to  actually commercialize                                                                    
     gas within  Alaska within the  2012 to  2014 timeframe.                                                                    
     The  question  becomes  is  it  worth  phasing  it  in,                                                                    
     starting  with, let's  say, 2.5  BCF  per day,  knowing                                                                    
     that  you've  got  the  ex-Alberta  capacity  available                                                                    
     there. You can  use existing pipe and then  ramp up the                                                                    
     volumes,  either  through  compression or  through  the                                                                    
     construction  of  another  36-inch line,  so  that  you                                                                    
     start  to match  the available  take-away capacity  and                                                                    
     which  one of  those  is cheaper.  We  don't know  that                                                                    
     because you  don't know -  we've got an idea  where the                                                                    
     market  is  for the  gas,  but  until the  open  season                                                                    
     happens,  until you  know what  the volume  commitments                                                                    
     are like,  until you know  where you actually  want the                                                                    
     gas delivered,  we don't also know  from the ex-Alberta                                                                    
     perspective where we need to get that gas.                                                                                 
                                                                                                                                
     So, in  the event that  the MPS 36-inch pipe  does make                                                                    
     sense and  that we're  starting with lower  volumes and                                                                    
     ramping up  over time,  some of  the advantages  of the                                                                    
     36-inch line,  one is the greater  certainty around the                                                                    
     cost  estimates that  we have.  There are  a number  of                                                                    
     companies   within  North   America   right  now   that                                                                    
     manufacture  36-inch.  There  are  none  that  actually                                                                    
     manufacture  48  or   52-inch  pipelines  within  North                                                                    
     America so there's a greater  supply risk around the 48                                                                    
     or the 52- inch option.                                                                                                    
                                                                                                                                
     A big  benefit potentially to  the state is  that we're                                                                    
     in service  one year earlier so  you're making revenues                                                                    
     one  year  earlier  as well.  It's  easier  to  perform                                                                    
     maintenance without service  interruption. You're going                                                                    
     to  find a  more  experienced and  skilled labor  force                                                                    
     that's actually  worked with the construction.  The big                                                                    
     bang  here as  well is...more  supplies can  be sourced                                                                    
     from Canada  and the U.S.  versus overseas.  We're just                                                                    
     going  to have  a  more positive  impact  on the  North                                                                    
     American  economy,  and  potentially within  Alaska  as                                                                    
     well.  We're going  to  be  able to  keep  more of  the                                                                    
     revenue  within  the  state  and  in  the  construction                                                                    
     process as well,  versus having to go over  to Japan or                                                                    
     Germany or Russia.                                                                                                         
                                                                                                                                
     One  of  the  disadvantages  that we  talked  about  is                                                                    
     really  just the  reduced economy  of  scale if  you're                                                                    
     able to bring on higher volumes right away.                                                                                
                                                                                                                                
     So...just to wrap  up some of the  key points here...is                                                                    
     that one,  and we've  heard it all  today, is  that the                                                                    
     open season volume commitments  and ramp-up timing will                                                                    
     drive the  most economic  pipeline design and  we don't                                                                    
     know what  that looks like  yet. The Alaska  to Alberta                                                                    
     volumes and timing  need to be matched  with the lowest                                                                    
     cost  Alberta to  market take-away  capacity and,  as I                                                                    
     mentioned,  that may  mean  existing  pipeline or  that                                                                    
     could  be   new  pipeline.  Alliance   Pipeline,  which                                                                    
     Enbridge has  a 50  percent ownership in,  for example,                                                                    
     has .5 BCF of cheap  expansion - the cheapest expansion                                                                    
     available into the  Chicago market through compression.                                                                    
     Other than that, we need to  look at a new build out of                                                                    
     the Alberta  market, whether it's  through TransCanada,                                                                    
     through Northern Border, or through other options.                                                                         
                                                                                                                                
