Legislature(2003 - 2004)

09/02/2004 09:00 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                                                                             
                       September 2, 2004                                                                                        
                           9:00 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
LEGISLATIVE BUDGET AND AUDIT                                                                                                    
                                                                                                                                
 Representative Ralph Samuels, Chair                                                                                            
 Representative Mike Chenault                                                                                                   
 Representative Mike Hawker                                                                                                     
 Representative Beth Kerttula (via teleconference)                                                                              
 Representative Reggie Joule, alternate                                                                                         
 Senator Gene Therriault, Vice Chair                                                                                            
 Senator Lyman Hoffman                                                                                                          
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Fred Dyson                                                                                                             
 Senator Ralph Seekins                                                                                                          
 Senator Kim Elton                                                                                                              
 Senator Georgianna Lincoln                                                                                                     
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                       
                                                                                                                                
 Representative Bill Stoltze                                                                                                    
 Representative Ethan Berkowitz                                                                                                 
 Representative Les Gara                                                                                                        
 Representative Eric Croft                                                                                                      
 Representative Paul Seaton (via teleconference)                                                                                
 Representative David Guttenberg (via teleconference)                                                                           
 Senator Donny Olson                                                                                                            
 Senator Gretchen Guess                                                                                                         
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
LEGISLATIVE BUDGET AND AUDIT                                                                                                    
                                                                                                                                
 Senator Ben Stevens                                                                                                            
 Representative Vic Kohring                                                                                                     
 Senator Con Bunde                                                                                                              
 Senator Gary Wilken                                                                                                            
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Tom Wagoner, Vice Chair                                                                                                
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
^ALASKA NATURAL GAS PIPELINE ISSUES                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record.                                                                                                   
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Lesa Adair                                                                                                                      
Vice President, Muse Stancil                                                                                                    
                                                                                                                                
Harold Heinze                                                                                                                   
Chief   Executive  Officer,   Alaska   Natural  Gas   Development                                                               
Authority                                                                                                                       
                                                                                                                                
Brian Rogers, Information Insights                                                                                              
                                                                                                                                
Robert Cupina, Deputy Director, Office of Energy Projects                                                                       
                                                                                                                                
John  Katz,  Assistant  General   Counsel  for  Energy  Projects,                                                               
Federal Energy Regulatory Commission (FERC)                                                                                     
                                                                                                                                
Margery Fowke, National Energy Board, Canada                                                                                    
                                                                                                                                
Commissioner  Dave  Harbour  and  Administrative  Law  Judge  Jan                                                               
Wilson, Regulatory Commission of Alaska                                                                                         
                                                                                                                                
Commissioner  Daniel Seamount,  Alaska Oil  and Gas  Conservation                                                               
Commission                                                                                                                      
                                                                                                                                
Mark Myers, Director  of the Division of Oil  and Gas, Department                                                               
of Natural Resources                                                                                                            
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 04-24, SIDE A [BUD TAPE]                                                                                                 
                                                                                                                                
CHAIR RALPH SAMUELS  called the joint meeting  of the Legislative                                                             
Budget  and Audit  Committee and  the  Senate Resources  Standing                                                               
Committee to  order at  9:00 a.m.  Chair Samuels  introduced Lesa                                                               
Adair, Vice  President of Muse  Stancil and Company and  said Ms.                                                               
Adair   consults  on   issues  related   to  valuations,   damage                                                               
assessment,  market evaluations  and transactional  due diligence                                                               
in the energy  sector. Ms. Adair has over 20  years experience in                                                               
the industry and  is frequently obtained to  resolve disputes and                                                               
advise clients on mergers,  acquisitions, project development and                                                               
investment  decisions  in  the transportation  process,  refining                                                               
marketing, and electrical generation sectors.                                                                                   
                                                                                                                                
    NATURAL GAS LIQUIDS, IN-STATE NATURAL GAS PROCESSING AND                                                                  
                    PETROCHEMICAL FACILITIES                                                                                  
                                                                                                                                
MS. LESA ADAIR, Vice President  of Muse Stancil, told members she                                                               
would review natural gas liquids,  the market in general, and the                                                               
options for in-state processing  and petrochemical facilities, as                                                               
well as the  alternatives. She referred members to page  2 of her                                                               
handout and  said she  would talk briefly  about the  natural gas                                                               
liquids (NGL) market  and focus on the United  States and Canada,                                                               
relative to potential NGL production from Alaska. She began:                                                                    
                                                                                                                                
     If we look  at 2003 total year  numbers, the production                                                                    
     of natural  gas liquids in  the Lower 48  totaled about                                                                    
     1.7  million  barrels.  That production  was  primarily                                                                    
     concentrated  in the  southcentral United  States -  no                                                                    
     big surprise there - that's  where the bulk of the oil,                                                                    
     and  particularly gas  production, is  in the  Lower 48                                                                    
     with  about 66  percent of  the production  coming from                                                                    
     that particular  area. In  addition, we  imported about                                                                    
     165,000 barrels  per day  of NGL  production, primarily                                                                    
     from Canada,  coming through  pipelines into  the upper                                                                    
     Midwest.                                                                                                                   
                                                                                                                                
     In  contrast, let's  talk a  little bit  about Canadian                                                                    
     production. Their production  was about 670,000 barrels                                                                    
     a  day and,  of course,  their exports  just happen  to                                                                    
     equal  our  imports at  about  165,000  barrels a  day.                                                                    
     Based  on   numbers  we've   been  provided   from  the                                                                    
     Department  of Natural  Resources  and  looking at  the                                                                    
     total potential  production and  throughput on  NGP and                                                                    
     the compositions that are expected  of NGLs in the gas,                                                                    
     it looks like the  potential production from the Alaska                                                                    
     gas pipeline (AGP) throughput for  NGLs would be on the                                                                    
     order  of  160,000  barrels a  day  but  about  120,000                                                                    
     barrels a  day of that  would be ethane.  Contrast that                                                                    
     with U.S. supply of about  625,000 barrels a day of 1.7                                                                    
     million  barrels being  total ethane,  the AGP  liquids                                                                    
     are  going to  run about  50 to  60 percent  ethane, as                                                                    
     opposed   to   current   Lower   48   consumption   and                                                                    
     production, which is about  one-third ethane. Canada is                                                                    
     very  much  the same.  They've  got  a slightly  higher                                                                    
     percentage of  ethane at  about 40  percent. So  AGP is                                                                    
     going to be more highly leveraged on ethane.                                                                               
                                                                                                                                
     Let's look at  how the market really works  in terms of                                                                    
     natural  gas liquids  today. In  the Lower  48 we  have                                                                    
     two,  really, principle  market hubs  - Mont  Bellevue,                                                                    
     which is  located on the  Texas gulf coast  and Conway,                                                                    
     right  in   the  center  of  the   United  States  near                                                                    
     Hutchison,   Kansas.  Both   of  those   locations  are                                                                    
     interconnected   with   large   diameter   transmission                                                                    
     piping. Further,  they are  interconnected all  the way                                                                    
     back  up into  Edmonton,  Alberta through  a series  of                                                                    
     pipelines  so that  the entire  Lower  48 and  Canadian                                                                    
     natural gas liquid markets are very well integrated.                                                                       
                                                                                                                                
     As a result,  what we tend to see,  because the largest                                                                    
     consumption of  natural gas liquids occurs  here in Pad                                                                    
     3, and  it's specifically  on the  U.S. Gulf  Coast, is                                                                    
     that the prices are pretty  much set by the consumption                                                                    
     that occurs  in Mont Bellevue  and then the  whole rest                                                                    
     of  the  market  adjusts,  all   the  way  back  up  to                                                                    
     Edmonton, off  basis differentials  for transportation.                                                                    
     From time  to time,  there can be  regional disruptions                                                                    
     in supply,  seasonal supply and  demand that  may throw                                                                    
     those  particular  relationships  out of  whack  for  a                                                                    
     little while but, in general,  the price is pretty much                                                                    
     netback from a market clearing price at Mont Bellevue.                                                                     
                                                                                                                                
     The other key thing to  keep in mind about these market                                                                    
     centers and  again, the  biggest ones  in the  Lower 48                                                                    
     are Mont Bellevue  and Conway, Sarnia is  also north of                                                                    
     Detroit - is  also a large NGL market  center, and then                                                                    
     Edmonton,  Alberta. These  particular areas  have large                                                                    
     fractionation   units,  multiple   large  fractionation                                                                    
     units. And  the other distinctive factor  there is that                                                                    
     they have both  the demand for the NGLs  in those areas                                                                    
     and  significant underground  storage  in  the form  of                                                                    
     salt cavern  storage. Salt cavern  storage is  the most                                                                    
     efficient way to store natural  gas liquids. In Conway,                                                                    
     they  really   only  have  the  fractionation   in  the                                                                    
     underground  storage.  They're  really  a  distribution                                                                    
     point  balancing the  demand between  the northern  and                                                                    
     southern  parts  of  the   United  States  and  Canada,                                                                    
     whereas in  the other markets, they're  all derivative,                                                                    
     manufacturing polyethylene, polypropylene  and so forth                                                                    
     in those areas.                                                                                                            
                                                                                                                                
     If we look at product  price trends, and truthfully all                                                                    
     we want to  talk about here are the  trends, the ethane                                                                    
     natural gas  liquid tracks the  natural gas  price very                                                                    
     closely.  It is  correlated  very well  to the  natural                                                                    
     gas,  while  propane and  butane  track  the crude  oil                                                                    
     price.  The  important  thing to  understand  with  gas                                                                    
     processing, as opposed to  refining, for example, where                                                                    
     all of  the products  that are  derived from  crude oil                                                                    
     generally  follow the  crude oil  price,  there are  so                                                                    
     many derivative  markets for  natural gas  liquids that                                                                    
     we don't have  the gas price setting the  price for all                                                                    
     the  products. They  move independently.  As a  result,                                                                    
     the margins move  independently and you can  have a lot                                                                    
     more volatility in the margins.                                                                                            
                                                                                                                                
     Let me  just point out a  couple of spots here  to make                                                                    
     that clear. If we look here  in the period of 1995, you                                                                    
     can see that crude oil  prices are tracking fairly flat                                                                    
     in this  area but  you can see  natural gas  and ethane                                                                    
     moving  independently  in  a  downward  trend  in  this                                                                    
     particular area. Propane and  butane prices were likely                                                                    
     relatively stable  while gas  prices were  falling. The                                                                    
     other thing  to notice  is that  as these  prices move,                                                                    
     you don't  necessarily get the same  order of magnitude                                                                    
     shifts,  even though  they may  be  following the  same                                                                    
     trend. For  example, in the  period towards the  end of                                                                    
     the curve  out here in  the 2001 forward  period, crude                                                                    
     changed about  $10 a barrel  or moved about  40 percent                                                                    
     of  its value,  where  gas moved  $3.50  for about  140                                                                    
     percent of its underlying value  so large change is not                                                                    
     necessarily the same order of magnitude.                                                                                   
                                                                                                                                
     When  we look  at natural  gas processing,  we have  to                                                                    
     look at what  is the value of  extracting these natural                                                                    
     gas liquids from the gas  itself and that's really what                                                                    
     the next  page 5  is focusing on.  Here, as  opposed to                                                                    
     the prior slide,  what we're looking at  is the dollars                                                                    
     per MMBTU  for both  natural gas, the  blue line  - the                                                                    
     bottom line in most of  the chart, and ethane, which is                                                                    
     the red line, the top  line. And we're actually able to                                                                    
     compare the  value of  the ethane if  it's sold  on the                                                                    
     top line  in red as a  liquid directly to the  value of                                                                    
     the ethane if it's sold as natural gas.                                                                                    
                                                                                                                                
     The important  thing to recognize  here is if  you look                                                                    
     at the period of the early  1990s, you can see a fairly                                                                    
     wide  difference  between  those two  lines  indicating                                                                    
     that if you  take ethane out of natural  gas, you don't                                                                    
     sell it  for the blue  price -  turn it into  a liquid,                                                                    
     sell it for the red  price, you make the difference. As                                                                    
     you  track across  time, move  closer  to current  and,                                                                    
     specifically after  late 2000  where you see  the great                                                                    
     big  lovely peak  in prices,  you can  see those  lines                                                                    
     moving  much  closer  together.  As  those  lines  move                                                                    
     closer together,  the value  of ethane  as a  liquid is                                                                    
     becoming  almost equal  to  the value  of  ethane as  a                                                                    
     natural  gas. What  that says  is there's  no incentive                                                                    
     for  a  processor to  change  it  from gas  to  liquid.                                                                    
     Rather, he's  indifferent. He'd rather just  sell it as                                                                    
     natural gas and not have to pay the processing cost.                                                                       
                                                                                                                                
     NGL pricing on  page 6 - there's a lot  of debate about                                                                    
     what's going to happen to  pricing and, frankly, one of                                                                    
     the  things  that  I  think is  going  to  create  some                                                                    
     disruption  in the  market may  be the  timing and  the                                                                    
     actual location of the extraction  of liquids from AGP.                                                                    
     EIA  has rolled,  I believe,  Alaska  natural gas  into                                                                    
     their forecasts.  At least  it appears  to be  in there                                                                    
     for everything  I've looked at and  they're forecasting                                                                    
     that on  average, on  an annual  basis, they  think NGL                                                                    
     prices are going  to remain essentially flat  on a real                                                                    
     basis  in   the  long  term.  They're   projecting  the                                                                    
     increase of  something around 1 percent,  slightly more                                                                    
     than natural gas, which leads  me to believe that their                                                                    
     view is  that we  may see a  slight improvement  in gas                                                                    
     processing margins over time.  But specifically for AGP                                                                    
     liquids, what  we have to  be concerned about  is where                                                                    
     those  liquids are  going to  end up  and specifically,                                                                    
     how much  it costs  to get  it there  because obviously                                                                    
     we're not  going to  have enough  demand in  Alaska for                                                                    
     all of the  natural gas liquids that  can be extracted,                                                                    
     therefore  you're going  to have  to  deal with  export                                                                    
     pricing  and that  really is  going to  be the  biggest                                                                    
     determinator  really of  what those  prices are  netted                                                                    
     back to the  wellhead or to the  border, whatever basis                                                                    
     you want to look at.                                                                                                       
                                                                                                                                
     The other  thing that  you need to  think about  too is                                                                    
     that because  AGP liquids will  be highly  leveraged to                                                                    
     ethane, we  have to think  about where will all  of the                                                                    
     ethane go  but the  best place for  all the  ethane may                                                                    
     not necessarily be  the best place for  the propane and                                                                    
     the butane. Because these products  all go to different                                                                    
     derivative  markets,  you  may  have  widely  differing                                                                    
     economics,  depending on  the  ultimate destination  of                                                                    
     each segment of the NGL production.                                                                                        
                                                                                                                                
     Let's  talk  a  little bit  about  historic  processing                                                                    
     margins.  We'll look  at the  Lower 48  and maybe  that                                                                    
     will  help us  get some  idea of  what you'll  be faced                                                                    
     with in looking  at AGP liquids. My  firm, Muse Stancil                                                                    
     and  Company,  publishes every  month  an  oil and  gas                                                                    
     journal  - these  NGL  extraction  margins. And  really                                                                    
     what  they're  meant   to  represent  are  hypothetical                                                                    
     plants in  the mid-continent  and the U.S.  Gulf Coast.                                                                    
     And  really,   this  margin   is  meant   to  represent                                                                    
     economically  how  is  gas processing  doing.  In  each                                                                    
     individual  situation  the  margins may  be  higher  or                                                                    
     lower but,  on average, this  tells us how  margins are                                                                    
     changing  over time.  In the  mid-continent we  tend to                                                                    
     see fairly  rich natural gas  streams. Those  plants do                                                                    
     require usually  a little bit more  compression. On the                                                                    
     Gulf Coast  you have  less compression but  much leaner                                                                    
     gas, much  larger plants.  And you can  see that  if we                                                                    
     look at the trend, over  time, from early 1990, that we                                                                    
     are  in  a  significant  long,  very  slow  decline  in                                                                    
     natural   gas  processing   margins.  This   particular                                                                    
     calculation is  done from the  standpoint of  the plant                                                                    
     operator, assuming  that he buys  the gas,  he extracts                                                                    
     the liquids,  and pays all  of his operating  costs. So                                                                    
     this gives  us the  cash margin  really, that  he would                                                                    
     earn for  performing those services.  It does  not take                                                                    
     into account  the overhead, which can  vary widely from                                                                    
     company  to company  or the  capital expenditures  that                                                                    
     may  be going  on  - the  return of  or  the return  on                                                                    
     capital. So this  is sort of a before  tax type number.                                                                    
     But you  can definitely see  we're in a  downward trend                                                                    
     long term  and, for  gas processors in  particular, the                                                                    
     last three  and one-half years have  been pretty tough.                                                                    
     On the  U.S. Gulf  Coast you can  see that  since 2001,                                                                    
     margins have actually averaged negative cash return.                                                                       
                                                                                                                                
     Now  what is  the producers'  perspective on  this same                                                                    
     profitability  for gas  processing? One  of the  things                                                                    
     that's pretty typical in  gas processing contracts that                                                                    
     we see  all over the world,  not just in the  Lower 48,                                                                    
     is what  a processor  agrees to  produce or  to process                                                                    
     gas for a  percent of the proceeds. In  other words, he                                                                    
     captures the percent of the  product and that's what he                                                                    
     takes as his payment for  the services. So the producer                                                                    
     is used  to paying  a percent of  his proceeds  over to                                                                    
     the processor  and so one  other thing that we  look at                                                                    
     is from  a producer's perspective, he  usually pays for                                                                    
     all the  fuel. He has to  bear the shrinkage -  that is                                                                    
     how  much his  gas  volume decreases  when he  extracts                                                                    
     liquids, and also  the transportation and fractionation                                                                    
     charges  from  moving  those  products  away  from  the                                                                    
     plant. So  we look  at it from  his perspective  and we                                                                    
     say  okay, if  you're going  to process  your gas,  how                                                                    
     much of  a liquid do  you need to  get back to  pay for                                                                    
     processing,  to pay  for fuel,  for the  shrinkage, and                                                                    
     the transportation fractionation? And  if you look back                                                                    
     in the early  '90s, you can see that a  producer in the                                                                    
     mid-continent or on the Gulf  Coast was making money if                                                                    
     he got 60 percent of his proceeds back.                                                                                    
                                                                                                                                
     But over time,  just as we saw with  the gas processing                                                                    
     margin, that amount  of liquids he needs  to receive to                                                                    
     pay for processing has continued  to increase. When the                                                                    
     value of the  liquids exceeds the 100  percent bar that                                                                    
     means  that the  producer  has gone  from earning  some                                                                    
     income  for  processing  to paying  for  it;  in  other                                                                    
     words, it's  become a  cost center.  He can't  ever get                                                                    
     enough liquid back to pay for the cost of processing.                                                                      
                                                                                                                                
     And so,  in the period  since late 2000, we  have begun                                                                    
     to see  a shift in  the mentality in the  industry that                                                                    
     more and more  people view processing, at  least in the                                                                    
     short to  medium term, as  a cost center rather  than a                                                                    
     profit  center.  There  are  unique  opportunities  out                                                                    
     there, depending  on composition,  capital expenditures                                                                    
     and so forth,  where some people are  making money but,                                                                    
     again,  as  a  barometer  in  general,  processing  has                                                                    
     become more of a cost than a profit center.                                                                                
                                                                                                                                
     Now I'd like to shift gears  a little bit, moving on to                                                                    
     page 9, to talk  about alternative dispositions for the                                                                    
     AGP-NGL  throughput.  The  Department  of  Revenue  has                                                                    
     obtained   us    to   assist   in    developing   their                                                                    
     understanding  of  the  economics  of  these  different                                                                    
     alternatives and so  one of the first things  we took a                                                                    
     look at is what  particular areas, what market centers,                                                                    
     make  the  most sense.  If  we  look at  extraction  in                                                                    
     petrochemical  manufacturing outside  of  the State  of                                                                    
     Alaska, the first  place that you think of  is the U.S.                                                                    
     Gulf Coast, where  over 80 percent of  the capacity for                                                                    
     [indisc.]  production  in  North  America  is  located.                                                                    
     Other  centers include  in  Alberta,  primarily in  the                                                                    
     Edmonton area,  where about 12 percent  of the capacity                                                                    
     exists, and then Sarnia and  other various locations in                                                                    
     the  U.S.  Midwest, which  tend  to  be large  isolated                                                                    
     manufacturing  facilities.  The nearest  infrastructure                                                                    
     of  any plausible  size, and  this includes  derivative                                                                    
     manufacturing    of     ethane,    the    fractionation                                                                    
     capabilities  and  the  underground storage  we  talked                                                                    
     about earlier,  is really Alberta.  If we  look though,                                                                    
     at   Alberta's   ethane  balance,   they're   currently                                                                    
     manufacturing  just  a little  bit  more,  not even  10                                                                    
     percent more  ethane than they utilize,  and so they're                                                                    
     pretty  balanced  on  supply.  We do  know  that  their                                                                    
     availability of liquids  is going to go  down over time                                                                    
     as  their gas  continues to  decline and  so, over  the                                                                    
     medium to  long term,  there may be  some opportunities                                                                    
     to supplement  the ethane that  they're using  in their                                                                    
     petrochemical  manufacturing  there in  Alberta.  Their                                                                    
     total demand currently is about  250,000 barrels a day.                                                                    
     If we look at AGP's  potential of 120,000 barrels a day                                                                    
     of ethane, that's roughly  half their current capacity,                                                                    
     so that's an  awful lot of NGL or  ethane in particular                                                                    
     to have to displace  into Alberta. However, there could                                                                    
     be  additional capacity  installed there  or additional                                                                    
     take-away  pipeline capacity  installed  to handle  the                                                                    
     incremental ethane coming off of AGP.                                                                                      
                                                                                                                                
     Extraction in Alaska - first  of all we'd have to think                                                                    
     about the fact that when  we pull out the ethane, other                                                                    
     things  are going  to come  with the  ethane. It's  not                                                                    
     likely  that   we  could  come  up   with  an  economic                                                                    
     solution,  which says  we build  a natural  gas liquids                                                                    
     pipeline  to take  the excess  propane,  butane and  so                                                                    
     forth that  comes out with  the ethane to a  market, as                                                                    
     well as a gas pipeline.  So our feasibility look really                                                                    
     centered on the notion that  you would extract what you                                                                    
     need for  manufacturing in  Alaska and  that everything                                                                    
     else would  go back in the  AGP so that you  would only                                                                    
     have   to    build   one   piece    of   transportation                                                                    
     infrastructure for the state.                                                                                              
                                                                                                                                
     To have a  market for that primarily  ethane would also                                                                    
     require    the   development    of   a    petrochemical                                                                    
     manufacturing complex  and, most likely, that  would be                                                                    
     ethylene   going   to   polyethylene   and   then   the                                                                    
     infrastructure to  support that, including  the storage                                                                    
     utilities, electrical and so  forth. It's possible that                                                                    
     you   may   require  some   additional   transportation                                                                    
     infrastructure but our design is  not at a level yet to                                                                    
     really determine  that. Polyethylene is pretty  easy to                                                                    
     transport - you  can put it in rail  cars, hopper cars,                                                                    
     in bags and transport it by rail and marine.                                                                               
                                                                                                                                
     The  facility would  look something  like this  on page                                                                    
     10.  The  facility  would  handle   about  1.4  bcf  of                                                                    
     throughput  on the  extraction plant.  That's out  of a                                                                    
     roughly 4.3 bcf  total throughput on AGP.  From that we                                                                    
     would produce  about 40,000 barrels  per day  of ethane                                                                    
     to be  fed to the  ethylene facility and  another 1,000                                                                    
     barrels a day  of propane or so  for local consumption.                                                                    
     Any  incremental  propane  that couldn't  be  sold  and                                                                    
     butane  that's   extracted  would  go  back   into  the                                                                    
     pipeline  for transportation  to the  ultimate pipeline                                                                    
     termination point.  You would  also be able  to produce                                                                    
     commercial quality  natural gas for  local distribution                                                                    
     off the  top of the  extraction plant. And  any residue                                                                    
     gas  that you  couldn't  sell, which  our figures  show                                                                    
     would be  about a B [BCF]  or a little over  a B [BCF],                                                                    
     would go back into AGP as well.                                                                                            
                                                                                                                                