     So  our  measured  approach  is -  it's  not  a  phased                                                                    
     approach, we're really just aiming  to align the Alaska                                                                    
     volumes,  whatever  they  are,  whatever  the  market's                                                                    
     willing to step up to,  what they're willing to take as                                                                    
     far as risk  and provide, either, you  know, through an                                                                    
     existing  or for  optimal  cost  efficiency and  market                                                                    
     alignment....                                                                                                              
                                                                                                                                
SENATOR WAGONER  asked what would  happen to  Enbridge's interest                                                               
in this  project if, in fact,  the gas liquids were  stripped out                                                               
in  Fairbanks and  shipped down  the TransAlaska  pipeline to  be                                                               
used for other industries.                                                                                                      
                                                                                                                                
MR.  WATSON said  that would  not have  any impact  on Enbridge's                                                               
decision in the  project. He noted, "It's really  what's best for                                                               
the  producers,  where they're  going  to  get  - and  the  state                                                               
itself,  or the  gas owners,  wherever they're  going to  get the                                                               
best  netbacks,   I  think  there   potentially  could   be  some                                                               
resistance  from  the Province  of  Alberta  itself...." He  said                                                               
whether it is  moved into the Alberta market or  not will have no                                                               
bearing on whether it's good or bad for Enbridge. He continued:                                                                 
                                                                                                                                
     So if  Alaska wants  to build a  petrochemical industry                                                                    
     up here  and the gas  and the  liquids need to  be left                                                                    
     within the state, that's fine,  or, if the producers in                                                                    
     the  state  feel  that  liquids need  to  go  into  the                                                                    
     Province, certainly the  infrastructure exists there to                                                                    
     handle the liquids.                                                                                                        
                                                                                                                                
SENATOR ELTON  asked Mr.  Watson to  discuss the  tension between                                                               
access and capacity and those  with the proven reserves and those                                                               
who may  be more dependent  on undiscovered resources with  a 36-                                                               
inch  pipe.  He  asked  what  happens  with  a  smaller  pipeline                                                               
transmission system.                                                                                                            
                                                                                                                                
MR. WATSON  said he  does not  see a  smaller pipeline  making it                                                               
more challenging  to get  access. Initially  there would  be less                                                               
access  because of  the  smaller design  capacity  but the  plans                                                               
could  allow for  a ramp  up to  5.2 over  the course  of 3  to 4                                                               
years, so that  capacity would become available at  the same time                                                               
as a 52-inch line.                                                                                                              
                                                                                                                                
SENATOR  ELTON said  during testimony  by  Department of  Revenue                                                               
staff,  members learned  they may  need to  have a  discussion on                                                               
smaller amounts  of gas moving over  a longer period of  time. It                                                               
would seem easier, during an  open season for those with reserves                                                               
but less capacity  to have it easier than  those without, because                                                               
if  capacity is  increased over  time,  that would  make it  more                                                               
difficult for explorers who have to wait.                                                                                       
                                                                                                                                
MR. WATSON  said Senator Elton hit  the nail on the  head when he                                                               
said  the producers  or shippers  themselves would  decide during                                                               
the initial open season because:                                                                                                
                                                                                                                                
     You  hit  a  crossover  there where  the  52-inch  line                                                                    
     becomes  a more  economical choice.  It really  depends                                                                    
     what the  market's willing to  step up to  initially so                                                                    
     you don't go into the  open season and say, okay, we're                                                                    
     proposing a dual 36-inch pipeline.  The market comes to                                                                    
     the open season and [you]  say, okay, here's the gas we                                                                    
     need within  the Lower 48  and then you take  that away                                                                    
     and  say  okay,  what's the  most  economical  pipeline                                                                    
     design....  So,  to  that extent,  that's  where  we're                                                                    
     coming with the  measured approach, is that  we need to                                                                    
     come  in  with  an  understanding of  what  the  market                                                                    
     needs,  what volumes  they need  and really  where they                                                                    
     need it  as well. Obviously,  it's not going  to impact                                                                    
     the  design from  Alberta or  [indisc.] from  Alaska to                                                                    
     Alberta but also  what needs to happen  from Alberta to                                                                    
     market as well.                                                                                                            
                                                                                                                                