     The design  and construction  of this sort  of facility                                                                    
     is probably  duplicative in  that you  would ultimately                                                                    
     size all  the facilities  at the  terminus of  the main                                                                    
     line pipeline  to handle 100 percent  of the throughput                                                                    
     because,  obviously,  if  you're   going  to  have  one                                                                    
     ethylene plant,  one polyethylene plant,  they're going                                                                    
     to have  to be in  shut down  and turn around  for some                                                                    
     extended periods of time and  you wouldn't want to have                                                                    
     to  shut down  your pipeline  to do  that so  you would                                                                    
     probably just  have a slightly bigger  extraction plant                                                                    
     at  the  terminus of  the  pipeline  to allow  you  the                                                                    
     flexibility to mute that gas in either direction.                                                                          
                                                                                                                                
     Downstream of  the extraction plant,  on page  11, your                                                                    
     ethane  would  feed  an  ethylene  cracker.  You  would                                                                    
     produce  ethylene,  which  would  feed  a  polyethylene                                                                    
     plant and  then produce  the polyethylene  resin, which                                                                    
     would be little pellets that  look like little chips of                                                                    
     wax. There are some  by-products from the production of                                                                    
     ethylene,  however ethylene  production is  by far  the                                                                    
     most efficient  process. If you  try to use  propane to                                                                    
     propylene or  naphthenic-type cracking,  you get  a lot                                                                    
     more  by-product, stuff  you can't  use.  If you're  in                                                                    
     Edmonton or  on the U.S. Gulf  Coast, those by-products                                                                    
     can   be   sold   into  other   related   petrochemical                                                                    
     facilities   in   the    area   -   refineries,   other                                                                    
     petrochemical  manufacturing. Here  we've assumed  that                                                                    
     all  these  by-products  have  to  be  burned  as  fuel                                                                    
     because  we are  not  anticipating that  we would  have                                                                    
     additional  available  infrastructure to  absorb  those                                                                    
     by-products.                                                                                                               
                                                                                                                                
     In  summary,  if  we look  at  Fairbanks  versus  other                                                                    
     potential   points   for  extraction   and   downstream                                                                    
     processing  of  NGLs,  we  believe  there  will  be  an                                                                    
     attractively  priced   feedstock  at   Fairbanks  that,                                                                    
     because you're exporting  the gas, the price  of gas at                                                                    
     Fairbanks is  likely going to  be some  Canadian border                                                                    
     or Alberta-related  price netted back from  the tariff,                                                                    
     which  should lead  you to  a fairly  inexpensive price                                                                    
     for feedstock  in Fairbanks. Fairbanks also  does, with                                                                    
     the  rail  connection,  offer   a  link  to  waterborne                                                                    
     transportation  and there  is  demand for  polyethylene                                                                    
     resin  in  California. Now  that  demand  is being  met                                                                    
     today so  you would  have to be  able to  penetrate the                                                                    
     market at  the right price  to make sure you  could get                                                                    
     all the placement of that market.                                                                                          
                                                                                                                                
     There  are  synergistic  benefits,  including  pipeline                                                                    
     quality  natural  gas  availability  to  Fairbanks  and                                                                    
     possibly   other  areas.   You  would   have  to   have                                                                    
     electrical generation within the  complex and you could                                                                    
     possibly oversize that  facility and provide additional                                                                    
     merchant electrical power delivery into the grid.                                                                          
                                                                                                                                
     The disadvantages  we see of the  Fairbanks location is                                                                    
     that there  is some variability in  the gas composition                                                                    
     over time, that's just a  function of how gas comes out                                                                    
     of  the reservoir  and that's  something  we deal  with                                                                    
     everywhere.  However,  here  it's   going  to  be  very                                                                    
     localized. In  the Lower  48, it's  kind of  spread out                                                                    
     all  over the  place. What  that means  is you  have to                                                                    
     size your gas processing facility  to be able to ensure                                                                    
     that you're always  going to be able  to extract enough                                                                    
     ethane to  keep your ethylene plant  going, which means                                                                    
     it's  probably  a  little  bit  bigger  than  it  would                                                                    
     generally need to be.                                                                                                      
                                                                                                                                
     There's going  to be  a little  bit of  inefficiency in                                                                    
     processing because  you're going to process  1.5 bcf of                                                                    
     gas in  Fairbanks; 1 bcf  of that  is going to  go back                                                                    
     into the pipeline.  When it does, it  gets remixed with                                                                    
     other  components and  has to  be reprocessed  again at                                                                    
     the terminus  of the  pipeline so you  do have  to have                                                                    
     the capacity  and pay the  operating costs for  that to                                                                    
     be  processed twice.  We talked  about the  non-optimal                                                                    
     sizing. You're  going to want  to make  your downstream                                                                    
     facilities big enough to take  all the gas in the event                                                                    
     that you've  got an outage in  your ethylene production                                                                    
     or  just  for  routine  maintenance  of  your  ethylene                                                                    
     facility.                                                                                                                  
                                                                                                                                
     In looking at  capital costs - and I think  this is one                                                                    
     that's real  important, especially since we've  just in                                                                    
     the last several weeks learned  that there are at least                                                                    
     three ethylene plants in the  Gulf Coast that are going                                                                    
     to  be   shutting  down  because  they're   at  a  cost                                                                    
     disadvantage.  Fairbanks  appears  to  be  about  a  35                                                                    
     percent  higher capital  cost  than installing  similar                                                                    
     facilities  on  the U.S.  Gulf  Coast,  and perhaps  25                                                                    
     percent higher than an  Alberta type installation. That                                                                    
     is  before we  consider the  fact that  we're going  to                                                                    
     have  to  add  infrastructure that  already  exists  in                                                                    
     Alberta or exists on the  U.S. Gulf Coast that we could                                                                    
     incorporate and use so there  would be additional costs                                                                    
     above and  beyond that. The  fixed operating  costs are                                                                    
     likely higher,  due to wages  and also due to  the fact                                                                    
     that you're going  to have to fly  in expertise, parts,                                                                    
     and  equipment, which  are readily  available in  those                                                                    
     other centers.  We talked about the  lack of supporting                                                                    
     infrastructure  and  the   fact  that  the  by-products                                                                    
     really don't  have a  market here  so anything  that we                                                                    
     create out  of ethylene  manufacturing that's  not pure                                                                    
     ethylene  is going  to have  to be  burned probably  as                                                                    
     fuel in the facility.                                                                                                      
                                                                                                                                
     If we look at the  preliminary economics, and this is a                                                                    
     very high  level analysis,  but it  appears to  us that                                                                    
     the  production  of the  ethane  in  Fairbanks is  just                                                                    
     economically less attractive than  in either Alberta or                                                                    
     on the  U.S. Gulf  Coast. You've  got the  advantage of                                                                    
     potentially a  lower feedstock price than  your ethane.                                                                    
     The lower variable costs, and  by that we mean fuel, if                                                                    
     your gas  is cheaper, it's  cheaper to burn as  fuel as                                                                    
     well.  But  that's more  than  offset  by higher  fixed                                                                    
     operating costs, the location  differential in a remote                                                                    
     location,   and  the   lower  product   value  due   to                                                                    
     downgrading those by-products to fuel.                                                                                     
                                                                                                                                
     The significantly higher capital  cost is probably also                                                                    
     going  to be  a  disincentive for  most  of your  major                                                                    
     manufacturers  to  invest.  If  they're  looking  at  a                                                                    
     location in Alaska where there's  stranded gas versus a                                                                    
     location in  Asia where there's  stranded gas  and they                                                                    
     can  build a  plant  for  30 to  40  percent less  than                                                                    
     Alaska, they're more  than likely going to  go to Asia.                                                                    
     We  see an  awful  lot of  manufacturing of  facilities                                                                    
     being installed  in Asia today  and, in fact,  the U.S.                                                                    
     Gulf  Coast   facilities  are  running  at   less  than                                                                    
     capacity because they're  having trouble competing with                                                                    
     the more efficient and cheaper  product out of the Asia                                                                    
     Pacific.                                                                                                                   
                                                                                                                                
     Looking at  recent historical  U.S. Gulf  Coast margins                                                                    
     for ethylene  production, we're  assuming -  we believe                                                                    
     Fairbanks  could  probably  achieve  a  similar  margin                                                                    
     because its got the  feedstock advantage but it's going                                                                    
     to have higher  investment costs. But, if  it's able to                                                                    
     do that,  it will have a  significantly less attractive                                                                    
     rate  of  return simply  because  you've  got a  higher                                                                    
     capital  investment.   Alberta's  rate  of   return  is                                                                    
     probably  a  little  bit higher.  Their  contracts  are                                                                    
     structured a little bit differently  than the U.S. Gulf                                                                    
     Coast.   So,    Fairbanks   is    pretty   economically                                                                    
     disadvantaged  in terms  of trying  to  compete in  the                                                                    
     world market. And that's all  I have. I'm happy to take                                                                    
     any questions.                                                                                                             
                                                                                                                                
CHAIR SAMUELS  asked, regarding the  capacity, if Ms.  Adair said                                                               
the capacity  from Fairbanks south would  have to be the  same as                                                               
the capacity from the North Slope  to Fairbanks, just in case the                                                               
plant was out and had to be modified.                                                                                           
                                                                                                                                
MS. ADAIR  said that is  correct and,  more than likely,  to keep                                                               
the gas  flowing, the  downstream facility would  be sized  as if                                                               
Fairbanks wasn't  there. That would  provide the ability  to keep                                                               
the  gas  flowing   if  Fairbanks  had  to  be   shut  down.  The                                                               
incremental cost in terms of the pipe size is not that great.                                                                   
                                                                                                                                
CHAIR SAMUELS asked what percent would  be taken out if the plant                                                               
was up  and operating as  intended as  it goes by  Fairbanks; and                                                               
how much empty space would be headed for Chicago.                                                                               
                                                                                                                                
MS. ADAIR  replied, "About 1/2 B  [BCF] is what our  numbers show                                                               
because we  pull off  1.5 and we  put back in  about 1,  so about                                                               
500,000."                                                                                                                       
                                                                                                                                
SENATOR  RALPH SEEKINS  asked  how  the NGL  content  of the  gas                                                               
envelope that comes  off the North Slope compares  to other areas                                                               
or regions.                                                                                                                     
                                                                                                                                
MS. ADAIR  said the  composition is  more like  a Gulf  of Mexico                                                               
type gas. It tends to have less  propane and butane in it but has                                                               
more ethane.  From the  extraction profitability  standpoint, the                                                               
propane and butane tend to be  the higher value components of the                                                               
gas.  She  noted  as  compared  to  the  Lower  48  and  Canadian                                                               
production, Alaska gas  is 50 to 60 percent ethane;  the Lower 48                                                               
and Canadian gas is 30 to 35 percent.                                                                                           
                                                                                                                                
SENATOR SEEKINS  said the primary object  is to get gas  from the                                                               
North Slope to someone who will burn  it at a power plant or at a                                                               
commercial application  down the  road. He  asked, "Let's  say we                                                               
had a complete  gas envelope that didn't have  anything taken off                                                               
from it and  it got to the  Canadian border. Is then  that - what                                                               
do  we deliver  out  the other  end?  Is there  any  BTU per  BTU                                                               
relationship  that exists  when  it comes  back  into the  United                                                               
States?"                                                                                                                        
                                                                                                                                
MS. ADAIR  replied the real question  has to do with  the way the                                                               
major transmission  line systems  and local  distribution systems                                                               
are  designed and,  to a  certain degree,  how water  heaters and                                                               
stoves are designed to work  with natural gas. She explained what                                                               
you typically see in the  United States are natural gas pipelines                                                               
operating at  1,000 btu gas.  Some operate  as high as  1,050. In                                                               
Alberta, the gas processing facilities  that are remotely located                                                               
do what is called dew point  control. They strip out the heaviest                                                               
liquids -  propanes and butanes; and  make it easier to  move the                                                               
gas  in pipelines  without  a  lot of  liquids  falling out.  The                                                               
problem  with  liquids   falling  out  is  twofold:   a  loss  of                                                               
efficiency and safety considerations.  In the Alberta system, the                                                               
heavier  liquids  are  extracted  in the  field  and  then  large                                                               
straddle plants sit  over their big gas  transmission systems and                                                               
extract  the rest  of  the  ethane. However,  in  all cases  when                                                               
looking at local  distribution systems, the btus are  very low so                                                               
the producer  does not  have a  choice. At  some point  along the                                                               
value chain, the  gas must be processed. The btu  content must be                                                               
reduced for distribution purposes and someone must pay for it.                                                                  
                                                                                                                                
SENATOR SEEKINS  said everyone wants  to make natural  gas usable                                                               
in Alaska in Fairbanks and with  a line to Anchorage. He asked if                                                               
the  product that  comes down  that  line to  Fairbanks would  be                                                               
usable downstream in Alaska without any processing.                                                                             
                                                                                                                                
MS.  ADAIR said  it would  not without  some sort  of processing,                                                               
however, a  petrochemical complex taking  the product all  of the                                                               
way  to polyethylene  resin  would  not be  necessary  to make  a                                                               
commercial quality natural gas for local use.                                                                                   
                                                                                                                                
SENATOR  SEEKINS commented,  "I've heard  people talking  about -                                                               
well  there are,  on  the other  side of  the  border, there  are                                                               
people that  are saying and they  get to the Whitehorse  area and                                                               
they're saying  if we can get  that intact envelope here,  we can                                                               
strip that stuff off, we can  get it down to the Alaska coastline                                                               
and  get it  out to  the  markets if  Alaska doesn't.  Is that  a                                                               
possibility?  Is  there any  discussion  about  that that  you're                                                               
aware of?"                                                                                                                      
                                                                                                                                
MS. ADAIR said  she is not aware of any  such discussions and has                                                               
not been  asked to study  that question. She noted  the potential                                                               
limitation revolves  around having  enough heavy-duty  vessels to                                                               
move that high-pressure product, particularly ethane.                                                                           
                                                                                                                                
SENATOR  SEEKINS said  many [legislators]  want to  have in-state                                                               
processing  to  enhance Alaskans'  overall  quality  of life.  He                                                               
asked Ms.  Adair, with that in  mind, if her basic  conclusion is                                                               
that may not be economically feasible.                                                                                          
                                                                                                                                
MS. ADAIR said  the problem is that Alaska will  have a hard time                                                               
competing  in   the  worldwide  market   if  it   has  integrated                                                               
petrochemical manufacturing in-state.                                                                                           
                                                                                                                                
CHAIR SAMUELS  asked what  type of  processing facility  would be                                                               
required to pull  the heavy liquids out to  service Fairbanks and                                                               
Anchorage.                                                                                                                      
                                                                                                                                
MS.  ADAIR  explained  the  processing  would  require  the  same                                                               
technology to produce the natural  gas liquids but the processing                                                               
plant  would be  a  different size  and the  cost  would be  much                                                               
smaller. It  would not require  any of the  downstream processing                                                               
and the  liquids that were  not used could  be put back  into the                                                               
pipeline.                                                                                                                       
                                                                                                                                
SENATOR SEEKINS asked  if those liquids would be put  back in the                                                               
gas pipeline as opposed to the oil pipeline.                                                                                    
                                                                                                                                
MS. ADAIR said that is correct  and that it would be a relatively                                                               
small amount compared to the overall throughput on the AGP.                                                                     
                                                                                                                                
CHAIR SAMUELS  referred to  page 8  and asked  if demand  for the                                                               
liquids  drops, the  processing cost  goes up  for everyone,  and                                                               
whether  the demand  has dropped  so low  that the  manufacturers                                                               
cannot recover their operating costs.                                                                                           
                                                                                                                                
MS. ADAIR  said the  margin for gas  processing is  very volatile                                                               
and  feedstocks, which  are  natural gas,  work  off a  different                                                               
supply and demand  curve than the products do.  What has happened                                                               
is that the demand for natural gas  in and of itself is so strong                                                               
that, to  the extent everything possible  is left in the  gas, it                                                               
is more  economically beneficial  to do  so. She  continued, "And                                                               
that's really what  creates this situation is gas  prices are so,                                                               
so high.  People would  like to  - producers  would like  to sell                                                               
their propane  as natural gas if  they could in some  places but,                                                               
because of  the safety  considerations, they are  not able  to do                                                               
that.  So,  demand  is  still   very  strong  for  all  of  these                                                               
products."                                                                                                                      
                                                                                                                                
SENATOR SEEKINS asked, " It appears  to me then what we're saying                                                               
when we  look at this  chart on  page 8, that  this is kind  of a                                                               
stand-alone - I'm  buying the gas, what the price  of the gas is.                                                               
It's a  separate accounting  for that  structure but  what you're                                                               
saying is it's  necessary for them to take some  of these liquids                                                               
out?"                                                                                                                           
                                                                                                                                
MS. ADAIR said it is.                                                                                                           
                                                                                                                                
SENATOR SEEKINS asked if the  break-even chart is based on having                                                               
to  buy the  liquids but  not considering  that they  have to  be                                                               
stripped out.                                                                                                                   
                                                                                                                                
MS.  ADAIR  explained   that  it  is  based   on  the  producers'                                                               
opportunity costs - the gas given  by the producers to create the                                                               
liquids. She continued, "Some of that  he gives up because he has                                                               
to shrink out the propane and the  butane. Some of it he gives up                                                               
because it's burned as fuel. That's  gas that he could be selling                                                               
for revenue.  So it's that  whole opportunity cost that  he bears                                                               
to  produce  those  liquids.  That's really  what  the  chart  is                                                               
driving at; it's that his cost has gone up."                                                                                    
                                                                                                                                
SENATOR SEEKINS said often the  expense structure is a necessity,                                                               
not necessarily a reduction in opportunity.                                                                                     
                                                                                                                                
MS. ADAIR  said the  producer may have  flexibility to  a certain                                                               
degree, depending  on whether  he or  someone else  is processing                                                               
for  him, to  reduce  the amount  of  processing done.  Generally                                                               
producers sell to  someone else who does the  processing but some                                                               
producers  in the  Gulf Coast  retain  the right  to not  process                                                               
their gas when prices get high.                                                                                                 
                                                                                                                                
CHAIR  SAMUELS  acknowledged   that  Senators  Lincoln,  Hoffman,                                                               
Dyson,  Guess,  Elton,  Seekins  and  Olson  and  Representatives                                                               
Berkowitz, Joule, Chenault, Hawker,  and Stoltze were present. He                                                               
then  announced   that  Mr.  Harold  Heinze   would  address  the                                                               
committee.                                                                                                                      
                                                                                                                                
     IN-STATE OFF-TAKE POINTS AND SPURLINE: COST AND DESIGN                                                                   
                                                                                                                                
eHe                                                                                                                             
MR. HAROLD HEINZE, Chief Executive  Officer of the Alaska Natural                                                               
Gas  Development  Authority  (ANGDA), advised  members  that  his                                                               
presentation would  mirror Ms. Adair's  but would address  a much                                                               
smaller scale. He noted that  at the last hearing, members talked                                                               
about  some  access  and  opportunity  issues,  and  some  people                                                               
"raised  their eyebrows"  over the  assertion  that these  things                                                               
would  work   economically.  As   a  result,  ANGDA   hired  some                                                               
contractors to  do some feasibility  studies based on  some worst                                                               
case assumptions  and came to  the conclusion that there  are gas                                                               
off-take opportunities in Alaska  worth understanding. He said he                                                               
would focus on  providing gas for a number  of different options:                                                               
electric  power  plants,  propane  distribution,  and  piped  gas                                                               
distribution  systems.  He  also  said he  would  talk  about  an                                                               
approach  that  is  on  a  different  scale.  ANGDA  designed  an                                                               
entirely  stand-alone facility  to  perform  those functions  and                                                               
costed it. He pointed out that  it is not an optimized design but                                                               
ANGDA has identified many ways to  lower its cost and improve the                                                               
design. He  advised members that  they need to  immediately start                                                               
considering  that any  gas pipeline  that runs  any major  volume                                                               
down  through Alaska  will  have compressor  stations  on it.  If                                                               
those compressor  stations are  100 miles  apart, there  would be                                                               
seven or eight of them. Every  one of those stations must perform                                                               
the  function of  conditioning the  gas. They  must make  the gas                                                               
usable as  a fuel and, in  the process of doing  so, will extract                                                               
products  that are  valuable to  Alaska's  citizens. He  reminded                                                               
members that  may not  be on  the scale  of a  huge petrochemical                                                               
industry but  it is very important  for Alaska. He said  he would                                                               
then talk  about a  spur line  into the  Cook Inlet  area because                                                               
that represents a major off-take  opportunity for Alaska. He gave                                                               
the following presentation.                                                                                                     
                                                                                                                                
     Again, to  kind of put it  in scale for you,  if you go                                                                    
     back  to the  previous presentation,  one of  the early                                                                    
     charts  there showed  the  U.S.  propane production  at                                                                    
     500,000  barrels a  day.  If you  kind  of look  around                                                                    
     Alaska,  how  much propane  is  used  in Alaska  today,                                                                    
     there's no exact number I  could find but my best guess                                                                    
     is it's probably  a little over 1,000 barrels  a day of                                                                    
     propane  is  used  in  Alaska right  now.  And  I  went                                                                    
     through and  I did  an estimate  just -  again, roughly                                                                    
     off some  previous demand studies  that have  been done                                                                    
     related to  gas and  I estimated  that if  you supplied                                                                    
     basically the whole interior of  Alaska that was not on                                                                    
     the highway  system or  not on  the pipeline,  in other                                                                    
     words  on  the  river  system  or  the  disbursed  road                                                                    
     system,  that  you'd  need something  maybe  resembling                                                                    
     2,000 barrels a  day of propane to do  that. So, again,                                                                    
     on the scale of the world, we're pretty small.                                                                             
                                                                                                                                
     But also just  to put in perspective for  you, what you                                                                    
     didn't  hear  in  the last  presentation  is  how  much                                                                    
     propane  is  going  down  the   line.  That  number  is                                                                    
     anywhere from  50 to 100,000  barrels a day  of propane                                                                    
     is  going down  that line.  So what  I'm talking  about                                                                    
     here  is a  relatively  minor  extraction of  something                                                                    
     that's going  by. It will  not change the  economics of                                                                    
     anything related  to the pipeline  but it  is important                                                                    
     to the economics  of Alaska and Alaskans.  [END OF TAPE                                                                    
     04-24, SIDE A]                                                                                                             
                                                                                                                                
TAPE 04-24, SIDE B                                                                                                            
                                                                                                                                
MR. HEINZE continued.                                                                                                           
                                                                                                                                
     ...on the line. We sized  - again, these kind of plants                                                                    
     are very  common. This  is not  brain surgery.  This is                                                                    
     off the shelf  stuff. You can call people  up and order                                                                    
     these parts  from a catalog and  you can put them  on a                                                                    
     skid if  they are  small enough. As  a matter  of fact,                                                                    
     the unit  we are  looking at here  is smaller  than any                                                                    
     manufacturer really  wanted to  talk about but  we were                                                                    
     able, through a  little cajoling, to get  them to think                                                                    
     really small. This facility process  is only 10 million                                                                    
     cubic feet a day of gas.  Again, to kind of put that in                                                                    
     perspective  for you,  Fairbanks would  probably use  a                                                                    
     number  two or  three  times that.  Ten  million a  day                                                                    
     would be  enough for  a large  mine development  but it                                                                    
     would be an overwhelming number  compared to any of our                                                                    
     smaller  communities or  smaller opportunities  that we                                                                    
     would be looking at. In  terms of scale, that was about                                                                    
     as  small as  we  could  get people  to  kind of  think                                                                    
     about.  And we  said  okay, we'll  stop there,  because                                                                    
     even if  it was  too big, you  obviously can  turn this                                                                    
     kind of facility  on, run it for a period  of time, and                                                                    
     when the  tank is full,  you turn  it off and  then you                                                                    
     turn  it back  on. You  can do  that in  an operational                                                                    
     sense here.  Again, there's nothing  very magic  in all                                                                    
     of this stuff here.                                                                                                        
                                                                                                                                
REPRESENTATIVE BILL STOLTZE asked Mr.  Heinze if he has talked to                                                               
the  Matanuska  Electric Association  (MEA)  because  it will  be                                                               
ending  its  long-term  contract  with Chugiak  in  the  not  too                                                               
distant future  and the Matanuska  Valley is the  fastest growing                                                               
part of the state.                                                                                                              
                                                                                                                                
MR.  HEINZE  asked   to  defer  that  topic  to   the  spur  line                                                               
discussion. He then continued with his presentation.                                                                            
                                                                                                                                
     In terms  of the  propane issue here,  this is  a plant                                                                    
     that  again,  you'll  see summarized  a  little  later.                                                                    
     Again,  the  economics on  this  -  basically, what  we                                                                    
     found out,  this plant  would cost  a little  more than                                                                    
     $10  million.   If  you  work  the   economics  of  it,                                                                    
     basically you can extract  propane under this situation                                                                    
     for  about 50  to 75  cents  a gallon.  Now, there  are                                                                    
     optimizations you  could make on this  plant. There are                                                                    
     a lot  of variations on  this theme and,  for instance,                                                                    
     if  I looked  at the  Yukon River,  which would  have a                                                                    
     bigger  plant  than this,  I  could  keep driving  that                                                                    
     number down. So the 50 to  75 cents is the upper number                                                                    
     per gallon. On a broad  feasibility sense, I'd like you                                                                    
     to  think about  the fact  that that  is a  potentially                                                                    
     very  attractive number  to Alaska.  In  Alaska we  pay                                                                    
     basically  the  propane  price   in  Alberta  plus  the                                                                    
     transportation here.  If the  gas going  by here  is at                                                                    
     some intermediate value compared  to Edmonton, then our                                                                    
     price would be lower. At  50 cents even, you can afford                                                                    
     to  be   extracting  it  at  some   place  that's  very                                                                    
     convenient for  you to wholesale  from and so  there is                                                                    
     at  least worth  understanding here.  I'm not  claiming                                                                    
     this is a done deal but it's worth understanding.                                                                          
                                                                                                                                
CHAIR  SAMUELS asked  Mr. Heinze  to also  address, later  in his                                                               
presentation, the  reduction in  capacity and whether  there will                                                               
be empty capacity heading south.                                                                                                
                                                                                                                                
MR. HEINZE  replied, "You  will see  on the  scale of  the things                                                               
we're talking  about other than the  gas off-take to come  to the                                                               
Cook  Inlet area,  other than  the  spur line  issue, there's  no                                                               
issue I'm raising  here - it gets  lost in the round  off, let me                                                               
put it that way." He then continued.                                                                                            
                                                                                                                                
     We also  looked at the  same plant because if  you have                                                                    
     to basically  go through the same  process to condition                                                                    
     the gas  for, say,  to make a  turbine fuel  for either                                                                    
     powering a  pump station  or compressors  for providing                                                                    
     electric   power   generation,   or   providing   local                                                                    
     distribution of gas, you have  to go through these same                                                                    
     basic processors. If you look  at the front end of this                                                                    
     plant, it's identical.  All I've taken out  here is the                                                                    
     idea of reinjecting  the gas and now I'm  using the gas                                                                    
     beneficially. And  again, we looked at  this plant. The                                                                    
     economics are  very attractive and, frankly,  if I took                                                                    
     credit  for  having  both gas  available  for  use  and                                                                    
     propane, now the  price per unit on both  of those goes                                                                    
     down. So, again, I can improve on this.                                                                                    
                                                                                                                                
     What we  don't know at this  point is - and  we suspect                                                                    
     only   because  the   information,   frankly,  is   not                                                                    
     available to  us, is that at  every compressor station,                                                                    
     there  would be  something that  looked like  this. Our                                                                    
     engineering  expertise says  that to  run a  compressor                                                                    
     station, you've got to do  something like this at every                                                                    
     compressor  station. But,  since we've  never seen  the                                                                    
     plans  or  diagrams  or  process  or  anything  at  the                                                                    
     stations, we  don't know. But  that is  our engineering                                                                    
     judgment at this point.                                                                                                    
                                                                                                                                
     That's interesting because if  you already have a large                                                                    
     amount  of gas  that's going  to  be used  to fuel  the                                                                    
     compressor  station  and  burned in  the  turbines  and                                                                    
     pushing  that  4.5 billion  cubic  feet  of gas  south,                                                                    
     that's in itself  going to yield a lot  of propane. And                                                                    
     again,  how you  look at  that cost  structure and  all                                                                    
     those other things is very interesting.                                                                                    
                                                                                                                                
SENATOR SEEKINS asked if the gas  must be dehydrated before it is                                                               
put in the pipeline.                                                                                                            
                                                                                                                                
MR. HEINZE said  the water vapors are removed to  a certain level                                                               
but ANGDA  does not know  what that dehydration level  is because                                                               
it has  not seen  the exact specifications.  He pointed  out that                                                               
[the dehydration  requirement] could  be removed to  optimize the                                                               
facility. If the  pipeline specification was low  enough it might                                                               
not  be  necessary, depending  on  ANGDA's  process design.  That                                                               
process is there to get  to the necessary temperatures further in                                                               
the process.  The gas is chilled  to a very cold  temperature and                                                               
any water  vapor at  all at that  point creates  difficulties. He                                                               
noted the dehydration step accounts for several million dollars.                                                                
                                                                                                                                
SENATOR SEEKINS surmised  that if it is not  dehydrated, it would                                                               
produce  carbonic acid  mixed  with CO2,  which  would eat  right                                                               
through steel.                                                                                                                  
                                                                                                                                
MR.  HEINZE  said  ANGDA  is  very  comfortable  that  the  water                                                               
specification would  be such that that  would not be a  worry. He                                                               
said the  problem is that  as you went through  these facilities,                                                               
the water temperatures achieved would  be much lower. He repeated                                                               
that  for  the  feasibility  study,  ANGDA  took  the  worst-case                                                               
scenario it could think of.                                                                                                     
                                                                                                                                
SENATOR LINCOLN  recalled Mr.  Heinze saying  a propane  plant at                                                               
the compressor  stations would cost  about $10 million  and asked                                                               
if that  cost would increase by  having the utility gas  in there                                                               
as well.                                                                                                                        
                                                                                                                                
MR. HEINZE replied:                                                                                                             
                                                                                                                                
     This  is  actually a  lower  cost  facility because  we                                                                    
     don't  have to  reinject  the gas.  Because  we have  a                                                                    
     beneficial use for  the gas and don't  have to reinject                                                                    
     it, it saves us the cost  of a compressor. Every time I                                                                    
     drop a box  off of this thing,  I think of it  as $1 or                                                                    
     $2 million shaved off the  plant. It's just some pieces                                                                    
     of the  puzzle we don't  have to have there  to operate                                                                    
     correctly. So this  is a much simpler  operation in our                                                                    
     mind. And  so what it  argues very strongly  is, again,                                                                    
     as  you  look  at  what  we would  call  a  very  small                                                                    
     facility, for  some parts of  Alaska it is  very large.                                                                    
     But, on the  other hand, we can  make available through                                                                    
     these kinds of facilities a fair amount.                                                                                   
                                                                                                                                
     For instance,  this facility yields  100 barrels  a day                                                                    
     roughly of propane.  So in that sense it  is small. But                                                                    
     again,  we could  scale this  facility  up and  achieve                                                                    
     much greater  economies of scale. Let's  say you wanted                                                                    
     1,000  barrels  a day  at  the  Yukon River.  All  this                                                                    
     feasibility work says is that  might be very attractive                                                                    
     because  we could  beat That  50 to  75 cents  a gallon                                                                    
     propane,  by a  lot  probably, in  a facility  designed                                                                    
     just for that purpose.                                                                                                     
                                                                                                                                
MR. HEINZE continued his presentation.                                                                                          
                                                                                                                                
     Again, I've kind of told  you everything that's on that                                                                    
     slide already.  This was just  kind of looking at  it -                                                                    
     every place  you had  a power  plant, for  instance, at                                                                    
     North  Pole. North  Pole was  putting in  a 60-megawatt                                                                    
     plant.  It would  take a  facility about  this size  to                                                                    
     condition the  gas for  use in  that plant  probably or                                                                    
     some variation of it. You  could produce propane there.                                                                    
     You  could  probably  produce  100  barrels  a  day  of                                                                    
     propane, is all we're saying,  as a by-product of doing                                                                    
     this. So that's important.  We have no understanding of                                                                    
     the   combination  of   the   pump   stations  on   the                                                                    
     TransAlaska  pipeline,  which   are  being  electrified                                                                    
     under their  new program and  how that  might co-locate                                                                    
     and  co-act with  compressor  stations located,  again,                                                                    
     along  a  gas line.  And  from  our perspective,  there                                                                    
     might  be  some  wonderful synergies  involved  in  co-                                                                    
     locating  those  major  facilities and  operations,  in                                                                    
     which case -  again, you would have a  fairly large use                                                                    
     for gas  to fuel the  turbines that run  the generators                                                                    
     that drive  the motors  that drive the  compressors and                                                                    
     trunks, so it's logical.                                                                                                   
                                                                                                                                
     Again, I'm going  to continue to emphasize  to you that                                                                    
     even though we  are a small piece of  the show, there's                                                                    
     4.5 billion cubic  feet a day going down  that line and                                                                    
     we're talking  about here something that's  1/1000th of                                                                    
     that. It is  very important that we  define the ability                                                                    
     and where and  how those things might happen.  I took a                                                                    
     crack at it for you here.  Again, last time I drew up a                                                                    
     broad list. Here's  my more definitive list  of where I                                                                    
     would,  at least,  see those  kinds of  points. And  it                                                                    
     seems to me that you'll  notice some of the points I've                                                                    
     tried  to list  were  in Canada.  And  it's, again,  my                                                                    
     general  understanding that  this  type  of a  pipeline                                                                    
     going through  Canada would have  to make  the revision                                                                    
     for this kind  of access that we're  talking about. Now                                                                    
     maybe the law is  different there. Maybe something else                                                                    
     is  different. I  don't know.  I haven't  researched it                                                                    
     but it seems  to me that we, in our  own best interest,                                                                    
     ought to be looking at something like that.                                                                                
                                                                                                                                
     And then  my final point  is I  think you ought  to put                                                                    
     the  burden  of what  I'm  trying  to talk  about  here                                                                    
     today,  frankly, on  any project  proponent. These  are                                                                    
     issues and  opportunities that are  part and  parcel of                                                                    
     running the system  through the public land,  as far as                                                                    
     I'm concerned,  and they need  to be addressed  as part                                                                    
     of  the design.  We found  our ability  to do  this was                                                                    
     very hindered by the fact  that there is, for instance,                                                                    
     no  publicly available  information on  the composition                                                                    
     of the gas that's going  down this pipeline. I mean you                                                                    
     just  heard a  presentation  on  a whole  petrochemical                                                                    
     industry  and  I don't  know  what  the basis  of  that                                                                    
     presentation was. It's not  publicly available. I don't                                                                    
     even know how to design these facilities for sure.                                                                         
                                                                                                                                
     The  other  thing you've  got  to  worry about  is  the                                                                    
     tariff issue  and, again, I've  got to just  bring this                                                                    
     back up with you because  the key to this is physically                                                                    
     we  can take  the gas  off. I've  shown you  a facility                                                                    
     that can  do it.  I've shown you  feasibility economics                                                                    
     that say  it is  possible economically  to do  it. But,                                                                    
     it's dead  in the water  under a tariff  structure that                                                                    
     discriminates against taking gas  off in Alaska. If you                                                                    
     don't have  a tariff structure  that allows us  to gain                                                                    
     the benefit  of being  closer to  the source,  all bets                                                                    
     are off. If  I have to pay the same  price in Fairbanks                                                                    
     that I would in Edmonton,  the economics don't work and                                                                    
     it's that simple.                                                                                                          
                                                                                                                                
     Again,  I would  suggest to  you that  you can  include                                                                    
     these  things in  either the  grant of  right-of-way by                                                                    
     the state, or whatever Stranded Gas Act things you do.                                                                     
                                                                                                                                
     Mr. Chairman, I'd  like to just take a  few minutes and                                                                    
     talk  about  the  spur  line and  some  of  the  issues                                                                    
     related to it. Part of  the charge that ANGDA was given                                                                    
     in Ballot Measure 3 was  to look specifically at a spur                                                                    
     line to  the Cook Inlet area.  It was not just  to look                                                                    
     at an  LNG project  but also  to look  at a  spur line.                                                                    
     Basically,  a  part  of  the report  that  we  will  be                                                                    
     publishing  in a  week -  we did  do that  and we  have                                                                    
     basically, again, completed preliminary  work on it and                                                                    
     I very  briefly summarized  it here.  We did  define an                                                                    
     alignment for the  140 miles that's shown  on these two                                                                    
     poster  boards  behind  you. It  goes  from  Glenallen,                                                                    
     basically,  at  the TransAlaska  pipeline  right-of-way                                                                    
     and it leads  into a place in Palmer  that is basically                                                                    
     - I  would describe it  to you  as the place  where the                                                                    
     highways  and the  railroad intersect  -  the Glen  and                                                                    
     Parks  Highway and  the railroad  and the  new overpass                                                                    
     and all  that. That happens  to be the point  where you                                                                    
     can  get to  the Enstar  20 inch  system, which  is the                                                                    
     basic piping  system in  this whole  area. And  so we'd                                                                    
     design that line  to go between those  two places. It's                                                                    
     a high-pressure line. Its cost  estimate was about $300                                                                    
     million.                                                                                                                   
                                                                                                                                
     We  also  hired a  financial  company  to look  at  the                                                                    
     financing  of that  where ANGDA  would be  acting as  a                                                                    
     state-owned utility.  The advantage  of being  a state-                                                                    
     owned utility is that basically  you can do 100 percent                                                                    
     debt financing for  a project of this size  and you can                                                                    
     do it  at a  very low  interest rate  - lower  than the                                                                    
     interest rates  that we talked  about yesterday  in the                                                                    
     presentation. For  that type  of a design  we estimated                                                                    
     that we  could move  gas from  Glenallen to  the Palmer                                                                    
     area for about 15 cents/million  btu. That's a very low                                                                    
     number. It's  very difficult to  move any  gas anywhere                                                                    
     in Cook Inlet for that number.  Most of the time it's a                                                                    
     bigger  number than  that just  within  the Cook  Inlet                                                                    
     area.                                                                                                                      
                                                                                                                                
     There are, obviously, in terms  of the spur line, a lot                                                                    
     of issues  that are well beyond  our control. Obviously                                                                    
     there is not  gas sitting there right  now in Glenallen                                                                    
     for me to  go pick up. If  you want to go  to Delta and                                                                    
     pick  it up  there,  it's about  twice  the cost.  It's                                                                    
     about twice the pipeline  and about twice to everything                                                                    
     else. We  did not work  that problem in  detail because                                                                    
     the pipeline would follow  the TAPS right-of-way, which                                                                    
     is a  well understood  pipeline and corridor  and there                                                                    
     are just no big issues in laying a 24 inch pipe.                                                                           
                                                                                                                                
     As you'll see  on the map here, we did  lay out a basic                                                                    
     route that  follows the Glen Highway  because the state                                                                    
     does have that right-of-way. We  do have the ability to                                                                    
     lay pipe  in that right-of-way. From  a technical point                                                                    
     of  view,  there are  places  that  we have  identified                                                                    
     where it was logical  to deviate from that right-of-way                                                                    
     and  possibly  improve  the  pipelining  circumstances.                                                                    
     Again, as  anybody whose driven  the road  knows, there                                                                    
     are places where  the side slopes are  pretty steep and                                                                    
     where the  river kind  of comes  up against  the cliffs                                                                    
     and those kinds  of things. It would be hard  to fit in                                                                    
     the  right-of-way. It  could be  done but  it would  be                                                                    
     hard  to and  we've  identified other  areas that  we'd                                                                    
     like to go down.                                                                                                           
                                                                                                                                
SENATOR SEEKINS  noted that Senator  Wagoner was  very interested                                                               
in looking into the routing of  a connection into the Palmer area                                                               
from the Fairbanks  area that would follow the  Parks Highway and                                                               
asked if ANGDA looked at such a route.                                                                                          
                                                                                                                                
MR. HEINZE said at this point,  ANGDA has looked into the record.                                                               
The state has  information on file sufficient to  define a right-                                                               
of-way from the Fairbanks to  Palmer area. ANGDA also found there                                                               
is no  information on the  Glenallen "on-in" route so  ANGDA will                                                               
take  the  step  of  submitting  that  right-of-way  application.                                                               
Regarding the  study between  the two  different routes,  at this                                                               
point,  ANGDA  has formed  no  opinion  that  has allowed  it  to                                                               
differentiate between the  two. ANGDA is aware  of advantages and                                                               
disadvantages to  each; the biggest  advantage to  coming through                                                               
Glenallen  is  twofold.  First,   it  would  reach  the  greatest                                                               
population  of the  state and,  secondly,  it is  the easiest  in                                                               
terms of  right-of-way issues because it  follows the TransAlaska                                                               
pipeline right-of-way through  an area that is made  up solely of                                                               
state and private  lands. On the other hand, the  other route has                                                               
a definable right-of-way.  ANGDA will study that and  look at the                                                               
smaller projects for bringing North Slope gas to the area.                                                                      
                                                                                                                                
SENATOR  SEEKINS  said  it  is  his  understanding  that  Senator                                                               
Wagoner believed the possible route  from Fairbanks to Palmer did                                                               
not cross  any federal land either;  it is all state  and private                                                               
land.                                                                                                                           
                                                                                                                                
MR. HEINZE said the examples he  has seen of that route contained                                                               
some special  state park land  and federal parkland.  He admitted                                                               
he does  not know whether ways  can be found around  that at this                                                               
point.                                                                                                                          
                                                                                                                                
SENATOR SEEKINS said he saw a  relocation to the east side of the                                                               
Parks  Highway, which  is  totally outside  of  federal land  but                                                               
other people say it would have to go through the national park.                                                                 
                                                                                                                                
MR. HEINZE said at this  point, ANGDA's preliminary assessment is                                                               
that  the cost  to deliver  gas  either way  is very  comparable.                                                               
ANGDA sees  no cost advantage  to one  route over the  other, the                                                               
reason being that  even though the Glenallen route  is longer, it                                                               
would be more economically attractive  to "ride a longer distance                                                               
in a  big pipe to  Delta" and, second,  that route already  has a                                                               
right-of-way and road system.                                                                                                   
                                                                                                                                
SENATOR SEEKINS  asked if  the right-of-way  from Delta  south is                                                               
already owned and would have to be purchased by the state.                                                                      
                                                                                                                                
MR.  HEINZE said  in one  of  ANGDA's studies  about its  broader                                                               
responsibilities  under Ballot  Measure 3,  it determined  one of                                                               
the specifics was  to look at the permits  and other certificates                                                               
held by  the Yukon Pacific  Corporation. ANGDA determined  that a                                                               
large number of those permits  are still good and valuable. ANGDA                                                               
looked  at that  favorably in  that it  could buy  a federal  and                                                               
state right-of-way  held by  Yukon Pacific that  would go  all of                                                               
the way to Glenallen.                                                                                                           
                                                                                                                                
SENATOR DYSON asked  if ANGDA anticipates the optimum  use of in-                                                               
state gas will exceed the state's royalty share.                                                                                
                                                                                                                                
MR. HEINZE  said right now, 200  bcf is used in  Alaska annually.                                                               
About half of  that amount is used in the  LNG export facility on                                                               
the  Kenai, owned  by Conoco  and Marathon.  They currently  feed                                                               
that  with their  own reserves.  He  does not  know their  future                                                               
intentions. He continued:                                                                                                       
                                                                                                                                
     I have  no idea,  I have  no way  of knowing  what they                                                                    
     intend to  do in the  future on that. For  the purposes                                                                    
     of  these economics,  I have  made the  assumption that                                                                    
     what  I  see  today  is  what I  have  in  the  future.                                                                    
     Obviously  there is  a  case where  they  choose to  do                                                                    
     zero. There is also a  case where they choose to expand                                                                    
     based on  a new and  plentiful supply. At least  one of                                                                    
     the companies I  just named is a major owner  of gas on                                                                    
     the North Slope.  If their gas was used  in that plant,                                                                    
     I  presume  the  state  would  not  take  it  as  their                                                                    
     responsibility  to supply  that gas.  Of the  remaining                                                                    
     100 billion  a year,  half of  that is  roughly Agrium.                                                                    
     And, again,  I don't know  exactly what role  the state                                                                    
     would play in  that. The state might be  a seller there                                                                    
     or they  might buy  gas from other  people commercially                                                                    
     or whatever.  I know  they are  interested in  the fact                                                                    
     that a spur line like this,  hooked this close to a big                                                                    
     supply up  north, might give  them the kind  of pricing                                                                    
     advantage  they   feel  they   have  to  have   in  the                                                                    
     marketplace to  continue to  operate. Again,  our focus                                                                    
     has  been much  more on  them frankly,  than trying  to                                                                    
     build a  new industry, because  if we can't  make their                                                                    
     economics  work, then  again  my  experience says  it's                                                                    
     going to be very difficult  to do something in terms of                                                                    
     greenfield, so  we have  a lot of  incentive to  try to                                                                    
     make that work.                                                                                                            
                                                                                                                                
     If I  could, back to Representative  Stoltze's question                                                                    
     about  the  Matanuska area  and  all  that, it  is  our                                                                    
     intention in  the spur line  that we would put  major -                                                                    
     we would like others  to have major electric generation                                                                    
     facilities at  both ends  of that  spur line.  It makes                                                                    
     sense that  where we  take off in  Glenallen to  have a                                                                    
     generating  plant -  that also  wholesales propane.  It                                                                    
     makes sense to  have an electric power  plant and other                                                                    
     things as we come into the Enstar system.                                                                                  
                                                                                                                                
REPRESENTATIVE STOLTZE  asked if  an entity  that might  have the                                                               
capacity  to serve  20 percent  of the  state's population  would                                                               
provide  more justification  or impetus  and whether  that entity                                                               
would need to "come to the table" formally.                                                                                     
                                                                                                                                
MR.  HEINZE said  that early  in  the spur  line discussions,  he                                                               
invited every utility,  agency, and others to a  meeting. MEA did                                                               
attend  that meeting.  Since then,  people have  taken a  greater                                                               
interest in the  dialog but that is the choice  of each entity at                                                               
this point.  A spur line  to this area  may be a  very attractive                                                               
proposition for the citizens of  Alaska. And while everyone hopes                                                               
that a lot of gas is discovered  in Cook Inlet, the DOE study put                                                               
a  multi-billion   dollar  price  tag  on   it.  Therefore,  this                                                               
alternative must be kept on the table.                                                                                          
                                                                                                                                
SENATOR DYSON  said everyone  at the  table feels  responsible to                                                               
make   sure  that   Alaskans  benefit   from   North  Slope   gas                                                               
distribution but  the bottom line  question is whether  the state                                                               
is able to  meet the foreseeable need for home  heating and power                                                               
with its royalty share.                                                                                                         
                                                                                                                                
MR.  HEINZE said  the portion  he  firmly believes  the state  is                                                               
responsible for dealing with is in  the range of 50 to 60 billion                                                               
cubic feet per year. That is  a very small amount compared to the                                                               
state's share of several trillion  cubic feet. However, regarding                                                               
all  other  in-state uses,  the  arithmetic  becomes a  bit  more                                                               
problematic, but that is for  commercial and industrial companies                                                               
that are  capable of taking  care of themselves.  His preliminary                                                               
review says if ANGDA  can bring a large supply to  this area at a                                                               
reasonable price, it makes sense  for the industrial users to not                                                               
only continue but to expand to  help their own economics. He then                                                               
alerted  members that  in one-week  newspapers  around the  state                                                               
will produce a  12-page report to the people,  required by Ballot                                                               
Measure 3.  ANGDA has distributed  150,000 copies  throughout the                                                               
state for inclusion in all major  newspapers in Alaska.  He hopes                                                               
it provides a  positive view of what ANGDA can  do related to gas                                                               
use in Alaska. He noted that  ANGDA will be powering up a website                                                               
at the  same time  that will contain  all consultant  reports and                                                               
everything it has done in its first year.                                                                                       
                                                                                                                                
SENATOR SEEKINS asked  Mr. Heinze if he is aware  of any plans or                                                               
consideration of a  liquids line that would go  from the Interior                                                               
to the Cook Inlet area.                                                                                                         
                                                                                                                                
MR. HEINZE said he is not  aware of any current consideration but                                                               
when he mentioned that he  looked at the right-of-way information                                                               
on file  with the state,  the information  was for a  liquid line                                                               
from Fairbanks south. That application  was submitted a number of                                                               
years  ago. At  that  time, the  parties  were having  difficulty                                                               
discussing the cost of shipping  on the railroad. Someone decided                                                               
it  was  appropriate  to  look  into  alternative  economics.  He                                                               
believes that design is legitimate.                                                                                             
                                                                                                                                
SENATOR SEEKINS  asked if  there has  been an  ongoing discussion                                                               
about that possibility.                                                                                                         
                                                                                                                                
MR. HEINZE  said not that he  is aware of  but he is not  in that                                                               
business.                                                                                                                       
                                                                                                                                