CHAIR OGAN  expressed concern about  the disadvantages  of higher                                                               
capital  costs, which  will translate  into  higher tariffs,  and                                                               
questioned   whether  Enbridge   has  run   any  models   on  the                                                               
differences.                                                                                                                    
                                                                                                                                
MR.  WATSON said  Enbridge has  and [the  answer] depends  on the                                                               
volumes. As you  start to shift into lower  volumes, that's where                                                               
the 36-inch will  come up with a smaller capital  cost because an                                                               
asset will  be buried in the  ground that is not  being utilized.                                                               
The other consideration is the ramp-up  time. It gets back to the                                                               
open season and  matching a design that produces  the lowest toll                                                               
for what's  needed in  the marketplace. That  is why  Enbridge is                                                               
not  saying  the  36-inch  pipe   is  the  most  economic;  other                                                               
alternatives may be  more economic, depending on  what the market                                                               
needs.  He pointed out:                                                                                                         
                                                                                                                                
     And  from our  numbers, once  you get...  over 4  BCF a                                                                    
     day, if  you can take  that initially, and  that's what                                                                    
     the market  is willing  to accept,  that's kind  of the                                                                    
     crossover  where it  becomes more  economic to  look at                                                                    
     the larger line.  If the market's stepping  up for less                                                                    
     initially, you've  got kind of two  factors. If they're                                                                    
     stepping up for  a lot less for a long  period of time,                                                                    
     the dual 36-inch is more  economic. If they're stepping                                                                    
     up for  less initially  and you've  got a  ramp-up that                                                                    
     occurs over  a period of  four more years,  the numbers                                                                    
     we used  were 2.6  up to  5.2 over  the course  of four                                                                    
     years, you're  pretty much  at a break  even as  far as                                                                    
     the tolls  that work  out. So, a  48 or  52-inch option                                                                    
     would come up  with about the same toll as  a 36. A lot                                                                    
     has  to do  with being  able to  bring the  capacity to                                                                    
     market a year earlier and  some of the economic factors                                                                    
     and depreciation as well.                                                                                                  
                                                                                                                                
REPRESENTATIVE GARA  said it seems counter-intuitive  to him that                                                               
if Enbridge  plans to build two  36-inch pipes, that it  would be                                                               
as efficient  to come  up and  down the corridor  with a  crew of                                                               
workers twice.  He asked Mr.  Watson to  give an estimate  of the                                                               
production costs of  the dual 36-inch pipe and  one 48-inch pipe.                                                               
He then  said that many  people want to be  able to tap  into the                                                               
pipeline to use some of that  gas, but Mr. Watson said that would                                                               
not impact Enbridge. He questioned  how that could not but impact                                                               
Enbridge since  it would  create less  capacity after  the tap-in                                                               
point.                                                                                                                          
                                                                                                                                
MR. WATSON  responded, in regard  to Representative  Gara's first                                                               
question,  Enbridge has  estimated  the cost  of construction  at                                                               
$1.3 billion more  to build the dual 36-inch pipe  versus the 48-                                                               
inch option.  He noted  from a  total capital  cost in-the-ground                                                               
perspective,  it might  cost a  little more,  but there  would be                                                               
less risk.  Regarding the second  question, he said his  point is                                                               
it is  the same issue  for Enbridge as  a pipeline company  as it                                                               
would be  for any other.  If gas was taken  out of the  system at                                                               
Fairbanks,  that would  definitely have  an impact  on the  total                                                               
system, but  he can't answer what  the industry would plan  to do                                                               
to make concessions for that.                                                                                                   
                                                                                                                                
CO-CHAIR OGAN  asked if it  would be  a matter of  stationing the                                                               
compressors a little farther apart after Fairbanks.                                                                             
                                                                                                                                