REPRESENTATIVE GARA recalled the  Wood MacKenzie "folks" said, at                                                               
the meeting  yesterday, that contrary  to what others  have said,                                                               
the state  has a  large window  of opportunity  to secure  an LNG                                                               
contract if it ships LNG to  Valdez. He noted that contrasts with                                                               
people who have  said that time is of the  essence regarding that                                                               
sale. He asked Mr. Heinze to  respond. His second concern is that                                                               
Southcentral will  always have an  increasing demand for  gas and                                                               
no one  knows what will be  available in Cook Inlet  in 10 years,                                                               
so  the amount  that will  need to  come off  of a  spur line  is                                                               
unknown. He  said five or six  years from now, when  the gas line                                                               
is more  definite, the Cook  Inlet supply will be  more definite.                                                               
He asked  if companies that are  deciding whether to build  a gas                                                               
pipeline will  base their decisions  on whether natural  gas will                                                               
be offloaded in  Southcentral because of an  inadequate amount in                                                               
Cook Inlet and whether they will have to analyze that now.                                                                      
                                                                                                                                
MR. HEINZE said in regard to  the second question, ANGDA has made                                                               
certain assumptions  as to size,  cost, volume and  other factors                                                               
and showed  the low number of  15 cents per million  btu. If that                                                               
same line moved half the volume  through it, the cost would be 30                                                               
cents per million  btu. If half the volume came  all the way from                                                               
Delta, the cost would be 60 cents per million btu. He explained:                                                                
                                                                                                                                
     If we are  delivering into this area gas  priced at the                                                                    
     North   Slope  that's   based  upon   a  transportation                                                                    
     distance to  Chicago, and we're this  much closer, even                                                                    
     at  60 cents  from Delta  here, that  is a  price lower                                                                    
     than the world price. We  have some advantage. Again, I                                                                    
     don't know if  it's $1.00, I don't know  if it's $1.50,                                                                    
     but it's a  number. And again, we can  see that clearly                                                                    
     in our work.                                                                                                               
                                                                                                                                
     What's also very clear is  that while we don't know how                                                                    
     much will  be found in Cook  Inlet, we do know  it will                                                                    
     be  expensive. And  again,  I'll just  go  back to  the                                                                    
     statistics. DOE  estimated [that]  to find  reserves to                                                                    
     sustain this area would take  $5 or $6 billion worth of                                                                    
     exploration investment. Why wouldn't  you look at a few                                                                    
     hundred  million dollars  for  a pipeline  as a  viable                                                                    
     alternative?  And again,  that's  the arithmetic  we're                                                                    
     lead to is that you  don't, fortunately, have to decide                                                                    
     right  now  which  way  you  prefer  or  whatever,  and                                                                    
     certainly the spur  line does not change  the course of                                                                    
     the  big pipeline  and all  those  other things.  We're                                                                    
     prepared to  tack the  spur line  into wherever  we can                                                                    
     find  the gas.  In  the ultimate,  you'll  see in  this                                                                    
     report, one of the projects  we suggest looking at into                                                                    
     the future  is frankly going  all the way to  the North                                                                    
     Slope  to just  supply  this area  and  a bullet  line.                                                                    
     However  difficult that  sounds to  you at  this point,                                                                    
     that  may  be  a  viable alternative  from  an  Alaskan                                                                    
     perspective   -   that   may  be   attractive.   Again,                                                                    
     remembering  that  the  advantage  of  getting  gas  to                                                                    
     tidewater anywhere  is that not  only do we  go through                                                                    
     our communities  in the Interior,  but once we  have it                                                                    
     to   tidewater,   we   can  deliver   it   to   coastal                                                                    
     communities,  which   again,  in  essence   reaches  99                                                                    
     percent  of our  population.  If you  can  go down  the                                                                    
     rivers, you go down the  highway system, and you can go                                                                    
     on  the coastal  marine transport,  you can  reach just                                                                    
     about everybody in Alaska one way or another.                                                                              
                                                                                                                                
     So, that's kind  of the feel we have for  the spur line                                                                    
     is  that  I've  had  producers  or  people  looking  at                                                                    
     drilling  in  Cook  Inlet and  asked  me  whether  they                                                                    
     should drill. And I said can  you get a good price? And                                                                    
     if they answer yes, I  say why wouldn't you drill? What                                                                    
     are  you worried  about me  for? On  the other  hand, I                                                                    
     wouldn't sit  around and wait  for ten years to  see if                                                                    
     we do build a pipeline  in and then expect you're going                                                                    
     to get the same prices then  that you can once there is                                                                    
     a large supply hooked to the area.                                                                                         
                                                                                                                                
     On  the flip  side, about  this report,  again, not  to                                                                    
     steal  its  thunder,  this is  a  feasibility  at  best                                                                    
     report -  okay? And what we  looked at was in  terms of                                                                    
     the specific  LNG project  we were asked  to look  at 2                                                                    
     bcf/day to  Valdez basically. Did  we see  things about                                                                    
     it that  said stop, don't  work on this  anymore, quit,                                                                    
     this is a bad idea and  the answer was no. If anything,                                                                    
     we  found  encouragement  frankly. And,  for  instance,                                                                    
     Wood MacKenzie was  one of the people,  you'll see, was                                                                    
     working this. And  they, in particular rate,  in a cost                                                                    
     sense, all the LNG projects in  the world. And I mean I                                                                    
     will break  it to  you - it  doesn't steal  our thunder                                                                    
     that we are  not one of the low cost  ones. But, on the                                                                    
     other side  of it, we're  not so  far out the  top that                                                                    
     it's silly  for us to  think about an LNG  project. For                                                                    
     instance,  the  example I  use  -  the easiest  one  to                                                                    
     understand is Shell Oil  Company, a major knowledgeable                                                                    
     player in  the world,  a mega-major, developed  a place                                                                    
     called Sakhalin, facing a lot  of similar challenges to                                                                    
     what we  face here. If  you go to the  rudimentaries of                                                                    
     that  economic  decision  they made,  our  decision  is                                                                    
     probably actually  more positive  than theirs,  I would                                                                    
     contend. So, if  they thought it was okay  to go ahead,                                                                    
     that tells me we need  to understand our project better                                                                    
     and  that's  all  this report  says  is  understand  it                                                                    
     better.                                                                                                                    
                                                                                                                                
     At the  same time,  it also has  become clear  from the                                                                    
     consultive  reports  we've  gotten back  in  trying  to                                                                    
     understand  these  projects,  that Alaska  clearly  has                                                                    
     some  issues. We  have some  competitive disadvantages.                                                                    
     We  don't  have  workers  that   are  brought  in  from                                                                    
     Bangladesh.  We don't  pay third  world wages  here. So                                                                    
     our labor  component on a  project that may  involve 30                                                                    
     or  40 million  man  hours  of labor  is  a pretty  big                                                                    
     factor in this  thing and it may  affect, somewhat, our                                                                    
     competitiveness.  And  that's   something  we  need  to                                                                    
     understand  because again,  I would  hope that  you all                                                                    
     realize that if  we were able to design  the project in                                                                    
     a way  that it better  fit the Alaska labor  pool, such                                                                    
     that even  if we did have  a lot of extra  money in the                                                                    
     project but it was money  that you were comfortable was                                                                    
     being spent  in Alaska, that  might not be all  bad. If                                                                    
     instead of  doing something  in one  year we  took five                                                                    
     years to  do it and made  it happen in that  way - that                                                                    
     might  be considered  good by  some  people. Again,  we                                                                    
     have to do those kinds of factors in it.                                                                                   
                                                                                                                                
     We are going  to be, because of that,  looking at other                                                                    
     variations of  the theme than  we were given  in Ballot                                                                    
     Measure  3.  We are  going  to  look at  smaller,  more                                                                    
     Alaskan sized  projects and with some  other variations                                                                    
     that  we think  might help  the competitiveness  of the                                                                    
     project.                                                                                                                   
                                                                                                                                
SENATOR LINCOLN said she is anxious  to read the ANGDA report and                                                               
is  pleased to  hear about  the potential  take-off locations  he                                                               
listed.  She  believes  that  Alaskans must  look  at  what  this                                                               
project can do  in terms of delivering some of  the by-product of                                                               
the gas  line to the people,  not just solely the  bottom line of                                                               
extracting the gas  for export to the Lower 48.  She noted she is                                                               
extremely encouraged to see how  the take-off points might affect                                                               
the  smallest villages,  not  just the  most  populated areas  of                                                               
Alaska.                                                                                                                         
                                                                                                                                
SENATOR HOFFMAN asked  Mr. Heinze to expand on how  99 percent of                                                               
communities  can  benefit  and  whether that  will  be  from  the                                                               
state's royalty share.                                                                                                          
                                                                                                                                
MR. HEINZE  said ANGDA took a  hard look at the  fact that Alaska                                                               
has  a small  population  that would  not use  a  huge amount  of                                                               
energy,  compared to  the amount  that  would be  shipped to  the                                                               
Lower 48.  He said he  was trying to  draw attention to  the fact                                                               
that a  pipeline route that  goes through the Interior,  down the                                                               
highway system and  intersects with the Yukon  River, would reach                                                               
a large number of people. But,  to take that further to bring gas                                                               
to  anywhere on  the  coast, a  compressed  natural gas  facility                                                               
could be built  so that it could be barged  to communities of any                                                               
size. ANGDA  and a  contractor are  looking at  that possibility,                                                               
especially  in  the smaller  communities,  of  providing a  barge                                                               
mounted  gas supply  with  a large  gas  driven electric  turbine                                                               
generator next  to it  where the village  plugs in.  He cautioned                                                               
that  is not  something  that would  instantly happen  throughout                                                               
every  coastal  community  in  Alaska,  but  it  might  within  a                                                               
generation. Regarding  the state's  role, he  said to  the extent                                                               
that ANGDA makes a  margin, it has not faced up  to what it would                                                               
do  with  that  margin  but it  might  provide  an  interest-free                                                               
revolving loan fund.                                                                                                            
                                                                                                                                
TAPE 04-25, SIDE A                                                                                                            
                                                                                                                                
SENATOR  SEEKINS  said if  the  line  was  brought in,  it  would                                                               
eventually  become   dominant  and   have  to  be   designed  for                                                               
expansion. He  asked if that  wouldn't have a chilling  effect on                                                               
exploration.                                                                                                                    
                                                                                                                                
MR.  HEINZE replied  in reality,  if a  pipeline were  brought in                                                               
with a  large supply at  a certain  price, his decision  to drill                                                               
would be  based on that  price. He  couldn't expect to  command a                                                               
higher  price.  Different  companies  have  different  economics,                                                               
however. It  would discourage some,  but not others.  Because the                                                               
state has  had a surplus  supply for  many years, it  has enjoyed                                                               
very  low prices,  about $2.50  MBTU wholesale  or about  half of                                                               
what the world  price is right now. He estimates  that price will                                                               
rise with more  exploration money. If the spur  line were brought                                                               
in at a cost of $300 million  that would drive the prices back to                                                               
what  they  are today.  If  one  translates that  into  potential                                                               
disposable income  of residential  families, it would  equal $100                                                               
million a year of additional disposable income.                                                                                 
                                                                                                                                
SENATOR  SEEKINS said  the demand  for that  pipe would  increase                                                               
quicker than if there was still  a competing force trying to find                                                               
additional gas sources.                                                                                                         
                                                                                                                                
MR. HEINZE said the linkage here  will supply a generation or two                                                               
with a plentiful supply. If  some of the bigger numbers presented                                                               
by Mark Myers  (Director, Division of Oil and  Gas) were realized                                                               
on the  North Slope, they  are talking about many  generations of                                                               
Alaskans.                                                                                                                       
                                                                                                                                
SENATOR KIM ELTON said he had  a comment about the report that he                                                               
wanted Mr. Heinze to respond to.                                                                                                
                                                                                                                                
     It would have been helpful  to have a presentation or a                                                                    
     document  from  you  on  what  those  findings  or  the                                                                    
     elements of  the report would have  been, because we've                                                                    
     gathered yesterday  and today a great  number of people                                                                    
     with  certain levels  of expertise  and  it would  have                                                                    
     been  great to  toss the  findings that  you have  into                                                                    
     that  mix to  get  their reaction.  So, I'm  frustrated                                                                    
     that you  don't want to  steal the thunder of  a report                                                                    
     that is  going to  be printed in  the newspaper  in the                                                                    
     next week. If  it's going to be printed  next, you know                                                                    
     what the report says.                                                                                                      
                                                                                                                                
MR. HEINZE  apologized, but said  the reality  is that he  had to                                                               
make a  choice. He would have  loved to have the  release at this                                                               
meeting,  but  he   didn't  have  control  over   both  of  their                                                               
timelines.                                                                                                                      
                                                                                                                                
     I assure  you that  all of you  as legislators  will be                                                                    
     given advance  copies tomorrow. Every  one of  you will                                                                    
     receive that. We  certainly respect the fact  that as a                                                                    
     number of the important leaders  of our state, that you                                                                    
     need to know  what this looks like before  it is widely                                                                    
     available. On the  other hand, Ballot Measure  3 was an                                                                    
     initiative  of the  people;  this is  a  report to  the                                                                    
     people  and we  felt that  the proper  approach was  to                                                                    
     find  a way  to let  everybody  know at  one time  and,                                                                    
     frankly,  not let  any one  segment of  the media  gain                                                                    
     some advantage  or control over  what the  message was.                                                                    
     We carefully  thought through a  12-page report  and we                                                                    
     wanted the  message to be  holistic and go out  and let                                                                    
     everybody see  it at  once.... I  will also  clarify to                                                                    
     you that  the report is  not a bottom line.  The report                                                                    
     simply says, 'Here's what we  found out and here's what                                                                    
     we think  needs to  be done  going forward.  I honestly                                                                    
     see  the  report more  as  a  start  than a  finish  of                                                                    
     anything....                                                                                                               
                                                                                                                                
CHAIR SAMUELS  said the  committee set  the parameters  on topics                                                               
that would  be discussed  and he  had no  idea that  Mr. Heinze's                                                               
report would be coming out next week.                                                                                           
                                                                                                                                
SENATOR ELTON observed:                                                                                                         
                                                                                                                                
     Having been in  the news business, I can  tell you that                                                                    
     if  you  don't have  every  comma  in place  two  weeks                                                                    
     before publication  date of something  like this  - and                                                                    
     it would  have been  very, very  helpful to  have those                                                                    
     findings so  that we could toss  it into the mix  - I'd                                                                    
     be  stunned I  guess  if they  don't  know where  every                                                                    
     comma is in their report at this point in time.                                                                            
                                                                                                                                
CHAIR  SAMUELS   announced  a  brief  at-ease   before  the  next                                                               
presentation.                                                                                                                   
                                                                                                                                
NEGOTIATION  OF  STATE AND  MUNICIPAL  PROPERTY  TAXES UNDER  THE                                                             
STRANDED GAS ACT                                                                                                              
                                                                                                                                
MR. STEVEN THOMPSON,  Mayor, City of Fairbanks, said  he is chair                                                               
of the  Municipal Advisory  Group (MAG), and  that he  would give                                                               
them an  overview of MAG  and what it has  agreed upon so  far in                                                               
resolutions  regarding taxes  and gas  pipeline impacts.  MAG was                                                               
formed to  advise and make recommendations  to the administration                                                               
on the anticipated social, economic  and revenue impacts of a gas                                                               
pipeline project  as well as on  the affect of any  municipal tax                                                               
relief the administration may negotiate in an effort to enhance                                                                 
the economics of a project.                                                                                                     
                                                                                                                                
     The   group  is   made  up   of  representatives   from                                                                    
     communities   that   will   likely   be   impacted   by                                                                    
     construction  of the  natural  gas pipeline,  including                                                                    
     Anchorage,  the City  of Delta  Junction,  the City  of                                                                    
     Fairbanks, the  Fairbanks North Star Borough,  the City                                                                    
     of  Kenai, the  Kenai Peninsula  Borough, Skagway,  the                                                                    
     Haines  Borough,  the City  of  North  Pole, the  North                                                                    
     Slope Borough, the  City of Seward, the  City of Valdez                                                                    
     and  representing the  unorganized regions,  the Tanana                                                                    
     Chief's Conference....                                                                                                     
                                                                                                                                
     Today I'm  here to talk  to you about  what's important                                                                    
     mostly to  our communities. Even  though we are  a very                                                                    
     geographically  and culturally  diverse group,  we have                                                                    
     been  able  to  identify  many  issues  that  we  share                                                                    
     similar perspectives on and those  are reflected in our                                                                    
     first resolution.  I believe you have  copies of those.                                                                    
     We  all  agreed  that  no   reduction  or  deferral  in                                                                    
     municipal  taxes  is   acceptable  without  appropriate                                                                    
     justification from the State  of Alaska and the project                                                                    
     sponsors.  We  are willing  to  help  make the  project                                                                    
     happen,  but  if  it  means   a  reduction  in  revenue                                                                    
     opportunities  for  us,  there  needs to  be  a  clear,                                                                    
     verifiable justification  for it.  We have  also agreed                                                                    
     that  the State  of  Alaska should  weigh  the cost  of                                                                    
     benefit  of  a tax  exemption  with  the difficulty  of                                                                    
     administering an exemption from specific taxes.                                                                            
                                                                                                                                
     We've agreed that  the State of Alaska  should devise a                                                                    
     payment  in  lieu  of  taxes  structure  that  provides                                                                    
     certainty for  municipalities at least through  the end                                                                    
     of  the stated  contract  period -  that  the State  of                                                                    
     Alaska  should  insure the  payment  in  lieu of  taxes                                                                    
     structure  recognizes the  loss to  present and  future                                                                    
     forms of local government  of opportunity to respond to                                                                    
     changing  conditions through  changing  tax rates,  and                                                                    
     that the  State of Alaska should  provide incentives to                                                                    
     the successful applicant under the  Stranded Gas Act to                                                                    
     insure  the training  and hiring  of  Alaskans for  the                                                                    
     construction,  operation, and  maintenance  of the  gas                                                                    
     line.                                                                                                                      
                                                                                                                                
     One critical point  we all agreed on is  that the State                                                                    
     of Alaska should require  that the successful applicant                                                                    
     will  include  takeoff  points at  strategic  locations                                                                    
     along the  pipeline to make  gas available to  meet the                                                                    
     reasonably foreseeable demand  for in-state natural gas                                                                    
     use  - that  the State  of Alaska  should insure  there                                                                    
     will  be  a  fair  tariff to  the  points  of  in-state                                                                    
     takeoff of gas.                                                                                                            
                                                                                                                                
     Finally,  we  agree that  the  State  of Alaska  should                                                                    
     insure that affected  municipalities' combined share of                                                                    
     the  economic  rent  of [an]  approved  project  should                                                                    
     correlate  with the  revenue stream  of the  project by                                                                    
     negotiating  that the  present value  of the  aggregate                                                                    
     amount of  payment in  lieu of taxes  is not  less than                                                                    
     the  amount  that  would   have  been  collected  under                                                                    
     current Alaska law.                                                                                                        
                                                                                                                                
     The  points  of  our  second  resolution  are  that  no                                                                    
     property currently  taxed under Titles 29.45  and 43.56                                                                    
     should become exempt under  this contract. The contract                                                                    
     should clarify  how dual-use  facilities will  be taxed                                                                    
     in order  to protect municipalities' current  tax base.                                                                    
     No   exemption    should   apply   to    existing   gas                                                                    
     infrastructure. Due to the  relatively small amount and                                                                    
     incredible complexity in administering  a sales and use                                                                    
     tax exemption, those  taxes should not be  on the table                                                                    
     for negotiations.                                                                                                          
                                                                                                                                
     Finally, at our  last meeting last week,  we approved a                                                                    
     third   resolution  that   mainly  focuses   on  issues                                                                    
     surrounding  the need  for natural  gas in  communities                                                                    
     all   around   the   state   and   we   requested   the                                                                    
     administration  specifically to  include the  placement                                                                    
     of  municipal takeoff  points in  the  rural and  urban                                                                    
     areas  of Interior,  Southcentral and  Southeast Alaska                                                                    
     [and] amend statutes to  provide greater assurance that                                                                    
     Alaska  communities will  have access  to gas  from any                                                                    
     trans-Alaska  gas  pipeline -  and  that  the State  of                                                                    
     Alaska  should retain  its right  to  take the  state's                                                                    
     royalty gas  in kind  to meet  those needs.  This third                                                                    
     resolution  has been  approved by  the group.  However,                                                                    
     there  still  needs  to be  ratification  by  community                                                                    
     councils before it is final.                                                                                               
                                                                                                                                
     We have also  had some great discussions  on what shape                                                                    
     of payment in lieu of  taxes [PILT] might work best for                                                                    
     us. Although we all  have different tax structures, the                                                                    
     municipal  advisory   group  is  working   together  to                                                                    
     identify  what our  similarities are  and make  as many                                                                    
     unified  recommendations to  the governor  as possible.                                                                    
     Again,  the point  I want  to  make very  clear to  you                                                                    
     right now  is that our  communities need access  to the                                                                    
     gas.  It  is  unthinkable  that there  may  even  be  a                                                                    
     possibility  of  a  gas pipeline  through  Alaska  that                                                                    
     doesn't allow us to use some  of that gas right here in                                                                    
     the state. And yet, for  some reason, it's apparently a                                                                    
     point   of  negotiation   in   this  proposed   project                                                                    
     application.                                                                                                               
                                                                                                                                
     The MAG, in our first  and third resolutions, made very                                                                    
     clear  that  we  expect  any gas  pipeline  project  be                                                                    
     required by law to  provide for adequate takeoff points                                                                    
     and  spur  lines  to meet  the  reasonably  foreseeable                                                                    
     demand  for in-state  use. We  recommend  in our  third                                                                    
     resolution that  you change Alaska statutes  to do just                                                                    
     that. We  also want to make  it clear that we  want the                                                                    
     State of Alaska  to insure a fair tariff  to the points                                                                    
     of in-state  takeoff of gas  and that the  state retain                                                                    
     its right to choose to take  its royalty gas in kind or                                                                    
     in value  - as determined  to be in the  best interests                                                                    
     of  the state  and  to change  that determination  when                                                                    
     conditions warrant.                                                                                                        
                                                                                                                                
     We need to be able to  share in the revenue benefits of                                                                    
     a gas pipeline.  Having said all that, if  you have any                                                                    
     questions     before    the     Information    Insights                                                                    
     presentation, I would be very happy to answer them.                                                                        
                                                                                                                                
SENATOR FRED DYSON agreed with  the spirit of what Mayor Thompson                                                               
said but  had a  few questions.  He referred  to language  on the                                                               
last page that  reads - be able to share  in the revenue benefits                                                               
of the  gas pipeline.  He asked if  Mayor Thompson  thought there                                                               
should be a formula for the  revenue that the state gets from the                                                               
gas pipeline, similar to the revenue sharing program.                                                                           
                                                                                                                                
MR. THOMPSON said that is the point that MAG was trying to make.                                                                
                                                                                                                                
SENATOR  DYSON asked  if he  was implying  that there  must be  a                                                               
pipeline  to Southeast  or  that  there be  a  supply system  for                                                               
Southeast.                                                                                                                      
                                                                                                                                
MR. THOMPSON answered  that it means that there  should be points                                                               
from which  take-off spur lines  could advance. Ports  and valves                                                               
could be put  into the line for a future  time when a compression                                                               
plant is built to service Southeast.                                                                                            
                                                                                                                                
SENATOR DYSON asked  if he thought there should be  a pipeline to                                                               
Southeast or whether  a supply could be barged  - not necessarily                                                               
a pipeline everywhere.                                                                                                          
                                                                                                                                
MR. THOMPSON said that is correct.                                                                                              
                                                                                                                                
SENATOR LYMAN HOFFMAN asked why Western Alaska was left out.                                                                    
                                                                                                                                
MR. THOMPSON said it wasn't left  out. One of the take-off points                                                               
would be the Yukon and areas in the upstream side.                                                                              
                                                                                                                                
SENATOR  ELTON asked  if  he had  identified  what the  statutory                                                               
changes  should  be  and  communicated  them  to  the  governor's                                                               
office.                                                                                                                         
                                                                                                                                
MR. THOMPSON  replied that MAG got  to the point of  adopting the                                                               
resolutions, but not beyond that point.                                                                                         
                                                                                                                                
SENATOR ELTON  asked who  the governor's  office or  a legislator                                                               
would  get in  touch with  to discuss  the statutory  changes MAG                                                               
envisions.                                                                                                                      
                                                                                                                                
MR. THOMPSON said he could get  more information on that and that                                                               
MAG would be adopting more resolutions.                                                                                         
                                                                                                                                
SENATOR SEEKINS asked if he  is suggesting that municipalities be                                                               
able to tax construction of a pipeline on a property tax basis.                                                                 
                                                                                                                                
MR. THOMPSON replied  that under the Stranded Gas  Act, the state                                                               
can exempt properties having to do  with the gas line - an office                                                               
building, for  instance, from property  tax through  the contract                                                               
period.  The  municipalities would  receive  payment  in lieu  of                                                               
taxes from  the state for  that. How municipalities  receive that                                                               
payment is  a problem  that needs  to be  resolved. They  need to                                                               
figure  out how  to  deal with  a  dual use  facility  as far  as                                                               
property tax goes.                                                                                                              
                                                                                                                                
SENATOR  SEEKINS  asked  if  the  tax bill  would  be  due  after                                                               
completion  of the  building or  during the  process. Discussions                                                               
indicate that the  impact would occur now and there  is no way to                                                               
meet the need for additional schools and services, etc.                                                                         
                                                                                                                                
MR. THOMPSON said MAG is addressing those questions.                                                                            
                                                                                                                                
      We're looking at the economic impact, which would be                                                                      
     during the construction and then the revenue impact of                                                                     
     not  having   property  tax  for  the   length  of  the                                                                    
     contract....  That  will be  in  our  reports. I  think                                                                    
     Information  Insights   will  give  you  some   of  the                                                                    
     economic impact  during construction when he  makes his                                                                    
     presentation.... The ramp up  period of construction is                                                                    
     going  to  have  an  effect on  communities  along  the                                                                    
     construction route  clear to Seward. If  that's where a                                                                    
     pipe  comes  in,  there'll be  an  economic  impact  of                                                                    
     upgrading their ports  to be able to  receive the pipe.                                                                    
     Kenai  could  be  building compression  modules.  There                                                                    
     could  be  a  big  impact  there.  Influx  of  pipeline                                                                    
     workers is  going to definitely  increase the  need for                                                                    
     police and  emergency services. The schools  part of it                                                                    
     is going to be addressed.                                                                                                  
                                                                                                                                
CHAIR SAMUELS agreed with what he said, particularly about                                                                      
Alaskans using their own resource and being able to choose                                                                      
between royalty in kind and royalty in value.                                                                                   
                                                                                                                                
     I want to just make sure  that it has a down side also,                                                                    
     that internally your discussion  - if you cannot adjust                                                                    
     the   compression  from   the   North   Slope  to   the                                                                    
     distribution center in Fairbanks  or Delta or wherever,                                                                    
     and you  have empty capacity going  south, somebody has                                                                    
     to pay  - it either  gets spread  over the cost  of the                                                                    
     remaining gas, in  which case at the end  point our gas                                                                    
     is  now the  transportation costs  are higher  and they                                                                    
     are already very high or we  have to charge more on the                                                                    
     front end  on the  Slope to Delta  portion. Internally,                                                                    
     I'm  assuming that  your discussions  have been  taking                                                                    
     place  that there's  not a  line  in the  sand going  -                                                                    
     we're not  going to  pay a tariff  one penny  more than                                                                    
     what it costs  to go from A  to B if it  puts the whole                                                                    
     project at risk to pay  on the capacity in the pipeline                                                                    
     headed south from Fairbanks or Delta.                                                                                      
                                                                                                                                
MR. THOMPSON responded that those conversations continue to take                                                                
place within the group. They want to make sure the State of                                                                     
Alaska benefits from the gas and not just see it all disappear.                                                                 
                                                                                                                                
CHAIR SAMUELS said the trade-off would be that you get the gas                                                                  
here, but you lose the cash at the end of the line.                                                                             
                                                                                                                                
MR. LARRY PERSILY, Department of Revenue, testified:                                                                            
                                                                                                                                
     The  state's ad  valorem property  taxes, which  are AS                                                                    
     43.56,  apply to  oil  and  gas production  exploration                                                                    
     property. Just  to run through  some of the  basics for                                                                    
     people  who  may  not  be   familiar  with  it  -  it's                                                                    
     generally based  on the remaining  value of  the asset.                                                                    
     That  would be  your  value  after depreciation.  Under                                                                    
     state law, it's limited  to 20 mils. The municipalities                                                                    
     assess  their tax  first; the  state gets  the balance.                                                                    
     So, if  a municipality has  an 18 mil rate,  they would                                                                    
     get 18  mils; the state would  get 2 mils. If  the muni                                                                    
     is at 15, they would get 15; the state would get 5.                                                                        
                                                                                                                                
     Property  tax   statute  regulations   treat  pipelines                                                                    
     different  during construction  than during  operation.                                                                    
     This gets  to Senator Seekins' question.  First of all,                                                                    
     under construction,  the property  tax is due  from the                                                                    
     commencement date of construction.  When that pipe hits                                                                    
     the  dock and  the  front end  loaders  are there,  the                                                                    
     property  tax is  due -  not at  the completion  of the                                                                    
     project. That has  been one of the  issues certainly in                                                                    
     the  past  and  certainly  of concern  to  any  project                                                                    
     sponsor - that  they have to start  paying property tax                                                                    
     during the  years of construction  before there  is any                                                                    
     cash flow  from the  project. During  the construction,                                                                    
     it's the full  and true value of the  actual cost. Then                                                                    
     when it  goes into  operation, it becomes  the economic                                                                    
     value,  which is  based on  the estimated  life of  the                                                                    
     proven  reserves.  So, if  you  believe  you've got  30                                                                    
     years  of  proven  reserves,  we're   going  to  use  a                                                                    
     depreciation  schedule for  that  30-year life-span  of                                                                    
     the  project and  in trying  to appraise  it -  just to                                                                    
     back  up  a minute  -  even  though the  municipalities                                                                    
     collect  oil and  gas  exploration production  property                                                                    
     tax, the  state does the  assessing, which has  also in                                                                    
     the past been an issue  of contention between the state                                                                    
     and  municipalities. Because,  of course,  if you're  a                                                                    
     municipality and  the state is doing  the assessing and                                                                    
     you're looking at your revenue  drop as the assessments                                                                    
     drop, you  may think the  state is  doing a bad  job of                                                                    
     assessing.  There is  a state  assessment review  board                                                                    
     that will  deal with  those cases. Of  course, property                                                                    
     owners  would think  the state  is doing  a bad  job of                                                                    
     assessing, because it might be  too high. So, the state                                                                    
     often gets caught in  the middle between municipalities                                                                    
     who  want  the  assessments  higher  and  the  property                                                                    
     owners who want the assessments lower.                                                                                     
                                                                                                                                
     In assessing pipeline property  that's in operation, we                                                                    
     look at  the life of  the proven reserves; you  look at                                                                    
     sales  comparison,  which  is  difficult  because  this                                                                    
     isn't a  home. You  don't have comps  out there  as you                                                                    
     think of  your home  assessment. It's not  that someone                                                                    
     has  sold pipelines  in Alaska  or  sold gas  treatment                                                                    
     plants on  the North  Slope. So,  doing comps  or sales                                                                    
     comparison is  difficult. Costs  - you  can get  into a                                                                    
     debate -  what is the  replacement cost, which  is what                                                                    
     state law talks about, not  explicitly what did it just                                                                    
     cost to  build that  facility, but  what would  it cost                                                                    
     you  today  to  replace  it. And  certainly,  on  older                                                                    
     facilities,    the   replacement    costs   could    be                                                                    
     significantly less  than what it  cost you to  build it                                                                    
     with  new  technologies. You  can  look  at the  income                                                                    
     approach and from all those  hopefully come up with the                                                                    
     right answer.                                                                                                              
                                                                                                                                
     As you  think of  the importance  of property  taxes to                                                                    
     municipalities  on  this  gas line  project,  certainly                                                                    
     there is  the impact funding in  the construction years                                                                    
     as  the  mayor  talked  about,  as  Brian  Rogers  will                                                                    
     discuss.  Under  property  tax   law,  status  quo  tax                                                                    
     payments are due the minute  you start construction and                                                                    
     during those years, in many  of the communities, you're                                                                    
     going  to  have  the  most  impact  -  schools,  roads,                                                                    
     ambulances,   police   protection   and   such.   After                                                                    
     construction, funding  of ongoing general  government -                                                                    
     that's what property  taxes are for -  and that's going                                                                    
     to be  an important  issue to municipalities  who, when                                                                    
     they look  at this, are  looking for certainty  as they                                                                    
     try  working on  their budget  planning -  as they  are                                                                    
     deciding  whether to  issue bonds.  Are  they going  to                                                                    
     have  revenue to  pay it  off? They  need to  know with                                                                    
     some  certainty what  kind of  revenue stream  they are                                                                    
     going to have.                                                                                                             
                                                                                                                                
     This is perhaps  just the way the grid was  set up - an                                                                    
     exaggerated look,  but it points out  the problem. This                                                                    
     is a very conservative scenario.  This is based on pure                                                                    
     cost of  a gas  pipeline - no  new reserves  that would                                                                    
     extend  the life.  So, if  you find  new reserves  that                                                                    
     line  that declines  would hit  a new  plateau. If  you                                                                    
     think you've got 20 more  years, it's going to level it                                                                    
     out and  then it's going  to start declining  again. It                                                                    
     assumes  no new  investments,  which would  add to  the                                                                    
     basis  value of  that  property. But  what this  points                                                                    
     out, and  this is an  example if  you had a  $5 billion                                                                    
     pipeline,  during  construction,  you're  property  tax                                                                    
     payments increase very quickly  and very steeply as all                                                                    
     that money  is being  spent during  the five  years. At                                                                    
     that point then,  you now have the basis  in your line,                                                                    
     you're draining your reserves. Every  year the value of                                                                    
     that  operating pipeline  decreases.  So, the  property                                                                    
     tax   revenue  decreases.   As  I   said,  this   is  a                                                                    
     conservative scenario that shows  no new investment and                                                                    
     no new reserves. So, it  really wouldn't be that steep,                                                                    
     but  it points  out the  problems for  municipalities -                                                                    
     you're  getting   a  percentage  of  an   asset  that's                                                                    
     declining in  value, which, if it's  your municipality,                                                                    
     is maybe not where you'd want to be long-term.                                                                             
                                                                                                                                
SENATOR DYSON  said he suspected  the gas pipeline, like  the oil                                                               
pipeline,  would have  a  much longer  life  than was  originally                                                               
anticipated.  "When  that  turns  out  to be  true,  is  there  a                                                               
mechanism  for recapture  and how  does that  work for  the local                                                               
folks?"                                                                                                                         
                                                                                                                                
MR. PERSILY replied:                                                                                                            
                                                                                                                                
     As the Department of Revenue's  assessors looked at the                                                                    
     oil pipeline  and we  looked at  extending the  life of                                                                    
     the line,  adjustments are made and  the assessed value                                                                    
     of that pipeline  is taken into account.  If it's going                                                                    
     to be producing income for  a longer period of time, it                                                                    
     should have  a higher value  as you extend it  out. So,                                                                    
     under  law  we  do  make  adjustments  and  change  the                                                                    
     assessments. It's  just like your  home - every  year a                                                                    
     new assessment notice goes out.                                                                                            
                                                                                                                                
SENATOR DYSON said a 15-year longer life than is expected would                                                                 
change the slope of the line considerably. He asked:                                                                            
                                                                                                                                
     Is  there a  mechanism  to go  back  and recapture  the                                                                    
     property taxes that should have  been paid based on now                                                                    
     a more  accurate assumption of  the useful life  of the                                                                    
     line?                                                                                                                      
                                                                                                                                
MR. PERSILY replied:                                                                                                            
                                                                                                                                
     The number doesn't go back  up if you can visualize....                                                                    
     You still only  had $X billion into the  line. The cost                                                                    
     basis didn't  change. What you're  doing now is  not so                                                                    
     much stopping the depreciation,  but extending out. So,                                                                    
     instead of going  down steep, it might  reach a plateau                                                                    
     and go  close to level  and then start to  climb again,                                                                    
     but  at a  much more  gradual pace  because you're  not                                                                    
     going  to retroactively  change  your collections,  but                                                                    
     you're going  to extend your collections  for many more                                                                    
     years than you had  expected collecting more money over                                                                    
     the life  of the project.  But the total basis  into it                                                                    
     that you're  depreciating hasn't gone up,  so the value                                                                    
     is  still,   say,  a  $10  billion   line.  Instead  of                                                                    
     collecting taxes  for 30 years, now  maybe you're going                                                                    
     to collect tax for 50 or 60 years.                                                                                         
                                                                                                                                
SENATOR SEEKINS inserted, "But at a low rate."                                                                                  
                                                                                                                                
MR. PERSILY  replied, "Right, but  cumulatively it's going  to be                                                               
much  more  than  you  would  expect  at  the  beginning  of  the                                                               
project."                                                                                                                       
                                                                                                                                
SENATOR DYSON added, "And similarly,  if the replacement costs go                                                               
up, that would also change the basis?"                                                                                          
                                                                                                                                
MR. PERSILY answered:                                                                                                           
                                                                                                                                
     Sure, you  could argue if  the replacement costs  go up                                                                    
     that  could  be a  factor  the  state would  take  into                                                                    
     account. I  can certainly tell  you that the  owners of                                                                    
     the  TransAlaska   Pipeline,  well  not  so   much  the                                                                    
     pipeline, but the Prudhoe  Bay facilities, always argue                                                                    
     that the replacement costs go  down, because they would                                                                    
     argue  you  could  build those  facilities  today  much                                                                    
     cheaper than you built them  then, because of what they                                                                    
     know now  as opposed  to what they  knew 30  years ago.                                                                    
     So,  I  welcome your  input,  but  I think  they  might                                                                    
     disagree. Not surprising.                                                                                                  
                                                                                                                                
SENATOR  SEEKINS  asked  what  the  statute  says  regarding  the                                                               
administrative codes he's quoting on page 3.                                                                                    
                                                                                                                                
MR. PERSILY  read from AS  43.56.060 (d), "'The  department shall                                                               
assess property for  the taxes levied at the full  and true value                                                               
January  1'  -  and  this  deals  with  pipelines  -  'The  first                                                               
assessment date shall be the construction commencement date.'"                                                                  
                                                                                                                                
SENATOR SEEKINS  said if the  legislature wants to change  any of                                                               
that, it has to be done in statute.                                                                                             
                                                                                                                                
MR. PERSILY replied that is  correct. Section (b) of that statute                                                               
deals with  construction; section  (e) talks  about once  it's in                                                               
operation. It says, "the full  and true value of taxable property                                                               
used  in pipeline  transportation" and  then it  goes on  to say,                                                               
"economic  values   based  on  estimated   life  of   the  proven                                                               
reserves."  Technically,  economically recoverable  talks  about,                                                               
"straight line basis  for depreciation over the  economic life of                                                               
the project."                                                                                                                   
                                                                                                                                
MR. PERSILY moved on to slide 7 and said:                                                                                       
                                                                                                                                
     The commercial  problems presented by the  property tax                                                                    
     in  the current  form  -  and I  guess  these would  be                                                                    
     commercial  problems   from  the  perspective   of  the                                                                    
     project sponsors  - front end  loaded. As  I explained,                                                                    
     you  start   paying  property  taxes  the   minute  the                                                                    
     equipment  hits state  territory. If  you're a  project                                                                    
     sponsor, you might say, 'Gee,  that's a lot of money to                                                                    
     pay  before I  start having  cash flow,"  but certainly                                                                    
     from  a municipal  perspective, that's  when you  start                                                                    
     seeing  the impact  when the  construction begins.  You                                                                    
     could say  it's regressive  in that it  exacerbates the                                                                    
     impact of  cost overruns  because your property  tax is                                                                    
     based  on the  value of  what you're  putting in  there                                                                    
     during  construction  or  the  basis  when  you  go  to                                                                    
     operation. If  project sponsors are worried  about a 20                                                                    
     percent cost  overrun on the  project, that  would mean                                                                    
     not only do they have  that problem to deal with, which                                                                    
     leads  to a  higher  tariff,  but if  you  have a  cost                                                                    
     overrun, the property tax bill is going to go up.                                                                          
                                                                                                                                
     Fiscal  uncertainty  is  an  issue  certainly  for  the                                                                    
     sponsors. They are not going  to know what the property                                                                    
     tax rate is going to be  - not just the assessment, but                                                                    
     the   mil  rate   itself  in   the   future.  For   the                                                                    
     municipalities it's  a problem too, as  you think about                                                                    
     municipal budgeting and wanting some certainty.                                                                            
                                                                                                                                
     The  uncertainty in  the asset  valuation  is an  issue                                                                    
     just  about  every year.  There's  a  lot of  money  at                                                                    
     stake. This  isn't whether your home  is worth $240,000                                                                    
     or  $220,000; this  is whether  the  property might  be                                                                    
     worth $3 billion or $3.5  billion - disputes whether to                                                                    
     use   cost   income   market  approach,   asset   life,                                                                    
     capitalization  rate.  So,  these  are  a  lot  of  the                                                                    
     problems that  are faced under  the status quo  that we                                                                    
     would  hope to  deal with  in the  Stranded Gas  Act to                                                                    
     help encourage  construction of  a project  and setting                                                                    
     up  a  fiscal  system  that   would  be  best  for  the                                                                    
     municipalities, too.                                                                                                       
                                                                                                                                
     Under the Stranded Gas Act  in terms of property taxes,                                                                    
     first is  that obligation that the  payments are shared                                                                    
     with the municipalities, that the  state sets up in the                                                                    
     Stranded Gas  Act and it's approved  by the legislature                                                                    
     some  system in  lieu of  the status  quo for  property                                                                    
     taxes. The  state is obligated  under statute  to share                                                                    
     that  with  municipalities  who would  be  losing  that                                                                    
     property tax  ability on their  own. It's to  be shared                                                                    
     with  not just  the economically  affected communities,                                                                    
     certainly, but the  revenue affected communities. There                                                                    
     are two  different ones - a  revenue-affected community                                                                    
     might be  someone who is  losing the ability  to assess                                                                    
     property tax  revenue on that pipeline.  Someone who is                                                                    
     economically  affected  might  be someone  who  is  not                                                                    
     going to have  any of the pipe in  their community, but                                                                    
     would  have  an  economic  impact,  for  example  -  if                                                                    
     construction equipment is brought  in at Haines, barged                                                                    
     to  Haines and  trucked through  the highway  system to                                                                    
     construction  sites.  Ultimately,  when the  line  goes                                                                    
     into   operation,  Haines   will   not  have   pipeline                                                                    
     property,  but  during  those  years  of  construction,                                                                    
     they're going  to have an  impact if you're  talking of                                                                    
     thousands of truckloads of  equipment moving across the                                                                    
     dock  and moving  through their  community. So,  you've                                                                    
     got two  different kinds of communities,  both of which                                                                    
     need to be accommodated in the Stranded Gas Act.                                                                           
                                                                                                                                
     You   certainly   want   something  that's   fair   and                                                                    
     reasonable with due regard to  the size of the tax base                                                                    
     that  would be  exempted  under the  Stranded Gas  Act.                                                                    
     You've  got  to  deal  with  the  economic  and  social                                                                    
     burdens imposed  by construction  and operation  in the                                                                    
     communities.  The Stranded  Gas Act  also calls  on the                                                                    
     Department  of Revenue  to consult  with the  Municipal                                                                    
     Advisory Group in crafting contract language.                                                                              
                                                                                                                                
MR. PERSILY said the last slide looks at negotiation issues.                                                                    
                                                                                                                                
     Certainly,   one  key   is  to   improve  the   project                                                                    
     economics.  We  want a  project;  you  want a  pipeline                                                                    
     built; that's the  whole goal of the  Stranded Gas Act.                                                                    
     One way you  can deal with it, certainly,  is the issue                                                                    
     of  the  front  end   loading,  the  [indisc.]  at  the                                                                    
     beginning during construction as  long as you take into                                                                    
     account certainly  the strong needs  for municipalities                                                                    
     during  those  years, but  you  want  to come  up  with                                                                    
     something that  improves project  economics, recognizes                                                                    
     the  municipal   issues,  deals   not  just   with  the                                                                    
     certainty   for  the   sponsors,   certainty  for   the                                                                    
     municipalities  as they  budget  and the  issue of  the                                                                    
     declining  tax base.  The fact  that  under status  quo                                                                    
     every  year in  theory, that  pipeline is  going to  be                                                                    
     worth  less  as  you  get  closer to  the  end  of  the                                                                    
     economic life, impact aid  during construction - that's                                                                    
     when a  lot of  municipalities are  going to  see their                                                                    
     highest  costs -  is during  the construction  boom. We                                                                    
     don't believe  it would  be as much  as during  the oil                                                                    
     pipeline, but  it's going to  be significant and  as we                                                                    
     heard   at  the   last  committee   meeting  from   the                                                                    
     Department  of   Natural  Resources  and   the  federal                                                                    
     geologists, there could be a lot more gas there.                                                                           
                                                                                                                                
     This project could  have a much longer  life than we're                                                                    
     looking at now with just 35  TCF. You want to make sure                                                                    
     that   what's    in   that   contract    protects   the                                                                    
     municipalities so  that if this  project runs 50  or 60                                                                    
     years,  they're   still  getting   substantial  revenue                                                                    
     during all that time. And,  at the end of the contract,                                                                    
     because under the  Stranded Gas Act, it's  limited to a                                                                    
     35-year contract,  you've got  to look at  what happens                                                                    
     that next  day. If you've  got a 35-year  contract, and                                                                    
     you've  got  some  payment  in   lieu  of  taxes,  some                                                                    
     mechanism set up and then  the next day when you revert                                                                    
     back,  that needs  to  be dealt  with  in the  contract                                                                    
     rather than  just saying  you'll worry  about it  in 35                                                                    
     years.                                                                                                                     
                                                                                                                                
     One other thing to keep  in mind is restructuring taxes                                                                    
     is  not  necessarily   lowering  taxes.  Improving  the                                                                    
     project  economics doesn't  mean giving  away money  or                                                                    
     taking   something   away  from   the   municipalities.                                                                    
     Restructuring tax  in the Stranded Gas  Act, hopefully,                                                                    
     would  improve  the  economics  and  also  enhance  the                                                                    
     revenue  stream  for  the municipalities  at  the  same                                                                    
     time.                                                                                                                      
                                                                                                                                
TAPE 04-25, SIDE B                                                                                                            
                                                                                                                              
MR.  PERSILY, in  response to  a question  from Senator  Seekins,                                                               
related  that the  Stranded Gas  Act negotiators  are looking  at                                                               
what is the  best way to insure the  municipalities' revenue most                                                               
accurately reflects the  economics of the project  and the length                                                               
of the project's  life rather than the current  status quo, which                                                               
is tied to a declining number.                                                                                                  
                                                                                                                                
REPRESENTATIVE  LES  GARA asked,  "If  I'm  correct, we've  taken                                                               
roughly  $75  million  per  year  in  property  taxes  now,  then                                                               
distribute   it   to   the  municipalities   from   North   Slope                                                               
operations?"                                                                                                                    
                                                                                                                                
MR. PERSILY responded:                                                                                                          
                                                                                                                                
     The last  time I  looked, I believe  the total  take of                                                                    
     oil  and gas  production and  exploration property  tax                                                                    
     was  around   $250  million,  of  which   I  think  the                                                                    
     municipalities  get a  couple hundred  million and  the                                                                    
     state about $50 million - about 20 percent.                                                                                
                                                                                                                                
REPRESENTATIVE GARA asked  if he could assume the  ratio would be                                                               
similar  for pipeline  operations and  if he  could guess  at the                                                               
amount  property taxes  would bring  in  during the  construction                                                               
phase.                                                                                                                          
                                                                                                                                
MR.  PERSILY  said  the  state would  be  involved  in  receiving                                                               
payments if there  is a new structure in lieu  of property taxes,                                                               
because more of the  gas line is going to be  on state lands than                                                               
with the  oil line.  He guessed  that a property  tax rate  of 20                                                               
mils  on a  $10  billion  project would  bring  $200 million.  He                                                               
reminded  them  that  property  taxes   are  not  linked  to  the                                                               
economics of a project.                                                                                                         
                                                                                                                                