MR. WATSON said a  number of things could be done  but that he is                                                               
not in a position to say what the best alternative would be.                                                                    
                                                                                                                                
REPRESENTATIVE BETH  KERTTULA asked  if the dual  pipelines would                                                               
require two open seasons and two tariffs.                                                                                       
                                                                                                                                
MR. WATSON  replied there  would be  one open  season -  the dual                                                               
pipeline would be a design  element that would entail looping the                                                               
line. He explained,                                                                                                             
                                                                                                                                
     Now it  depends, if it's  not part of the  initial open                                                                    
     season for the commitment, then  yes, if it was labeled                                                                    
     expansion,  you'd  certainly have  to  go  back, but  I                                                                    
     think the intent  would be to include it.  If you don't                                                                    
     need the  5.2 BCF a day  right now, but you  need it in                                                                    
     the four years, you may  apply saying okay, this is all                                                                    
     part of  it. We're building from  2.6 up to 5  and it's                                                                    
     going to take four to five  years longer to build it so                                                                    
     you make that all part of the initial commitment....                                                                       
                                                                                                                                
REPRESENTATIVE KERTTULA  said she  understands the  arguments but                                                               
it seems  that right from  the beginning, it  undersells Alaska's                                                               
resource. She  explained that she  understands the market  but it                                                               
makes her  nervous because Alaska's  best interest is to  get the                                                               
gas up and to the market.                                                                                                       
                                                                                                                                
MR. WATSON said it is not  the pipeline company that decides what                                                               
the reserves  are and what  the market  is willing to  take. They                                                               
are trying to get more  commitment. Building bigger and sooner is                                                               
a benefit to his company.                                                                                                       
                                                                                                                                
     We just  want to present  that as a  potential economic                                                                    
     alternative, if  the case happens that  the market only                                                                    
     steps  up for  this or  you  need a  phased approach  -                                                                    
     because we also need to  look at the economics, as well                                                                    
     as what  the tolls look  like, not only from  Alaska to                                                                    
     Alberta, but what  the tolls look like  from Alberta to                                                                    
     the market, as  well. If we can  use existing pipelines                                                                    
     and  fill  existing pipes,  it  could  reduce tolls  or                                                                    
     tariffs from  Alberta to Chicago  by, who  knows, maybe                                                                    
     five  or  ten  cents....  This is  just  one  potential                                                                    
     option.                                                                                                                    
                                                                                                                                
MS. MARTY RUTHERFORD, Deputy  Commissioner, Department of Natural                                                               
Resources  (DNR),  said  her   presentation  addresses  both  the                                                               
regulatory  and  commercial  tools  available  to  the  state  to                                                               
improve   access  to   pipeline  capacity,   including  expansion                                                               
capacity. She would  discuss the Stranded Gas  Development Act as                                                               
a key commercial  tool giving the state the  ability to negotiate                                                               
conditions for access along with other contract terms.                                                                          
                                                                                                                                
     Another key tool are the  oil and gas lease provisions,                                                                    
     specifically the  state's ability  to take  its royalty                                                                    
     either  in  value or  in  kind  and our  discretion  to                                                                    
     switch between these periodically.                                                                                         
                                                                                                                                
     On the regulatory front, the  state has the opportunity                                                                    
     to influence  other policy makers, both  the regulatory                                                                    
     and the legislative arms,  including Ottawa, Canada and                                                                    
     Washington   D.C.,  also   the   U.S.  Federal   Energy                                                                    
     Regulatory Commission (FERC),  Canada's National Energy                                                                    
     Board (NEB), which is an  independent federal agency in                                                                    
     Canada  that  regulates  several  aspects  of  Canada's                                                                    
     energy  industry  and   the  Regulatory  Commission  of                                                                    
     Alaska  (RCA). My  comments  are  organized around  the                                                                    
     structure  of  relationships, specifically,  government                                                                    
     to  industry, government  to agency  and government  to                                                                    
     government.                                                                                                                
                                                                                                                                
     So,  let me  begin with  the first  category, which  is                                                                    
     government  to industry.  I might  note  here that  the                                                                    
     first  category will  take  the bulk  of  my time,  the                                                                    
     second and  third categories  will be  pretty brief....                                                                    
     As  I  said  previously,  and other  parties  like  Bob                                                                    
     Loeffler   from  Morrison   and   Forester  has   said,                                                                    
     negotiations under the Stranded  Gas Development Act do                                                                    
     provide  significant commercial  tools that  could, not                                                                    
     necessarily should, include  scheduled open seasons for                                                                    
     expansion  with, of  course, very  specific terms  that                                                                    
     are fair  to all parties.  I want  to note here,  and I                                                                    
     think  that  Bob  Loeffler  noted   it  as  well,  that                                                                    
     scheduled   open   seasons   are  not   standard   FERC                                                                    
     practices. Another  potential Stranded  Gas Development                                                                    
     Act  tool is  our  ability to  require pipeline  design                                                                    
     specifications that  are favorable for  expansions. For                                                                    
     example, the initial design  should allow for efficient                                                                    
     expansion.  It should  be preplumbed  for intake,  off-                                                                    
     take and expansion points. These could include:                                                                            
                                                                                                                                
     1) An intake  in the Foothills in order  to by-pass the                                                                    
        Prudhoe Bay Unit gas treatment plant                                                                                    
     2) An  intake at  Fairbanks  for the  Nenana and  Yukon                                                                    
        Flats  Basin development when  it occurs as  well as                                                                    
        an  off-take   at  Fairbanks  for  several  possible                                                                    
        purposes, including  various spur lines, such  as to                                                                    
        Valdez  in the  Cook Inlet,  for petrochemicals  and                                                                    
        for rural Alaska.  I believe that ANGDA has probably                                                                    
        talked  about  some  of  the  ideas  that  group  is                                                                    
        discussing  for providing  rural Alaska  energy such                                                                    
        as  propane  shipped in  tanks  or  barges to  rural                                                                    
        Alaska and compressed natural gas                                                                                       
     3) Future compression stations for expansion purposes                                                                      
     4) Intakes  for other gas  basins, such as  Susitna and                                                                    
        the Copper River Basin.                                                                                                 
                                                                                                                                
     In  addition to  requiring open  seasons for  expansion                                                                    
     and  design specs,  the state  could consider  ensuring                                                                    
     through  the  Stranded  Gas  Development  negotiations,                                                                    
     tariff structures  that are favorable  to the  entry of                                                                    
     new   gas.  There   are   known   devices  that   could                                                                    
     assist...rolled-in  tariffs,  for   example,  for  both                                                                    
     expansion of  the main line  and for  feeder pipelines.                                                                    
     Rolled-in tolls  for expansion means  that the  cost of                                                                    
     expansion  are rolled  into  the  existing base  rates.                                                                    
     Then, even  if the expansion is  expensive, the overall                                                                    
     tolls only increase modestly. The  effect of this is to                                                                    
     promote exploration  and development  of new  gas. This                                                                    
     is Canada's  National Energy Board policy,  but not the                                                                    
     usual  U.S. FERC  policy. FERC's  policy provides  that                                                                    
     expensive expansion  costs are  assigned to  only those                                                                    
     parties who will use the  new capacity, in other words,                                                                    
     the new guy on the block.                                                                                                  
                                                                                                                                
     When this same rolled-in  tolls approach is extended to                                                                    
     new  feeder pipelines,  such as  at National  Petroleum                                                                    
     Reserve  Alaska  (NPRA), and  they  are  treated as  an                                                                    
     expansion of  the existing main project,  then the cost                                                                    
     of bringing  new gas  to market  will also  be reduced.                                                                    
     Here  again, the  effect is  to promote  exploration of                                                                    
     new gas.  Canada has, in  one circumstance that  we are                                                                    
     aware of, adopted such a policy as this.                                                                                   
                                                                                                                                