  SOCIAL AND ECONOMIC IMPACTS OF A HIGHWAY ROUTE GAS PIPELINE                                                                 
                                                                                                                                
MR.  BRIAN ROGERS,  principal  consultant, Information  Insights,                                                               
Inc., said his  report is really a work  in progress. Information                                                               
Insights was  contracted by  the MAG  to look  at the  social and                                                               
economic  impacts  of the  gas  pipeline,  both construction  and                                                               
operations  with  a  real  focus   on  what  it  does  for  local                                                               
governments,  to look  at the  revenue impacts  to municipalities                                                               
under  the  Stranded Gas  Act  and  to  look at  subsistence  and                                                               
cultural impacts  to villages  and local  governments as  part of                                                               
gas  pipeline  construction.  His  focus  is  on  the  producer's                                                               
application only and, to date,  on just the gas pipeline portion,                                                               
not the  gas treatment  plant or the  upstream facilities  or any                                                               
in-state spur lines.                                                                                                            
                                                                                                                                
     As   some   background,   just   thinking   about   the                                                                    
     TransAlaska Pipeline System (TAPS),  the TAPS was a far                                                                    
     larger project in its impact  on Alaska - if escalating                                                                    
     those costs over today -  larger than the total cost of                                                                    
     the entire line  and almost four times the  size of the                                                                    
     Alaska segment and that impact  is placed on an economy                                                                    
     where the  population is  doubled and  it's a  far more                                                                    
     robust economy than we had in the early '70s.                                                                              
                                                                                                                                
     However,  TAPS  gives us  some  ideas  as to  what  the                                                                    
     impacts  are  likely to  be.  Looking  at the  pipeline                                                                    
     corridor   under  TAPS,   affecting  the   North  Slope                                                                    
     Borough, the North Star  Borough, the Interior villages                                                                    
     and Valdez, the  impact on schools was  lower than most                                                                    
     expected.  The   workforce  development  was   late  in                                                                    
     starting - very little effect.  On public safety - very                                                                    
     significant  impacts  -  high  staffing  turnovers.  As                                                                    
     staff  went  to  work for  the  pipeline  construction,                                                                    
     wages skyrocketed - municipal  wages up 40 percent over                                                                    
     a   two-year  period.   Some   increases  in   criminal                                                                    
     activity, basically indexed  pretty much to populations                                                                    
     increases. Huge increases in road  usage, both from the                                                                    
     population and  from the project and  those road usages                                                                    
     weren't just  on the primary industrial  routes. In the                                                                    
     health  care  -  significant  issues  for  the  private                                                                    
     sector -  very little in  the public sector  for health                                                                    
     care.  Real improvements  in  health care  availability                                                                    
     occurred during  that period. Acute  housing shortages,                                                                    
     particularly  in  Fairbanks  and Delta,  Valdez,  right                                                                    
     along  the  pipeline  corridor  -  utilities  were  way                                                                    
     overburdened.  I expect  Senator Seekins  remembers the                                                                    
     comment by  the municipal  utility system  in Fairbanks                                                                    
     in  1974  when they  said  they  ran out  of  telephone                                                                    
     numbers and  it would  be two  years before  they could                                                                    
     get any new ones ready.  It was just a way overburdened                                                                    
     system.                                                                                                                    
                                                                                                                                
     Over the  three years, household income  went up almost                                                                    
     60  percent; there  were cost  of  living increases  as                                                                    
     well over  that period  of time and  population impacts                                                                    
     significant throughout  the corridor.  Delta Junction's                                                                    
     population up by  over 25 percent, Valdez  - 76 percent                                                                    
     increase,   the   Fairbanks   North  Star   Borough   -                                                                    
     relatively low at  15 percent. Most of  that focused in                                                                    
     the city. The  City of Fairbanks went up  by 75 percent                                                                    
     over that period.                                                                                                          
                                                                                                                                
     But  the   impacts  were  felt  outside   the  pipeline                                                                    
     corridor.  In Southcentral  Alaska, you  saw the  Kenai                                                                    
     population go up by a third  over that period of time -                                                                    
     Anchorage  population  up  by 15  percent.  There  were                                                                    
     significant transportation  challenges during  the TAPS                                                                    
     construction that affected  areas throughout the state.                                                                    
     This  timeline is  looking at  1973 -  1977. There  was                                                                    
     even  more impact  post-construction.  If  you look  at                                                                    
     cumulative impacts  of oil and gas  production, the big                                                                    
     impacts happened once the  state started spending money                                                                    
     it was  receiving once  the line  was completed  and we                                                                    
     saw  the oil  price increase  of 1979.  That '79,  '80,                                                                    
     '81  period  had  even more  impacts,  particularly  on                                                                    
     education, but  also on  a lot  of the  other municipal                                                                    
     services and state services.                                                                                               
                                                                                                                                
     Looking  at the  gas pipeline  as we've  looked at  the                                                                    
     socio-economic  impacts, we're  focusing  right now  on                                                                    
     what  are the  issues  relative  to population  growth,                                                                    
     what requirements are  there for workforce development,                                                                    
     how does it affect  municipal and state infrastructure,                                                                    
     what are  the impacts on law  enforcement and emergency                                                                    
     services,  impacts on  education -  although we  expect                                                                    
     those  to be  fairly light,  health and  human services                                                                    
     and some  other municipal  impacts. Our study  is based                                                                    
     on  the  application  data from  the  producers,  which                                                                    
     looks  at  construction   costs,  schedule,  logistics,                                                                    
     workforce    and    materials    shipment    and    the                                                                    
     infrastructure  requirements  that the  producers  have                                                                    
     laid out.  However, there  is certain  information that                                                                    
     just  isn't there  in their  conceptual  model -  where                                                                    
     certain  construction   and  support   activities  take                                                                    
     place,  where  they  would spend  by  community,  which                                                                    
     really  causes the  impacts on  the  communities, or  a                                                                    
     hard timeline.  The starting date in  their application                                                                    
     depends on action at the state and federal level.                                                                          
                                                                                                                                
     We've  had   some  challenges   with  the   impacts  of                                                                    
     confidentiality.  We have  had  access to  confidential                                                                    
     data  and we  cannot release  any of  that confidential                                                                    
     data, but  some of that  drives some key  assumptions -                                                                    
     things like  where is the freight  movement, what's the                                                                    
     construction process, where are  the camps and when are                                                                    
     they operating  and what are  the costs of some  of the                                                                    
     components.  We've used  those  to  build our  economic                                                                    
     model, but  those underlying assumptions -  so far many                                                                    
     of them are  confidential ... we're trying  to make the                                                                    
     model  more transparent....   We  can estimate  some of                                                                    
     the regional  impacts, but can't  talk very  much about                                                                    
     exactly  where  those  occur, because  it  might  allow                                                                    
     somebody  to   sort  of   reverse  engineer   what  the                                                                    
     confidential data would be.                                                                                                
                                                                                                                                
     This project schedule is one  that was contained in the                                                                    
     producers'  application, however,  I've added  years to                                                                    
     it  -  that  is  if we  assume  that  the  governmental                                                                    
     frameworks were  in place by  the end of 2004,  when do                                                                    
     the activities take place....                                                                                              
                                                                                                                                
     [He then explained the chart.]                                                                                             
                                                                                                                                
     Permitting  completed  by  2008,  procurement  for  the                                                                    
     project   beginning   in    '09   and   preconstruction                                                                    
     activities  beginning in  2009  with full  construction                                                                    
     starting  in 2010  and going  through 2013,  the actual                                                                    
     delivery  of gas  at  the beginning  of  2014. This  is                                                                    
     based  on their  conceptual model  without any  changes                                                                    
     based on their 2001 study.  There may have been changes                                                                    
     in their thinking since then,  but that isn't available                                                                    
     as part of their application.                                                                                              
                                                                                                                                
     Based  on  what  information  we have  and  looking  at                                                                    
     population impacts, we see about  a 12,000 increase net                                                                    
     to Alaska  population over the  three-year construction                                                                    
     period. Some  increases in  services required  by local                                                                    
     governments  for  that  population and  that  increased                                                                    
     population and  the other activities drives  some other                                                                    
     impacts  in  addition  to  population-induced  impacts,                                                                    
     which would be those that are wage inflation issues.                                                                       
                                                                                                                                
     The  net  effect  of   the  population  based  services                                                                    
     throughout the  Railbelt and the  construction corridor                                                                    
     and  the  areas  that  serve  the  construction,  we've                                                                    
     estimated  at  $21 million  in  direct  costs to  local                                                                    
     government  over the  preconstruction and  construction                                                                    
     period from those impacts that are population-driven.                                                                      
                                                                                                                                
     The second  general area  is workforce.  If we  look at                                                                    
     direct and indirect and induced  on an annual basis, an                                                                    
     increase   of  about   8,500   jobs   with  some   very                                                                    
     significant  opportunities for  local  hire during  the                                                                    
     construction.                                                                                                              
                                                                                                                                
SENATOR HOFFMAN said a population increase of 12,000 seems low                                                                  
compared to TAPS impacts.                                                                                                       
                                                                                                                                
MR. ROGERS  replied that it  does intuitively feel low,  but TAPS                                                               
was far bigger  as a project and there is  a lot more opportunity                                                               
for local hire and contracts, which  means less in the way of new                                                               
population   coming  in.   If  the   local  hire   efforts  don't                                                               
materialize, the impacts and numbers would go up.                                                                               
                                                                                                                                
     On  the workforce,  the seasonal  factors and  the long                                                                    
     lead  time that  we have  - if  you look  back at  that                                                                    
     schedule  with  preconstruction   beginning  in  '09  -                                                                    
     there's  a lot  of time  to address  workforce training                                                                    
     between now and then to  assist the industry in keeping                                                                    
     the impacts of new  population down and assist Alaskans                                                                    
     in   getting   the   primary  benefits   out   of   the                                                                    
     construction process. We won't  get all of the benefits                                                                    
     obviously,  but there  will be  some significant  ones.                                                                    
     Some local  government costs in dealing  with workforce                                                                    
     development  -  primary  activities  here,  though,  we                                                                    
     anticipate  will be  the  industry,  state and  federal                                                                    
     governments  -  and  our  focus  is  on  the  municipal                                                                    
     impacts.                                                                                                                   
                                                                                                                                
     To give a  sense - one of the things  that is available                                                                    
     in the public  data looks at the  overall sequencing of                                                                    
     the   craft   trades   during  construction   and   the                                                                    
     conceptual model  assumes peak workforce in  the winter                                                                    
     months - actually  January through March -  is the peak                                                                    
     period line wide. If we  look from Prudhoe to Alberta -                                                                    
     we don't  have the data  that's exactly to  Alaska, but                                                                    
     looking  at  line-wide  and  taking  a  proportion  and                                                                    
     looking at what the impact would  be if you added it to                                                                    
     the current construction workforce.                                                                                        
                                                                                                                                
     This  chart  takes from  the  Department  of Labor  the                                                                    
     construction  employment in  Alaska  in  2003 and  lays                                                                    
     onto  it  the  additional craft  trade  workforce  that                                                                    
     would   be   required   during  a   typical   year   of                                                                    
     construction. What  you can see is  there's an increase                                                                    
     in the  construction workforce  in those  winter months                                                                    
     when there's  a lot  of unemployed  Alaska construction                                                                    
     workers who  potentially could  take advantage  of many                                                                    
     of those  jobs. There's  a second  peak in  the summer,                                                                    
     which is  a challenge, because  that's right on  top of                                                                    
     our existing peak. This does  not take into account any                                                                    
     of  the  support  activities. This  isn't  camp  staff,                                                                    
     contractor support,  or any of the  logistics materials                                                                    
     moving.  This is  actually just  the craft  demand, but                                                                    
     just looking at  the proportion of it that  is in those                                                                    
     winter  months  and  thinking about  the  structure  of                                                                    
     Alaska's  existing construction,  there are  some great                                                                    
     opportunities to  use Alaskans  for that and  that then                                                                    
     minimizes the need to import workers.                                                                                      
                                                                                                                                
SENATOR  LINCOLN said  her concern  is that  outside workers  are                                                               
continuing to be  imported for the existing  pipeline rather than                                                               
hiring Alaskans. Yesterday she heard  that a contract can't state                                                               
a  percent of  residents to  be hired  because it's  illegal. She                                                               
asked what he proposed to do  to leverage the state's position to                                                               
use state businesses and workforce.                                                                                             
                                                                                                                                
MR. ROGERS replied that Information  Insight's role is to develop                                                               
specific policy level mitigating measures  for that. There may be                                                               
ways  to  set  targets  in  the  negotiations  and  have  certain                                                               
provisions take effect if those  targets get reached. He was sure                                                               
there would be other measures.                                                                                                  
                                                                                                                                
SENATOR LINCOLN  asked if he had  seen the hard numbers  from the                                                               
TAPS in terms of where we are today.                                                                                            
                                                                                                                                
MR. ROGERS replied that he  had looked at existing apprenticeship                                                               
programs in  Alaska today and  how long  it takes to  complete by                                                               
craft.                                                                                                                          
                                                                                                                                
     Most of  them, if we start  soon, we are in  a position                                                                    
     to   graduate  sufficient   journey-level  workers   to                                                                    
     address many of  the crafts. There are  some crafts for                                                                    
     which  the skill  level is  beyond a  beginning journey                                                                    
     level and we can't get  there. There are several skills                                                                    
     that just  aren't out  there. An  example cited  by the                                                                    
     producers is the  equipment that will be  used to lower                                                                    
     the pipe into  the trench - that's  equipment - they'll                                                                    
     be using  more equipment  on this  line than  exists in                                                                    
     the  world  today  and  two  to  three  times  as  many                                                                    
     operators for that  size as there are  out there today.                                                                    
     So,  there's got  to be  a major  training effort.  The                                                                    
     question  there is  how much  of  that is  going to  be                                                                    
     Alaska-trained and  non-Alaska-trained.... If  we train                                                                    
     Alaskans for skills that are  good for one project that                                                                    
     won't  be replicated,  what  do  they do  post-project?                                                                    
     They have  to look  elsewhere to  find work  with their                                                                    
     skill  level. So,  there's a  balancing  act there.  We                                                                    
     don't  assume that  100  percent hire  is  going to  be                                                                    
     possible even if  we had all the training  funds in the                                                                    
     world.                                                                                                                     
                                                                                                                                
SENATOR ELTON observed  that one of the impacts he  saw from TAPS                                                               
was that  people were  leaving jobs  in other  communities around                                                               
the state for  higher paid pipeline jobs and  the communities had                                                               
to import people to fill their jobs.                                                                                            
                                                                                                                                
MR. ROGERS replied that economically  speaking, the higher paying                                                               
jobs would offset  the entry-level jobs that would  be created by                                                               
people moving up.                                                                                                               
                                                                                                                                
SENATOR  SEEKINS echoed  Senator  Elton's concern  and said  that                                                               
local  hire  requirements  can  have a  negative  affect  on  his                                                               
business in  Fairbanks, because his  people are recruited  and he                                                               
has to go out and find qualified people and train them.                                                                         
                                                                                                                                
MR.  ROGERS answered  that some  of those  things balance  out. A                                                               
more complete  socio-economic study  would have to  address those                                                               
impacts on the private sector.  The seasonal chart indicates that                                                               
income may  flow to families in  terms of a member  being able to                                                               
work year-round as opposed to just eight months.                                                                                
                                                                                                                                
REPRESENTATIVE  GARA asked  what kind  of population  increase he                                                               
envisioned if the local hire efforts can't be controlled.                                                                       
                                                                                                                                
MR. ROGERS replied that he  hadn't calculated those impacts, yet.                                                               
A poor effort would require  more recruitment and hiring from out                                                               
of state, which might have  a secondary impact. People could hear                                                               
there are jobs and move here.                                                                                                   
                                                                                                                                
CHAIR  SAMUELS  remarked  that  another  impact  to  the  private                                                               
industry is that wages for local businesses will have to go up.                                                                 
                                                                                                                                
MR. ROGERS  replied that would  happen, but he estimated  that it                                                               
would  be  far  more  moderate   than  during  the  oil  pipeline                                                               
construction,  although Delta  and  Tok might  have those  hyper-                                                               
numbers.                                                                                                                        
                                                                                                                                
     Transportation  infrastructure  is the  single  largest                                                                    
     cost item. That  has to do with the size  and weight of                                                                    
     the project  loads that will  be traveling  on Alaska's                                                                    
     transportation  infrastructure.   The  volume   of  the                                                                    
     direct traffic that's  part of the project,  as well as                                                                    
     population induced traffic in  the villages and off the                                                                    
     main  road system,  issues of  dust mitigation  and the                                                                    
     need for railroad improvements.                                                                                            
                                                                                                                                
     When  you think  about  Alaska's  infrastructure -  the                                                                    
     major routes for freight coming  into the state - ports                                                                    
     of  Anchorage, Whittier,  Valdez, Haines,  Seward -  we                                                                    
     have  the railroad,  potentially  Skagway all  impacted                                                                    
     during  construction,  barges  into  Prudhoe  Bay,  the                                                                    
     Alaska  Highway at  the Canadian  border -  significant                                                                    
     freight  movements across  all of  these. In  addition,                                                                    
     potentially,  Kenai, depending  on competitive  bidding                                                                    
     for  modules, Kenai  and Anchorage  numbers could  vary                                                                    
     significantly.                                                                                                             
                                                                                                                                
     We've  looked at  the transportation  maintenance needs                                                                    
     affecting local governments  and villages and estimated                                                                    
     those maintenance needs at $14  million over the period                                                                    
     of construction.  That's a very low  number because the                                                                    
     biggest  challenge  comes   post  construction  in  any                                                                    
     rebuilding that needs to occur.  We're still working on                                                                    
     how to  get at those  numbers, but this  portion really                                                                    
     focuses on  what's needed in a  construction payment in                                                                    
     lieu of taxes to assist local governments.                                                                                 
                                                                                                                                
     In addition, we've got  some major state transportation                                                                    
     infrastructure -  a series of  highways and  bridges in                                                                    
     the Port  of Haines, totaling  $265 million. If  all of                                                                    
     that  is  federal  aid available,  that's  $26  million                                                                    
     state  appropriation  toward  those highways  and  they                                                                    
     need to be  in place by 2009. So, in  order to get them                                                                    
     in  place by  2009, that's  going to  affect the  state                                                                    
     transportation  improvement  plan   and  the  municipal                                                                    
     impact of  that is  it pushes  back some  projects that                                                                    
     people would  like to see  sooner rather than  later to                                                                    
     the  extent  that  the  state   chooses  to  make  this                                                                    
     infrastructure  available. The  industry has  said that                                                                    
     these  really deal  with load  factors -  some bridges.                                                                    
     There  are   a  couple  that  are   height  factors  on                                                                    
     overpasses  and this  is  a core  level  that has  been                                                                    
     publicly released.  There may be other  roads, bridges,                                                                    
     highways, ports in addition to  this that would require                                                                    
     some enhancement prior to construction.                                                                                    
                                                                                                                                
MR. ROGERS  said for  a sense  of TAPS impact  on road  usage, he                                                               
picked a small  street closest to his office  in Fairbanks called                                                               
Wendell  Street.  The  preconstruction   rate  was  about  10,000                                                               
vehicles per day and peak  construction rate was about 18,000 per                                                               
day. There  would be similar,  but smaller,  increases throughout                                                               
Fairbanks, Delta  and certain areas  of Anchorage. Part of  it is                                                               
traffic  diversion from  the highways  that  have the  industrial                                                               
traffic and part of it is just population induced.                                                                              
                                                                                                                                
     Law  enforcement emergency  services -  we're basically                                                                    
     dealing  with  crime,   traffic,  subsistence  resource                                                                    
     protection. We  looked at both increased  state trooper                                                                    
     presence  and  local  police  and  VPSO.  In  addition,                                                                    
     increased use  of emergency services for  both paid and                                                                    
     volunteer  fire  and  ambulance  departments.  Assuming                                                                    
     that  a portion  of this  is troopers,  $20 million  in                                                                    
     costs to local governments,  $4.5 million to the state.                                                                    
     If the troopers aren't there,  it will be a higher cost                                                                    
     on local government and VPSO.                                                                                              
                                                                                                                                
MR.  ROGERS  said the  education  increase  is relatively  minor.                                                               
During  the oil  pipeline, for  every 47  workers, there  was one                                                               
additional student. Increases  in state funding as  well as local                                                               
contribution add up to $13 million.                                                                                             
                                                                                                                                
Health and human  services are relatively low,  about $4 million.                                                               
Health needs and emergencies are  covered in the camps. About $12                                                               
million  in wage  inflation is  estimated to  vary by  community.                                                               
Subsistence  issues,  including   village  liaisons,  subsistence                                                               
research and monitoring  preconstruction and during construction,                                                               
for a total of $5 million.                                                                                                      
                                                                                                                                
MR.  ROGERS said  this  all  totals about  $125  million for  the                                                               
preconstruction and construction periods  from 2007 to 2014. That                                                               
compares to $202 million that  would be paid from property taxes.                                                               
However  the  bulk of  those  taxes  are  paid  in FY  2014  when                                                               
construction is completed.                                                                                                      
                                                                                                                                
     The challenge is that while  the numbers are relatively                                                                    
     comparable,   if   you   exclude  that   amount   after                                                                    
     construction  is completed,  the municipal  impacts hit                                                                    
     before  the tax  impacts would  be there  and they  hit                                                                    
     differentially. The  City of Fairbanks has  no pipeline                                                                    
     within city  limits, but  is one  of the  most impacted                                                                    
     cities.  So, a  pure tax  regime does  not address  the                                                                    
     social  and  economic  impacts.  In  addition,  in  the                                                                    
     unorganized borough,  there is not a  way of addressing                                                                    
     those needs today. Of those  impacts, about $84 million                                                                    
     would  be the  municipals'  share and  $41 million  the                                                                    
     state's share,  which really is  focused on  the roads,                                                                    
     education and on police.                                                                                                   
                                                                                                                                
     There are  some offsets to these  municipals costs. New                                                                    
     construction  of property  that won't  be tax  exempt -                                                                    
     warehouses that  aren't direct  pipeline -  that drives                                                                    
     some new revenues to municipalities.  It can be used as                                                                    
     an  offset. We've  got  a  little more  work  to do  to                                                                    
     complete those offset numbers.                                                                                             
                                                                                                                                
     I'll run  quickly through  the subsistence  impacts and                                                                    
     socio-cultural.  The issues  there  really  have to  do                                                                    
     with  how does  a  project impact  the availability  of                                                                    
     resources,   the   access   to  those   resources   and                                                                    
     competition  for  the   resources.  Federal  law  would                                                                    
     require   certain   mitigation    measures   and   some                                                                    
     monitoring  and enforcement  of those  impacts. In  the                                                                    
     North  Slope,  those  impacts would  have  to  do  with                                                                    
     access, competition  and disturbance -  some cumulative                                                                    
     impacts. North Slope impacts will  be greater than what                                                                    
     we've cited  here because this  does not include  a gas                                                                    
     treatment  plant or  upstream facilities,  also impacts                                                                    
     in the  northern Interior and upper  Tanana villages in                                                                    
     terms of competition for  resources, harvest levels and                                                                    
     some cultural resource issues in the Interior.                                                                             
                                                                                                                                
     The activities  that affect those  have to do  with new                                                                    
     road  construction,   truck  traffic,   the  activities                                                                    
     around  a  construction  camp, and  those  things  that                                                                    
     happen  during  development  or   during  some  of  the                                                                    
     upgrades required to our infrastructure.                                                                                   
                                                                                                                                
     In  total -  impacts  on villages  - wage,  employment,                                                                    
     changes of  structure of villages during  the period of                                                                    
     construction  with a  shift in  focus from  subsistence                                                                    
     activities. If the population that  would have been out                                                                    
     hunting this week are instead  working for wage income,                                                                    
     there's less resource to share  with elders and others.                                                                    
     We see  some population shifts as  occurred during TAPS                                                                    
     and just  as in  the urban areas,  some changes  in the                                                                    
     social  fabric with  effects of  drugs  and alcohol  as                                                                    
     there is more cash income.                                                                                                 
                                                                                                                                
     Finally, some management and  regulatory issues are out                                                                    
     there. To close,  our work is focused  on the municipal                                                                    
     impacts. We've just about finished  the work on the gas                                                                    
     pipeline portion,  working on the gas  treatment plant.                                                                    
     Upstream, as other applications  come in, their impacts                                                                    
     may  be   different  from   those  of   the  producers'                                                                    
     pipeline. We'd  possibly also  be looking  at those....                                                                    
     Our final  report [is]  due to  the MAG  at the  end of                                                                    
     September.                                                                                                                 
                                                                                                                                
SENATOR LINCOLN  referred to the  population chart and  asked him                                                               
if he had considered the shifting population in-state.                                                                          
                                                                                                                                