     Conversely, an  incremental tariff structure,  which is                                                                    
     the normal  approach that  FERC assigns  to extensions,                                                                    
     and  to expensive  expansions, is  to  assign costs  to                                                                    
     only those parties who will  be using the new capacity.                                                                    
     I want to  emphasize that both of  these rolled-in toll                                                                    
     approaches could  be a very difficult  exercise to sell                                                                    
     to FERC, because it is  outside their normal policy and                                                                    
     they  must  approve  all tariffs  including  negotiated                                                                    
     tariffs.                                                                                                                   
                                                                                                                                
     Another example of a tariff  structure that could favor                                                                    
     entry  of   new  gas  into  expansion   capacity  is  a                                                                    
     negotiated  levelized   tariff  rate.  The  use   of  a                                                                    
     levelized tariff  allows any  producers lower  costs in                                                                    
     the early years, maintaining this  rate over time. This                                                                    
     may  improve  exploration  and  development  economics.                                                                    
     Conversely, a recourse rate will  start off high and it                                                                    
     may be  reduced if shippers successfully  request lower                                                                    
     tolls with FERC.                                                                                                           
                                                                                                                                
     One  additional point  here on  tariffs,  one means  of                                                                    
     improving the use  of a recourse rate  might be regular                                                                    
     updates  of  that  rate.  As you  heard  at  your  last                                                                    
     hearing  and   today,  again,  the  FERC   hasn't  been                                                                    
     exercising  authority  under  the Natural  Gas  Act  to                                                                    
     require  a pipeline  company to  periodically file  new                                                                    
     rates.  A  shipper can  protest  rates,  but relief  is                                                                    
     provided only prospectively,  not retrospectively. As a                                                                    
     result, recourse  rates paid by shippers  on a pipeline                                                                    
     such as this one can often  be too high. As well, there                                                                    
     is  some incentive  for pipeline  companies to  prolong                                                                    
     litigation.  However,  if  the  pipeline  company  were                                                                    
     contractually required  to periodically file  new rates                                                                    
     with  the FERC,  then  much of  this  problem might  be                                                                    
     resolved.                                                                                                                  
                                                                                                                                
     The final point I want  to make under tariff structures                                                                    
     is that  it might  be appropriate for  the conditioning                                                                    
     plant  rates to  also  be  reasonable and  transparent.                                                                    
     Again,   this   could   be   accomplished   either   by                                                                    
     negotiations  or  by making  them  subject  to a  rate-                                                                    
     making process.                                                                                                            
                                                                                                                                
     Moving  away from  the  Stranded  Gas Development  Act,                                                                    
     another key tool available to  the state is the oil and                                                                    
     gas  lease  provision.  That  provides  the  state  its                                                                    
     ability to  take its  gas either in  value (RIV)  or in                                                                    
     kind (RIK)  and our discretion to  switch periodically.                                                                    
     This tool could  be used to promote  explorer access to                                                                    
     early  open  season. This  term  of  the state's  lease                                                                    
     could  be  used  to backstop  explorer  commitments  to                                                                    
     initial  pipeline capacity  and  this  was the  concept                                                                    
     that  DNR invented  in the  proposed RIK  gas sales  to                                                                    
     Anadarko  and  EnCana [USA,  Inc.]  in  2002. That  was                                                                    
     never moved forward for legislative  approval or even a                                                                    
     royalty board approval, but we  did send it out for RFP                                                                    
     and EnCana and Anadarko did  win that. This could allow                                                                    
     explorers  to  ensure  they   have  the  necessary  gas                                                                    
     available to  fill an open  season commitment  if there                                                                    
     is insufficient  time to explore and  develop their own                                                                    
     lease acreage  prior to open  season. In  the interests                                                                    
     of  full disclosure  here,  I want  to  note that  this                                                                    
     proposed  RIK   gas  sale  in  2002   was  endorsed  by                                                                    
     independent  explorers  and  opposed  by  the  producer                                                                    
     sponsor group.                                                                                                             
                                                                                                                                
     The last two  items I would like to  briefly note under                                                                    
     the  government to  industry category  are the  state's                                                                    
     right-of-way leasing provisions.  It is conceivable for                                                                    
     the state  to condition  a state  pipeline right-of-way                                                                    
     approval on  reasonable access provisions and  we could                                                                    
     encourage the  federal government  to do the  same with                                                                    
     their federal  rights-of-way. I must note  that we have                                                                    
     not  so conditioned  any right-of-way  such as  this to                                                                    
     date.                                                                                                                      
                                                                                                                                
     And finally, using  our oil and gas lease  terms, it is                                                                    
     also conceivable  that we  could develop  provisions in                                                                    
     new leases  that require facility sharing  and pipeline                                                                    
     access, but again that would  be prospectively, not for                                                                    
     existing leases.                                                                                                           
                                                                                                                                
     So, moving on  to my second category of  tools, or what                                                                    
     I call  government to  agency, the  first of  these are                                                                    
     the state administration's  existing ability to provide                                                                    
     input to  FERC on  rate cases.  This is  an opportunity                                                                    
     that  the  state  may avail  itself  of  currently.  It                                                                    
     provides no surety  that that input is  welcomed by the                                                                    
     FERC and  as Bob Loeffler  mentioned a little  bit ago,                                                                    
     under  the  yet  to  be  adopted  U.S.  federal  energy                                                                    
     legislation,  that   legislation  provides   that  open                                                                    
     season regulations shall  (mandatory) be promulgated by                                                                    
     FERC  and,   of  course,  the   state  will   have  the                                                                    
     opportunity   to  affect   those  regulations   to  our                                                                    
     benefit. That  legislation provides  capacity expansion                                                                    
     regulations may (this  is discretionary) be promulgated                                                                    
     and  it   might  be  possible  to   encourage  FERC  to                                                                    
     promulgate these  optional regs and  if they do  to try                                                                    
     to affect  that package  of regulations to  the state's                                                                    
     benefit.                                                                                                                   
                                                                                                                                
     The final  issue that  I might note  in this  area, and                                                                    
     I've  never discussed  it with  Morrison and  Forester,                                                                    
     but  that  would be  to  approach  FERC regarding  open                                                                    
     season regulations  in advance  of U.S.  federal energy                                                                    
     legislation.  If the  legislation passed  this fall  or                                                                    
     early next  spring, it might  not be necessary,  but if                                                                    
     it does  not, it  is something that  I think  the state                                                                    
     might pursue.                                                                                                              
                                                                                                                                
     Another tool  available to  the state  under government                                                                    
     to  agency category  is  the  Regulatory Commission  of                                                                    
     Alaska's  influence  with   FERC.  Under  the  existing                                                                    
     Natural  Gas Act,  the FERC  may  establish a  FERC/RCA                                                                    
     joint board  for consultation  purposes. While  this is                                                                    
     currently  an  option under  the  Natural  Gas Act,  it                                                                    
     becomes  a mandate  under the  proposed federal  energy                                                                    
     legislation and  we have successfully used  this device                                                                    
     in the  past on  at least one  tariff structure  on the                                                                    
     Alpine pipeline, I believe.                                                                                                
                                                                                                                                
     Finally,  I think  it's  appropriate  to reiterate  the                                                                    
     obvious. A tool  available to the state  is to maintain                                                                    
     our  options for  all gasline  projects. This  includes                                                                    
     LNG, the  natural gas pipeline  into or  through Canada                                                                    
     and other pipelines within Alaska.                                                                                         
                                                                                                                                