MR. ROGERS  replied that his model  looks at net impacts  in each                                                               
region based on  the producers' conceptual model  and he couldn't                                                               
be precise about the effect of additional regional movement.                                                                    
                                                                                                                                
12:10 - 1:15 - recess                                                                                                           
                                                                                                                                
CHAIR SAMUELS called the meeting  back to order and the committee                                                               
moved  to   the  next  presentation  by   Robert  Cupina,  Deputy                                                               
Director, Office  of Energy  Projects, Federal  Energy Regulatory                                                               
Commission (FERC),  and John Katz, Assistant  General Counsel for                                                               
Energy Projects,  FERC. Chair Samuels  informed members  that Mr.                                                               
Cupina's office  is responsible  for processing  applications for                                                               
the construction  and operation  of interstate  and international                                                               
natural  gas  facilities  including  LNG and  licensees  for  non                                                               
federal  hydro-electric projects  as well  as managing  the dam's                                                               
safety  program. Mr.  Katz is  senior  counsel at  FERC where  he                                                               
specializes in  hydroelectric licensing and natural  gas pipeline                                                               
certification matters.                                                                                                          
                                                                                                                                
 PANEL DISCUSSION ON THE REGULATION OF GAS PIPELINES, GATHERING                                                               
                LINES AND PROCESSING FACILITIES                                                                               
                                                                                                                                
MR. CUPINA said  that natural gas is a critical  component of the                                                               
nation's energy mix and informed members:                                                                                       
                                                                                                                                
     The  Department  of  Energy predicts  that  growth  and                                                                    
     demand  over the  next several  decades will  require a                                                                    
     significant  increase in  gas  production and  delivery                                                                    
     capacity. Supplies from the  Lower 48 sources, imported                                                                    
     LNG  and  Alaskan  gas,  will all  be  needed  to  meet                                                                    
     projected  demand.  An  application  to  construct  and                                                                    
     operate  an Alaskan  pipeline may  be  filed with  FERC                                                                    
     under either the Alaska  Natural Gas Transportation Act                                                                    
     (ANGTA)  or  the Natural  Gas  Act  (NGA). We  have  no                                                                    
     application before us right now  and we would encourage                                                                    
     sponsors  to  make  a  single  filing  to  avoid  time-                                                                    
     consuming   duplicative    processing   and   potential                                                                    
     litigation. Whatever  form a  proposal to us  takes, we                                                                    
     are    positioned   to    review    such   a    project                                                                    
     comprehensively  and  expeditiously  so  that  gas  can                                                                    
     reach  the  market  in a  timely  fashion.  Alaska  gas                                                                    
     pipeline provisions  in the  national energy  bill will                                                                    
     ensure such  timely completion  by clarifying  that NGA                                                                    
     proposals,  to  compete  with  ANGS,  (A)  and  (D)  be                                                                    
     considered by  providing that FERC  is the  lead agency                                                                    
     and by imposing strict processing timeframes.                                                                              
                                                                                                                                
     So, our  comments today  and our  answers are  based on                                                                    
     the  commission's   current  competitive   market  non-                                                                    
     subsidization approach to  major new pipeline projects.                                                                    
     These  open-access policies  under  which shippers  are                                                                    
     able  to buy  gas  directly from  production areas  and                                                                    
     separately    obtain    transportation   capacity    on                                                                    
     interstate pipelines should serve  the interests of the                                                                    
     state of  Alaska as well  as of all other  shippers. At                                                                    
     the same  time, we  are mindful  that the  size, scope,                                                                    
     and importance  and uniqueness  of an  Alaskan pipeline                                                                    
     as well  as certain  provisions in the  National Energy                                                                    
     Bill may  call for  some variance  in that  approach to                                                                    
     insure its development.                                                                                                    
                                                                                                                                
SENATOR GRETCHEN GUESS said that it has been implied that FERC                                                                  
doesn't consider rolled-in tariffs, but only considers                                                                          
incremental tariffs and asked if he could comment on that.                                                                      
                                                                                                                                
MR. CUPINA replied:                                                                                                             
                                                                                                                                
     For  a new  pipeline,  we'd just  be  talking about  an                                                                    
     initial rate.  So, at that  juncture you're  not really                                                                    
     talking  about rolled-in  or incremental.  It's usually                                                                    
     when  there's  an  addition  to  that  system  or  some                                                                    
     expansion that  the issue  of how  to recover  the cost                                                                    
     for  that  expansion arises.  The  policy  has been  in                                                                    
     general for  an expansion  - we would  consider rolling                                                                    
     in, in  fact we  require rolling-in  when [END  OF TAPE                                                                    
     04-25, SIDE B]                                                                                                             
                                                                                                                                
TAPE 04-26, SIDE A                                                                                                            
                                                                                                                              
MR. CUPINA continued:                                                                                                           
                                                                                                                                
     The new  rate would  be higher  than the  existing rate                                                                    
     that is incrementally priced.  So, there's roll-in when                                                                    
     it  benefits the  existing shippers  by lowering  their                                                                    
     rate.                                                                                                                      
                                                                                                                                
MR. KATZ added:                                                                                                                 
                                                                                                                                
     As  you  probably  know   from  reading  [the  proposed                                                                    
     federal  energy bill]  and its  impacts with  regard to                                                                    
     expansion  and other  issues... the  draft energy  bill                                                                    
     required that if the commissioner  was going to require                                                                    
     an expansion  of an  Alaska gas  pipeline, that  it was                                                                    
     required by the  proposed law to insure  that the rates                                                                    
     established would not require  existing shippers on the                                                                    
     pipeline to  subsidize expansion shippers. So,  that is                                                                    
     fairly  consistent   with  the   commission's  existing                                                                    
     policy.                                                                                                                    
                                                                                                                                
CHAIR SAMUELS  asked if the ability  to roll in tariffs  could be                                                               
contracted away. "If  in the Stranded Gas Act  between Alaska and                                                               
the applicant  wanted to have  rolled in tariffs, how  would FERC                                                               
view that?"                                                                                                                     
                                                                                                                                
MR. CUPINA asked if he was talking about all expansions.                                                                        
                                                                                                                                
CHAIR SAMUELS replied yes - just in the instance:                                                                               
                                                                                                                                
     Let's  say that  the price  was going  to increase  the                                                                    
     tariff, not just decrease, could  it be contracted away                                                                    
     or how  would FERC  view the  ability to  contract away                                                                    
     the ability  to have incremental tariffs  as opposed to                                                                    
     mandating rolled-in tariffs?                                                                                               
                                                                                                                                
MR. KATZ  replied that it  depends. The  right to not  have rates                                                               
increased is  a right of  the existing  shippers, not a  right of                                                               
the pipeline.  He realizes that  in some scenarios in  Alaska the                                                               
shippers  are the  pipeline, so  that might  be different  than a                                                               
typical case.                                                                                                                   
                                                                                                                                
     In a  typical case,  I don't  know that  the commission                                                                    
     would  allow the  pipeline to  contract  the rights  of                                                                    
     shippers.  In  a  case  where   the  shippers  and  the                                                                    
     pipeline  have  the same  identity,  it  might view  it                                                                    
     differently.                                                                                                               
                                                                                                                                
CHAIR SAMUELS indicated there were  no further questions for FERC                                                               
and said that Margery Fowke would testify next.                                                                                 
                                                                                                                                
 NATIONAL ENERGY BOARD'S REGULATION OF THE CANADIAN SEGMENT(S) OF                                                             
                 AN ALASKA NATURAL GAS PIPELINE                                                                               
                                                                                                                                
MS. MARGERY FOWKE, National Energy  Board, Canada, said she would                                                               
speak on two matters with  respect to the board's jurisdiction of                                                               
practice  - those  are incremental  and rolled-in  tolls and  the                                                               
board's  ability to  order expansions  of  facilities in  certain                                                               
cases.                                                                                                                          
                                                                                                                                
     I thought  I'd spend  a few moments  to talk  about the                                                                    
     board's  mandate  and  jurisdiction and  processes  for                                                                    
     anybody  who might  not be  familiar with  the National                                                                    
     Energy Board  (NEB). The board has  both regulatory and                                                                    
     advisory  responsibilities, which  have changed  little                                                                    
     since  our  inception  in 1959.  We  have  jurisdiction                                                                    
     regarding  the certification  of  pipelines, tolls  and                                                                    
     tariffs,  construction  of  pipeline and  ongoing  safe                                                                    
     operation of the pipeline and  the ability of the board                                                                    
     to  require a  pipeline company  to provide  facilities                                                                    
     for  other  shippers.  The  board  also  regulates  the                                                                    
     export and  import of natural  gas and oil,  the export                                                                    
     of  electricity,  the   construction  of  international                                                                    
     power  lines, the  exploration  on federally  regulated                                                                    
     lands - that's offshore and  north of 60, and the board                                                                    
     provides advice  to the  federal government  of Canada.                                                                    
     It's not  that it's  an exhaustive  list, but  it's the                                                                    
     highlights of what we do.                                                                                                  
                                                                                                                                
     This  map  shows  generally the  natural  gas  and  oil                                                                    
     pipelines that are regulated by  the board, the ones in                                                                    
     Canada,  of course.  The  board  regulates over  27,000                                                                    
     miles  of  pipelines,   inter-provincial  and  national                                                                    
     pipelines. The board is  a quasi-judicial tribunal with                                                                    
     all  the powers  of a  court  of record.  We have  nine                                                                    
     full-time members  and the  Act provides  for temporary                                                                    
     members  as well.  We  currently  have eight  full-time                                                                    
     members. A quorum of the  board to sit on most hearings                                                                    
     is three  members and  the process  at a  board hearing                                                                    
     would be similar to what  most of you would be familiar                                                                    
     with -  witnesses are sworn, they're  cross examined by                                                                    
     parties of  opposing interests,  the board  counsel and                                                                    
     the  board   ask  questions  and  then   there's  final                                                                    
     arguments at the end of the hearing.                                                                                       
                                                                                                                                
     When an application for the  construction of a pipeline                                                                    
     is  filed,  the Act  requires  that  we have  a  public                                                                    
     hearing and  that that hearing  be oral. Section  52 of                                                                    
     the  Act sets  out some  of the  things that  the board                                                                    
     must  consider when  we look  at an  application for  a                                                                    
     pipeline    such   as    supply,   markets,    economic                                                                    
     feasibility. With  respect to economic matters,  one of                                                                    
     the  main  focuses  of  the board  right  now  is  with                                                                    
     respect  to third-party  impacts. In  addition, one  of                                                                    
     the  main  issues  these   days  is  environment.  With                                                                    
     respect to a pipeline of  interest to you, the Canadian                                                                    
     Environmental Assessment  Act would apply.  There would                                                                    
     likely  be a  joint review  panel, which  would involve                                                                    
     territorial,  federal,  including the  national  energy                                                                    
     board and aboriginal representatives.  I can't say with                                                                    
     any  certainty  what  the  process   would  be  for  an                                                                    
     application that  could be filed for  a pipeline coming                                                                    
     out of Alaska,  but I can tell you that  the model that                                                                    
     is currently  being used for  the Mackenzie  project is                                                                    
     that  there  is  a  joint   review  panel,  which  will                                                                    
     consider the  environmental matters. The board  has one                                                                    
     member  that's appointed  to that  panel and  I believe                                                                    
     there are eight members on it.                                                                                             
                                                                                                                                
     The board at the same  time will conduct a hearing into                                                                    
     all   matters   within   its  jurisdiction   and   will                                                                    
     incorporate  the joint  review  panel  with respect  to                                                                    
     environment.  The member  that's  on  the joint  review                                                                    
     panel will report back to the  board on it. Once all of                                                                    
     the hearings  are complete, if  the joint  review panel                                                                    
     allows  for it  and  the NEB  is of  the  view that  it                                                                    
     should  be  approved,  then  a  certificate  of  public                                                                    
     convenience and necessity would  be issued. This allows                                                                    
     the  pipeline company  to  construct  the pipeline  and                                                                    
     operate it.                                                                                                                
                                                                                                                                
     In  terms  of our  working  with  FERC, the  board  has                                                                    
     recently  entered into  a  memorandum of  understanding                                                                    
     (MOU) with  FERC and I've  provided that at tab  3. The                                                                    
     parties recognized that it's  in the public interest to                                                                    
     coordinate  their  efforts,  that there  may  be  cases                                                                    
     where  coordinated  reviews  may  be  considered,  that                                                                    
     timing should  be coordinated and the  parties agree to                                                                    
     notify the  other party if  there is an  application to                                                                    
     it  where  the  matter  is being  heard  by  the  other                                                                    
     tribunal.                                                                                                                  
                                                                                                                                
     I'd like  to move to  toll regulation by NEB.  When new                                                                    
     facilities,  either  greenfield  or an  expansion,  are                                                                    
     being applied for, the  board usually considers tolling                                                                    
     matters  at the  same hearing.  The requirement  in the                                                                    
     Act is that tolls be  just and reasonable and that they                                                                    
     be charged  equally to all  persons for traffic  of the                                                                    
     same description  over the same route  in substantially                                                                    
     the same  circumstances. That is  in section 62  of the                                                                    
     board's act.                                                                                                               
                                                                                                                                
     The board  can set  tolls using  a number  of different                                                                    
     methodologies.  We  can  use the  traditional  cost  of                                                                    
     service  methodology   or  any   other  to   set  tolls                                                                    
     ourselves. Tolls can also be  negotiated or they can be                                                                    
     subject to  a settlement.  The board is  very accepting                                                                    
     of  settlements. We  have settlement  guidelines, which                                                                    
     can  be found  on our  web  and they  require that  all                                                                    
     parties   have  a   chance   to   participate  in   the                                                                    
     settlement.  A settlement  can provide  for unique  and                                                                    
     different  arrangements and  most  new construction  of                                                                    
     pipelines  in recent  history have  had tolls  that are                                                                    
     either negotiated  in part or subject  to a settlement.                                                                    
     The only requirement  the board has is that  we be able                                                                    
     to find that the tolls  are just and reasonable. Pretty                                                                    
     much everything else is up for grabs.                                                                                      
                                                                                                                                
     The board  has broken down the  pipeline companies that                                                                    
     it  regulates  into  two   different  groups.  Group  1                                                                    
     companies   are   the   larger   companies,   such   as                                                                    
     TransCanada Pipelines  Ltd., Westcoast Energy  Inc. and                                                                    
     Enbridge. Group  2 companies are the  smaller pipelines                                                                    
     and they are regulated on a complaint basis.                                                                               
                                                                                                                                
     I was asked  to address the frequency  of toll hearings                                                                    
     and  whether  the  pipeline  has   the  option  or  the                                                                    
     obligation  to   refile  its  tolls  in   the  face  of                                                                    
     declining costs. The frequency  of toll hearings really                                                                    
     varies. For some group 1  companies, if they can't come                                                                    
     to a settlement with  their shippers, it's virtually an                                                                    
     annual  event  and  that's the  case  with  TransCanada                                                                    
     Pipelines  - the  largest  pipeline  that we  regulate.                                                                    
     They are right now pretty much annually before us.                                                                         
                                                                                                                                
     At any time after a  board decision, the pipeline or an                                                                    
     interested person  can file a  request for a  review of                                                                    
     the board decision.  One of the grounds  for the review                                                                    
     is changed  circumstances. So, if there  were declining                                                                    
     costs,  a review  application could  be filed  with the                                                                    
     board.  The board  would  then have  to  examine it  to                                                                    
     determine whether a  review should be held  and, if so,                                                                    
     whether  the previous  decision  needs  to be  changed.                                                                    
     Some pipelines have multi-year  settlements and in such                                                                    
     a  case,   we  wouldn't  expect  the   company  or  the                                                                    
     participants to  be back before  us during the  term of                                                                    
     that  settlement. In  the settlements,  usually changes                                                                    
     that could come  up through the term  of the settlement                                                                    
     are taken into  account by some cost  sharing factor or                                                                    
     risk sharing  factor. If the parties  to the settlement                                                                    
     were  to  agree  that  they   needed  to  reassess  the                                                                    
     settlement in the middle of  the term, it could be done                                                                    
     and  it is  right  now being  done in  one  of the  oil                                                                    
     pipelines. I  think, as  well, my view,  if you  are in                                                                    
     the middle of  a long settlement and it  could be shown                                                                    
     that  the tools  were  no longer  just and  reasonable,                                                                    
     that you  would have  an argument to  come back  to the                                                                    
     board and  have it  look at  the settlement  again. The                                                                    
     onus  would  be  on  the  party  trying  to  bring  the                                                                    
     settlement  back  towards the  board  to  show that  it                                                                    
     should be changed  and that the tolls are  not just and                                                                    
     reasonable, but I think it could be done.                                                                                  
                                                                                                                                
     If  you're talking  about a  group  2 company,  they're                                                                    
     regulated  on the  complaint basis  and if  there is  a                                                                    
     third party  shipper, tolls have  to be filed  with the                                                                    
     board, but it doesn't examine  them to any great extent                                                                    
     unless there  is a complaint  filed. So, if  there were                                                                    
     changes  in the  costs to  the pipeline  and a  shipper                                                                    
     wanted to  file a complaint  to request that  the board                                                                    
     look  at those  tolls, the  board could  do it  at that                                                                    
     point  in   time.  So,  in  short,   while  there's  no                                                                    
     obligation on a  company to file new tolls  in the face                                                                    
     of declining  costs or any other  change circumstances,                                                                    
     there  are  means  by which  the  pipeline  or  another                                                                    
     interested  party could  bring the  matter back  to the                                                                    
     board  for consideration  of the  issue.  As well,  the                                                                    
     board could of  its own motion bring the  matter up for                                                                    
     discussion.                                                                                                                
                                                                                                                                
     I'd  like to  turn  now to  the  question of  rolled-in                                                                    
     versus incremental  tolls. Let me start  by saying that                                                                    
     there are  no rules at  the NEB on this  issue. There's                                                                    
     nothing in the Act;  there's nothing in the regulations                                                                    
     and we have no policy  that we have issued with respect                                                                    
     to rolled-in  versus incremental tolls. There  are some                                                                    
     past  decisions  where  the board  has  considered  the                                                                    
     matter, but I'd like you to  note that we are not bound                                                                    
     by past decisions and, in  fact, we must consider every                                                                    
     relevant issue in  a new hearing. So, we  can't rely on                                                                    
     past decisions alone. We have  to reexamine issues. I'd                                                                    
     also like to note that  the seminal cases in this issue                                                                    
     were  in  1987  and  1989;  so there's  not  a  lot  of                                                                    
     anything recent.                                                                                                           
                                                                                                                                
     Any  expansion of  a pipeline  out of  Alaska would  be                                                                    
     fairly far  down the  road and we  all know,  there's a                                                                    
     lot of unanswered  variables that could be  at play. We                                                                    
     also don't  know what the regulatory  environment would                                                                    
     be.  I've seen  a  lot of  changes in  my  time at  the                                                                    
     board;  I foresee  that there  will be  changes in  the                                                                    
     next 10  to 15 years. I  can't tell you what  the board                                                                    
     would  do  with  an  application  at  the  time  of  an                                                                    
     expansion  in  terms  of rolled-in  versus  incremental                                                                    
     tolls,  but  I  can  tell  is  what  the  board's  past                                                                    
     decisions have  said and  I can tell  what some  of the                                                                    
     considerations that  the board  has taken  into account                                                                    
     in making those decisions.                                                                                                 
                                                                                                                                
     There   have   been   a  number   of   decisions,   but                                                                    
     unfortunately  for  our  purposes,  none  of  them  are                                                                    
     particularly recent. I'm going  to focus on GH-2-87 and                                                                    
     GH-5-89,  which are  TransCanada hearing  decisions and                                                                    
     those  are the  most helpful  decisions on  the matter.                                                                    
     I've  also included  references here  to the  Westcoast                                                                    
     Energy  Inc.   decisions,  but  Westcoast  is   a  very                                                                    
     different  system.  It  includes  gathering  lines  and                                                                    
     processing  plants;  it  has historically  had  a  much                                                                    
     different tolling  regime with a lot  of specific tolls                                                                    
     for  specific  services.  So, the  Westcoast  decisions                                                                    
     aren't   particularly   helpful.  I've   included   the                                                                    
     references   for   some   oil  pipeline   decisions   -                                                                    
     Interprovincial Pipe Line Inc.  and Trans Mountain Pipe                                                                    
     Line Company  Ltd. are  both oil  companies -  and I'll                                                                    
     briefly touch on those. All  of the board decisions are                                                                    
     on the  website. The last  two numbers in  the decision                                                                    
     are  the  year  of  the decision.  So,  GH-2-87  was  a                                                                    
     hearing that started in 1987.  I've included behind tab                                                                    
     4 some  excerpts for our decisions  from GH-2-87, GH-5-                                                                    
     89 and GH-5-94, the Westcoast decision.                                                                                    
                                                                                                                                
     I'd like to  discuss the specifics of just  a few cases                                                                    
     and what I think are  the board considerations that run                                                                    
     through  these   decisions.  In   GH-2-87,  it   was  a                                                                    
     TransCanada facilities  application. The  board decided                                                                    
     that the  rolled-in method of cost  allocation and toll                                                                    
     design   would   be   appropriate  for   the   proposed                                                                    
     facilities.  The board  looked at  practical and  legal                                                                    
     considerations. The  board made it clear  that existing                                                                    
     customers do  not possess acquired rights  to enjoy the                                                                    
     use of  the older  facilities at lower  embedded costs.                                                                    
     The payment  of tolls  in the past  did not  confer any                                                                    
     benefit  beyond the  provision of  the service  at that                                                                    
     time. The board  didn't equate those who  paid with the                                                                    
     service with  those who paid for  facilities. The board                                                                    
     also  endorsed  the  concept  that  TransCanada  is  an                                                                    
     integrated  system.  In  the   board's  view,  the  new                                                                    
     facilities  contributed to  the capacity  and integrity                                                                    
     of  the  system  as  a   whole.  Therefore,  the  board                                                                    
     determined  that  the  toll  should  be  charged  on  a                                                                    
     rolled-in basis. However, the  board also found that if                                                                    
     the  services  required by  only  a  limited number  of                                                                    
     shippers  and   the  facilities  could   be  separately                                                                    
     identified  from the  integrated  rate  base, that  the                                                                    
     principals of  cost-causation and user pay  would apply                                                                    
     to insure  that there was no  undue cross subsidization                                                                    
      by other toll payers. Therefore, in this hearing, GH-                                                                     
     2-87, the provision of  additional delivery pressure at                                                                    
     any delivery  point would  be recovered  through stand-                                                                    
     alone tolls.                                                                                                               
                                                                                                                                
     In   GH-5-89,  which   was   the  biggest   TransCanada                                                                    
     expansion  that   we've  ever  considered,   the  board                                                                    
     considered  the  rolled-in versus  incremental  tolling                                                                    
      methodology. The board reaffirmed its findings in GH-                                                                     
     2-87  that the  previous  toll-payers  have to  acquire                                                                    
     rights.  They can't  be exempted  from a  toll increase                                                                    
     simply because they  paid tolls in the  past. The board                                                                    
     found, again, that on  completion, the facilities would                                                                    
     be  integral to  the  TransCanada  Pipeline system.  It                                                                    
     looked at  cost causation and found  that the aggregate                                                                    
     demand  of all  shippers  gives rise  to  the need  for                                                                    
     additional  pipeline  capacity.  The  board  looked  at                                                                    
     economic  efficiency and  stated  that rolled-in  tolls                                                                    
     would send  appropriate price signals. The  board found                                                                    
     that   incremental   tolls    would   create   economic                                                                    
     distortions  because  existing  shippers would  not  be                                                                    
     exposed to  the appropriate  market signals.  The board                                                                    
     was of  the view  that the  magnitude of  the expansion                                                                    
     didn't  justify changing  the methodology  nor did  the                                                                    
     riskiness of  the market. It  stated that  factors such                                                                    
     as size, cost of impact  on tolls might be factors that                                                                    
     the  board would  take  into  account when  determining                                                                    
     whether  or not  to authorize  the construction  of the                                                                    
     facilities,  but  they  didn't  justify  discrimination                                                                    
     among shippers on  the basis of when  they commenced or                                                                    
     would commence paying tolls.                                                                                               
                                                                                                                                
     The one  Westcoast case that  I did want to  mention is                                                                    
      GH-5-94 and in that case, the board found for rolled-                                                                     
     in tolls  placing significant weight  on the  extent to                                                                    
     which the proposed facilities would  be integral to the                                                                    
     Westcoast facilities  in that specific area.  The board                                                                    
     stated  that  in  its  view  shippers  didn't  pay  for                                                                    
     specific  facilities;  they   contracted  for  specific                                                                    
     services.                                                                                                                  
                                                                                                                                