     My final category  is what I refer to  as government to                                                                    
     government.   Briefly,  this   category  includes   the                                                                    
     state's  influence on  the  federal energy  legislation                                                                    
     provisions  that support  access.  This influences  has                                                                    
     been  and continues  to  be,  until passage,  extremely                                                                    
     important.  Finally, the  state  has  begun to  develop                                                                    
     relationships  with   Canada  to   encourage  favorable                                                                    
     outcomes for  design and access  of a  Canadian portion                                                                    
     of the natural  gas pipeline. This can  be pursued both                                                                    
     on a federal level in both  the U.S. and Canada as well                                                                    
     as in the Canadian provinces  and with the First Nation                                                                    
     Tribal entities.                                                                                                           
                                                                                                                                
     In  closing, while  I've identified  a  whole suite  of                                                                    
     tools the  state has  available to  it, I  also believe                                                                    
     there  are a  limited number  of truly  effective tools                                                                    
     that are under the  state's direct control. You'll note                                                                    
     I  spent  more  time   focusing  on  the  Stranded  Gas                                                                    
     Development Act negotiations  and the RIK/RIV switching                                                                    
     option  because  I  believe these  offer  the  greatest                                                                    
     leverage to the state.  Therefore, it is important that                                                                    
     the  state has  full knowledge  of what  they're worth.                                                                    
     That completes my testimony.                                                                                               
                                                                                                                                
SENATOR  ELTON  asked if  the  state  can condition  right-of-way                                                               
approval on reasonable access provisions.                                                                                       
                                                                                                                                
MS. RUTHERFORD replied, "I believe that is a possibility, yes."                                                                 
                                                                                                                                
SENATOR  ELTON said  that seemed  to be  a rather  bold intrusion                                                               
into  something  FERC  has  control over.  "Would  FERC  have  to                                                               
endorse any  provisions that  were contractually  agreed on  in a                                                               
right-of-way contract?"                                                                                                         
                                                                                                                                
MS. RUTHERFORD answered:                                                                                                        
                                                                                                                                
     FERC has to approve of  tariffs, no matter whether they                                                                    
     are negotiated  or not.  I know  they have  policies on                                                                    
     open seasons;  I don't think  they have  regulations on                                                                    
     open seasons. I believe they  would probably be open to                                                                    
     a negotiated  agreement on  open seasons  for expansion                                                                    
     purposes.                                                                                                                  
                                                                                                                                
SENATOR  ELTON  asked if  that  was  included under  right-of-way                                                               
agreements.                                                                                                                     
                                                                                                                                
MS. RUTHERFORD responded,  "Well no; I think that  would be under                                                               
the Stranded Gas Development Act negotiations."                                                                                 
                                                                                                                                
CO-CHAIR  OGAN plugged  the  up-coming  September Energy  Council                                                               
meeting in Anchorage with Alberta  and British Columbia attending                                                               
as official first-time members.                                                                                                 
                                                                                                                                
     We literally run coast to  coast from Canada now - Nova                                                                    
     Scotia and  Newfoundland to British Columbia.  So, it's                                                                    
     a good opportunity to get  to know some of our Canadian                                                                    
     friends and help keep those relationships going.                                                                           
                                                                                                                                
He  thought a  pipeline  would provide  better opportunities  for                                                               
creating long-term jobs  once it was built and gas  had gone down                                                               
it.                                                                                                                             
                                                                                                                                
MS. RUTHERFORD agreed  that a lot of jobs in  the future would be                                                               
associated  with looking  for  new  gas and  trying  to fill  the                                                               
pipeline. "Based upon  what USGS said earlier today  and in which                                                               
DNR  concurs, that  we feel  there  are significant  undiscovered                                                               
resources, more than adequate to fill expansion capacity."                                                                      
                                                                                                                                
CO-CHAIR OGAN said the AOGCC  regulates the waste of hydrocarbons                                                               
and DNR  deals more with the  economic waste issues and  asked if                                                               
she  has the  statutory  authority  to insure  the  state has  no                                                               
economic waste.                                                                                                                 
                                                                                                                                
MS. RUTHERFORD replied, "We believe we do, Senator."                                                                            
                                                                                                                                
CO-CHAIR OGAN said there were  no further questions and adjourned                                                               
the meeting at 4:05 p.m.                                                                                                        

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