     There  are a  few oil  pipeline decisions  on rolled-in                                                                    
     tolls.  In   all  of  the  Interprovincial   Pipe  Line                                                                    
     decisions,  the board  found that  the  toll should  be                                                                    
     stand-alone, not rolled-in. This  was based on the fact                                                                    
     that  the facilities  would  only be  used  by a  small                                                                    
     number of  shippers. Not  all of  the shippers  are not                                                                    
     all  commodity  groups.  Therefore, the  principles  of                                                                    
     user pay would be  best reflected by stand-alone tolls.                                                                    
     The board  found there is  no unjust  discrimination in                                                                    
     shippers,   because  all   those  using   the  specific                                                                    
     services  were being  treated the  same way.  The board                                                                    
     also  noted the  need  to minimize  cross-subsidization                                                                    
     and to allow  for business decisions to be  made on the                                                                    
     basis or appropriate price signals.                                                                                        
                                                                                                                                
     The  Trans  Mountain  decisions   that  I  referred  to                                                                    
     allowed all  or part of  the expansion to  be rolled-in                                                                    
     where it found  the facilities would be for  use of all                                                                    
     of the shippers  or where it would  enhance the overall                                                                    
     efficiency of the entire system.                                                                                           
                                                                                                                                
     So,  from  all of  these  decisions,  I've pulled  what                                                                    
     seemed to  be in my view,  the important considerations                                                                    
     that the board  has taken into account.  I would stress                                                                    
     to  you that  this is  not a  board pronouncement.  The                                                                    
     board  has not  issued  anything on  it.  I would  also                                                                    
     point out to you that  although the board has stated in                                                                    
     numerous decisions that it  supports the principles set                                                                    
     out  in the  GH-5-89 decision,  any time  the issue  of                                                                    
     tolling methodology  comes up, it must  be addressed on                                                                    
     a case-by-case basis.                                                                                                      
                                                                                                                                
     The second matter that I was  asked to focus on was the                                                                    
     ability  of  the  board  to   order  the  provision  of                                                                    
     facilities. Subsection 71(3) of  the NEB Act allows the                                                                    
     board  to  order  a company  to  provide  adequate  and                                                                    
     suitable facilities  for the  transmission of,  in this                                                                    
     case,  gas. There  are two  tests in  this action;  the                                                                    
     board has to consider it  necessary and desirable to do                                                                    
     so in  the public  interest and the  board has  to find                                                                    
     that no  undue burden  will be  placed on  the pipeline                                                                    
     company  by  requiring  the  company  to  do  so.  This                                                                    
     section has been very infrequently considered.                                                                             
                                                                                                                                
     The few decisions  that we have had  that consider this                                                                    
     section don't provide  much guidance for us  on how the                                                                    
     board would consider an  application now. I've provided                                                                    
     the excerpts from these decisions  behind tab 5. In the                                                                    
     first  case  that  I could  find,  GH-3-86,  the  board                                                                    
     considered an  application by Cyanamid  Canada Pipeline                                                                    
     Inc.  to construct  facilities  to require  TransCanada                                                                    
     Pipelines  to  provide interconnection  facilities.  If                                                                    
     you  look at  that decision,  you'll note  that they're                                                                    
     talking about section  59 instead of section  71 - just                                                                    
     a change  of numbering the  late '80s. The  board found                                                                    
     that the  application by Cyanamid to  construct its own                                                                    
     facilities  should be  approved and  that the  approval                                                                    
     would  have  no  significance   if  the  board  weren't                                                                    
     prepared to  grant the interconnection.  Therefore, the                                                                    
     board  found the  interconnection to  be in  the public                                                                    
     interest and  found there would  be no undue  burden on                                                                    
     TransCanada.  That's  just  about  the  extent  of  the                                                                    
     board's reasoning. It was very  short on the section 71                                                                    
     issue  and  doesn't provide  as  much  guidance on  the                                                                    
     matter. It's also the only  case I could find where the                                                                    
     board   actually   ordered   the   interconnection   of                                                                    
     facilities.                                                                                                                
                                                                                                                                
     In MH-2-88,  the board was considering  both subsection                                                                    
     71-2  and 71-3;  71-2 is  the ability  of the  board to                                                                    
     require  a  gas  pipeline  to  receive,  transport  and                                                                    
     deliver gas.  In this  case, the  board found  that the                                                                    
     pipeline  company  could  transport the  gas  with  the                                                                    
     current configuration  of its system and  therefore, it                                                                    
     found  it  unnecessary to  order  a  71-3 to  construct                                                                    
     additional facilities.                                                                                                     
                                                                                                                                
     In  GH-4-91,  it  was again  a  TransCanada  facilities                                                                    
     application and  the board  heard an  application under                                                                    
     71-3  from a  prospective shipper  to provide  services                                                                    
     and facilities.  The board was  not convinced  that the                                                                    
     applicant had demonstrated need  for the facilities and                                                                    
     therefore denied the 71-3.                                                                                                 
                                                                                                                                
     Finally, in GH-3-96, it was  again an application under                                                                    
     both 71-2  and 71-3.  The pipeline company  was opposed                                                                    
     to  providing the  service, but  admitted on  the stand                                                                    
     that it could do  so without additional facilities. The                                                                    
     board told them  that they had to  provide the service,                                                                    
     but  didn't require  them to  construct any  facilities                                                                    
     under 71-3.                                                                                                                
                                                                                                                                
     So,  the  important  considerations that  I  take  from                                                                    
     those four cases are that  first, there must be a clear                                                                    
     demonstration  for  the  need for  the  facilities  and                                                                    
     second, that the transportation  can be provided by the                                                                    
     pipeline company on its  existing facilities, the board                                                                    
     will not order new  facilities to be constructed. There                                                                    
     has been  no discussion  in any  decision of  the tests                                                                    
     that are  in 71-3. In  my view, if an  application came                                                                    
     forward  now, the  board would  have to  be looking  at                                                                    
     what  those tests  are  and what  they  mean and  there                                                                    
     would probably  need to be  some discussion of  them. I                                                                    
     know   in  recent   hearings  where   there  has   been                                                                    
     discussion  on the  record about  71-3, there  has been                                                                    
     quite a  bit of debate  about what the tests  mean. The                                                                    
     board  has not  found it  necessary to  discuss in  any                                                                    
     reason. So,  we don't  know what  the board's  view is,                                                                    
     but we do know that there  has been a lot of discussion                                                                    
     on it.                                                                                                                     
                                                                                                                                
     That's all I was intending  to present today. I hope it                                                                    
     has been of some assistance to you....                                                                                     
                                                                                                                                
CHAIR SAMUELS  said he would  eventually have a lot  of questions                                                               
on how  the two  regulatory bodies, FERC  and NEB,  work together                                                               
when the pipeline  crosses the border, but he  wanted to continue                                                               
with Dave Harbour.                                                                                                              
                                                                                                                                
MR. DAVE  HARBOUR, Chair, Regulatory Commission  of Alaska (RCA),                                                               
introduced Judge  Jan Wilson, Administrative Law  Judge, RCA, who                                                               
specializes  in   the  application   of  oil  and   gas  pipeline                                                               
regulations, particularly under AS 42.06.                                                                                       
                                                                                                                                
     With your approval today, what  I'd like to do is offer                                                                    
     our  panel participation  as citizens.  The reason  for                                                                    
     this  is the  decisions we  make and  the statement  we                                                                    
     make in public are the  product of due process hearings                                                                    
     and a  legal record. So,  we don't for a  moving target                                                                    
     like this  express approval on  the commission  on what                                                                    
     we  say. We'll  do our  best  to help  today with  your                                                                    
     deliberations.  Our goal  is to  provide you  with this                                                                    
     brief opening statement and  then attempt to personally                                                                    
     help with the questions you may have.                                                                                      
                                                                                                                                
     Bonnie  Robson advised  us today  that we'd  be talking                                                                    
     about  general regulatory  issues affecting  the Alaska                                                                    
     gas  pipeline. I  think the  statements you've  got are                                                                    
     going to be most to the  point of the interests of this                                                                    
     committee. However, I think I  can provide a few points                                                                    
     that might assist and round out your understanding.                                                                        
                                                                                                                                
     First,   the  Alaska   Pipeline  Act   establishes  our                                                                    
     commission's   pipeline  jurisdiction   throughout  the                                                                    
     state  except   as  it  might  conflict   with  federal                                                                    
     jurisdiction.  The legislature  specified  in AS  42.06                                                                    
     that  the  Alaska   Commission  has  jurisdiction,  'of                                                                    
     intrastate  transportation of  North Slope  natural gas                                                                    
     through a  North Slope natural gas  pipeline.' So, that                                                                    
     is there.                                                                                                                  
                                                                                                                                
     Second,  in chapter  15  of USC  15,  we find  language                                                                    
     dealing  with the  regulation  of interstate  pipelines                                                                    
     and a special note  that federal regulation and matters                                                                    
     relating  to  the  transportation  of  natural  gas  in                                                                    
     interstate  and  foreign  commerce  is  in  the  public                                                                    
     interest.  So, that  will be  regulated by  the federal                                                                    
     government, but  the jurisdiction  is limited  and does                                                                    
     not include,  'local distribution of natural  gas or to                                                                    
     the  facilities used  for  such distribution'.  Federal                                                                    
     jurisdiction also doesn't apply  to 'persons engaged in                                                                    
     the transportation  in interstate commerce or  the sale                                                                    
     in  interstate  commerce  for  resale  of  natural  gas                                                                    
     received by  such person from another  person within or                                                                    
     at the boundary  of a state if all the  gas so received                                                                    
     is ultimately consumed within the state.'                                                                                  
                                                                                                                                
     Number three -  jurisdictional decision. Where specific                                                                    
     projects  are involved,  federal  and state  regulators                                                                    
     are similarly  situated. That is  to say we  can't make                                                                    
     findings and  issue decisions except when  we have real                                                                    
     applications, fact  finding, a complete record,  and an                                                                    
     opportunity for all parties to  have their due process.                                                                    
     I think all the regulatory  agencies that you hear from                                                                    
     today have that type of a concept in common....                                                                            
                                                                                                                                
     The RCA  and the FERC  have anticipated that  an Alaska                                                                    
     gas project could  produce jurisdictional questions and                                                                    
     we've  created  a  memorandum of  understanding  (MOA).                                                                    
     It's very  similar in  wording to the  MOA in  the pack                                                                    
     Ms. Fowke handed  to you from the NEB -  between it and                                                                    
     FERC.  That  is  to  say   we  don't  have  a  specific                                                                    
     application; we  don't have  specific projects  to deal                                                                    
     with,  but there  is an  anticipation by  the agencies,                                                                    
     the FERC, the NEB, and the  RCA that this is coming and                                                                    
     that  we  need  to   work  and  will  work  effectively                                                                    
     together to resolve jurisdictional questions.                                                                              
                                                                                                                                
     A number of conversations  we've had with Chairman Wood                                                                    
     of  the FERC  and  Commissioner  Brownel have  verified                                                                    
     this.  I think  that the  members can  take comfort  in                                                                    
     that.                                                                                                                      
                                                                                                                                
     Finally, I draw your attention  to the energy bill. Mr.                                                                    
     Cupina made some  reference to it earlier  and Mr. Katz                                                                    
     is highly conversant with it,  but while several recent                                                                    
     versions  are interesting,  I'll  refer to  the S  1005                                                                    
     version,  not  the whole  215  pages,  but section  131                                                                    
     dealing  with the  Alaska Natural  Gas Pipeline  Act. I                                                                    
     want  to  draw  your attention  to  several  provisions                                                                    
     relating to jurisdiction that  you've discussed at this                                                                    
     meeting that should give Alaska comfort.                                                                                   
                                                                                                                                
     Number one,  Section 133 requires  the FERC  to provide                                                                    
     by  an open  season  process  support for  exploration,                                                                    
     development and competition -  secondly, to provide for                                                                    
     capacity  beyond the  initial capacity  and access  for                                                                    
     gas other than from Prudhoe Bay and Pt. Thompson.                                                                          
                                                                                                                                
     Second,  the act  requires  the  certificate holder  to                                                                    
     evaluate  in-state needs  including  tie-in points  for                                                                    
     in-state access.                                                                                                           
                                                                                                                                
     Third, the  state can  request that  the FERC  hear its                                                                    
     concerns for access to  the pipeline for transportation                                                                    
     of royalty gas for local and state consumption.                                                                            
                                                                                                                                
     Fourth,  Section  135  provides for  expansion  of  the                                                                    
     pipeline in appropriate circumstances.                                                                                     
                                                                                                                                
     Fifth,  Section 138  anticipates local  distribution of                                                                    
     North   Slope  gas,   additional  pipelines   and  rate                                                                    
     coordination  with  us,  with Alaska.  Maybe  the  best                                                                    
     contribution I  can make to  your afternoon is  to give                                                                    
     you a memorandum that Bob  Loeffler gave me a couple of                                                                    
     days ago anticipating this event.  Bob is a lawyer; I'm                                                                    
     not a lawyer. Bob,  from his viewpoint representing the                                                                    
     state, has  summarized this jurisdictional  question in                                                                    
     a two-page  memo. I think  to some rights the  FERC and                                                                    
     RCA are  in a good  position to  efficiently coordinate                                                                    
     processes  as  a  project takes  shape  and  an  actual                                                                    
     application is  filed. I said an  application; I'm kind                                                                    
     of reflecting  the sentiment that  Mr. Cupina  gave you                                                                    
     earlier  -  the admonition  to  us  all that  a  single                                                                    
     application will  be much more  timely dealt  with than                                                                    
     multiple competitive applications  through a regulatory                                                                    
     process. Thank  you, Mr. Chairman.  Judge Wilson  and I                                                                    
     will be happy to answer  any questions that members may                                                                    
     have.                                                                                                                      
                                                                                                                                
CHAIR SAMUELS  asked if NEB  ordered an expansion and  FERC can't                                                               
order an expansion, would that  give Canadian explorers access to                                                               
the pipe  south of  Alberta and then  because that  expansion was                                                               
filled up, would that cut off Alaskan explorers.                                                                                
                                                                                                                                
MS. FOWKE  asked if he  was assuming  it was Canadian  gas coming                                                               
in.                                                                                                                             
                                                                                                                                
CHAIR SAMUELS  said yes and clarified  that he was asking  if the                                                               
Canadian  companies  would have  an  advantage  because of  their                                                               
regulatory environment. "Has that happened before?"                                                                             
                                                                                                                                
MS. FOWKE replied  that it hasn't happened  before. The pipelines                                                               
that are in  existence now originate in Canada  and the suppliers                                                               
are all Canadian.                                                                                                               
                                                                                                                                
     Because we have  all rolled-in, one producer  is not in                                                                    
     a better situation than  another producer, because they                                                                    
     all pay the same toll. If  your scenario is that if you                                                                    
     had a  pipeline coming from Alaska  down through Canada                                                                    
     and  there was  Alaskan  supply coming  through it  and                                                                    
     then there  was a  pool discovered  in Canada  that was                                                                    
     then going to come on? Was that your scenario?                                                                             
                                                                                                                                
CHAIR SAMUELS replied yes.                                                                                                      
                                                                                                                                
MS. FOWKE replied:                                                                                                              
                                                                                                                                
     I guess the producers that  are producing in the United                                                                    
     States  and  Alaska  and  the  Canadians  producing  in                                                                    
     Canada  would  pay  the  same  rate  for  the  Canadian                                                                    
     portion of the  pipeline. So, the toll  that they would                                                                    
     pay  in  Canada, assuming  that  the  pool that  you're                                                                    
     talking about is relatively far  north - if it's south,                                                                    
     you might have  a different issue - the  toll that they                                                                    
     would be  paying would be  the same or  essentially the                                                                    
     same  depending  on  your   tolling  regime.  So,  they                                                                    
     wouldn't  be  discriminated  against in  terms  of  the                                                                    
     Canadian toll that's being paid.                                                                                           
                                                                                                                                
CHAIR SAMUELS asked Mr. Cupina to respond.                                                                                      
                                                                                                                                
MR. CUPINA replied:                                                                                                             
                                                                                                                                
     I don't  think there's  any discrepancy  in that  if we                                                                    
     had an incremental  expansion and, at the  same time in                                                                    
     Canada  they  had  a  rolled-in  expansion,  those  two                                                                    
     different rate  regimes are applied.  I'm not  sure why                                                                    
     they would have to be uniform.                                                                                             
                                                                                                                                
MR.  KATZ said  he  heard the  question to  be  what happened  to                                                               
producers who  are not  initial shippers on  the pipeline  if gas                                                               
was  later developed  and  was  ready to  move  and the  pipeline                                                               
declined to  move that gas.  I think  you're correct that  in the                                                               
absence of  the energy  bill, the commission  would not  have the                                                               
authority to require the expansion of that pipeline.                                                                            
                                                                                                                                
SENATOR  ELTON added  that  the other  instance  is expansion  of                                                               
capacity in Canada  that would preclude expansion  of capacity at                                                               
the northern part  of the Alaskan component of the  line. He said                                                               
he'd  be interested  in  knowing how  the  two regulatory  bodies                                                               
would deal with that issue.                                                                                                     
                                                                                                                                
MS.  FOWKE  asked  how  an expansion  in  Canada  would  preclude                                                               
expansion in Alaska.                                                                                                            
                                                                                                                                
SENATOR ELTON was assuming that  authorized expansion of capacity                                                               
in Canada would limit expansion capacity for Alaskan producers.                                                                 
                                                                                                                                
CHAIR SAMUELS asked if the expansion caps out in Canada.                                                                        
                                                                                                                                
MS.  FOWKE replied  no,  the  engineers just  get  more and  more                                                               
excited  about what  they get  to do.  The cheapest  expansion is                                                               
going to  be with compression;  then you start looping  the line,                                                               
which  might   have  economic  restrictions.  There   aren't  any                                                               
physical restrictions.                                                                                                          
                                                                                                                                
     I don't see  how an expansion in  Canada would preclude                                                                    
     an expansion for Alaskan shippers.  If there was a pool                                                                    
     to be  developed in  Canada, in  the Yukon,  that would                                                                    
     then  ship  on this  same  pipeline  that was  bringing                                                                    
     Alaskan gas down  and if that somehow  captured some of                                                                    
     the  cheaper  expansion -  the  compressors  - then  it                                                                    
     wouldn't prohibit  or restrict  our ability  to provide                                                                    
     for  more  facilities  if  there  was  more  gas  being                                                                    
     produced in Alaska that needed  to be shipped and if it                                                                    
     was in the public interest to provide for expansion.                                                                       
                                                                                                                                
SENATOR  ELTON  asked,  "Doesn't  there have  to  be  a  protocol                                                               
between FERC and  NEB to accommodate U.S.  producers for capacity                                                               
expansion that would be conducted in Canada?"                                                                                   
                                                                                                                                
MS. FOWKE replied:                                                                                                              
                                                                                                                                
     It  may  well be  that  we  work  out  some kind  of  a                                                                    
     protocol, but  we can't influence the  other tribunal's                                                                    
     decision. FERC  can't influence  what our  decision is;                                                                    
     our  decision   has  to  be  in   the  Canadian  public                                                                    
     interest.  The  FERC's  decisions  have to  be  in  the                                                                    
     American  public interest....  I can  tell you  that in                                                                    
     all  the history  that's gone  on,  the pipelines  have                                                                    
     managed to meet at the  borders and the expansions have                                                                    
     been seamless.  And there  have been  major expansions.                                                                    
     The GH-5-89  expansion was a $2.6  billion expansion in                                                                    
     Canada that went  down into the States. It  was huge at                                                                    
     the time and  it was seamless. They  approved what they                                                                    
     needed to  approve; and we  approved what we  needed to                                                                    
     be approved. So, it's always happened....                                                                                  
                                                                                                                                
MR. KATZ added,  "That's the situation where the  MOU between the                                                               
commission and  the NEB  would come  usefully into  play, because                                                               
while I absolutely agree with what  was just said with respect to                                                               
each  tribunal needing  to make  independent  decisions. The  MOU                                                               
provides  the  framework  where   the  two  entities  could  work                                                               
together  developing   the  records   they  need   and  gathering                                                               
requisite information and  one would hope that  having done that,                                                               
the  logical conclusions  would be  reached by  both entities  if                                                               
they had the same information before them.                                                                                      
                                                                                                                                
CHAIR SAMUELS  said he hated to  beat a dead horse,  but the fear                                                               
is that  Canadians would  take advantage  of the  cheap expansion                                                               
rolled-in.  Alaskan  explorers  would  come  on  later  with  the                                                               
incremental  tariff and  the exploration  dollars flow  to Canada                                                               
then as opposed to flowing to Alaska.                                                                                           
                                                                                                                                
MS. FOWKE  responded that the  tolls are  just one of  the issues                                                               
that  the explorers  have to  look at.  However, in  the scenario                                                               
where the  Alaskan gas were  to come  on and have  more expensive                                                               
expansion  in Canada,  because a  pool in  Canada was  taking the                                                               
cheaper  expansion,  there  would  still be  rolled-in  tolls  in                                                               
Canada.                                                                                                                         
                                                                                                                                
     The producers who are producing  in Canada that came on                                                                    
     stream  with  the  cheaper  expansion  would  still  be                                                                    
     facing an  increase in toll,  the same increase  as the                                                                    
     producers that are producing in Alaska would face.                                                                         
                                                                                                                                
MR.  CUPINA  said he  thought  the  timing  of  when to  lock  in                                                               
capacity  would  be  a  market  decision  that  the  shippers  or                                                               
producers would have to take into consideration.                                                                                
                                                                                                                                
REPRESENTATIVE MIKE HAWKER  said there have been  references to a                                                               
25-year old treaty between the RCA and NEB.                                                                                     
                                                                                                                                
MS. LOWKE  replied that would  probably be the  Northern Pipeline                                                               
Treaty,  which is  what preceded  the Canadian  Northern Pipeline                                                               
Act  dealing   with  the  Foothills  project.   Since  there  are                                                               
outstanding issues  on that  matter, she  wasn't able  to discuss                                                               
it.                                                                                                                             
                                                                                                                                
REPRESENTATIVE HAWKER  said a statement  was made  by TransCanada                                                               
that they  have the  right to  build any  pipeline that  would be                                                               
built in  Canada. It was in  response to sponsors in  Alaska that                                                               
want to  be part of  building a pipeline  in Canada. He  asked if                                                               
TransCanada has a preemptory right.                                                                                             
                                                                                                                                
MS. LOWKE replied, "That is their view."                                                                                        
                                                                                                                                
REPRESENTATIVE HAWKER said  that Alaska has a  sponsor group that                                                               
is interested in building a pipeline across Canada.                                                                             
                                                                                                                                
TAPE 04-26, SIBE B                                                                                                            
                                                                                                                                
REPRESENTATIVE GUESS asked what  currently prohibits the RCA from                                                               
having an  approach like the NEB  on taking it on  a case-by-case                                                               
basis on whether  a roll-in on incremental tariff is  in the best                                                               
interest.                                                                                                                       
                                                                                                                                
MR.  CUPINA replied  that it's  the  commission's policy  choice,                                                               
which has  been in  effect since  1999, and  maybe since  1995 as                                                               
opposed  to  any inherent  bar.  There  is a  written  commission                                                               
policy statement  that spells  that out,  nothing at  the federal                                                               
level. "The statute  requires what is called  just and reasonable                                                               
rates.  Throughout the  history of  the Natural  Gas Act,  that's                                                               
constituted different types of rates  and different types of rate                                                               
designs.                                                                                                                        
                                                                                                                                
REPRESENTATIVE GARA observed  that nothing jumps out at  him as a                                                               
problem under  existing Canadian  law that  would prevent  a fair                                                               
transportation of Alaska gas.                                                                                                   
                                                                                                                                
     What is the  guarantee that we have that  at some point                                                                    
     when a  large new  reservoir of  Canadian gas  is found                                                                    
     that a  rule wouldn't be  adopted in Canada  that would                                                                    
     say all pipelines that go  through Canada have to allow                                                                    
     for  a 50  percent transportation  of Canadian  gas? It                                                                    
     would take a  law change in Canada. Should  we not even                                                                    
     consider that something like that might ever happen?                                                                       
                                                                                                                                
MS. LOWKE replied that it's possible.                                                                                           
                                                                                                                                
     The North  American energy market is  so integrated and                                                                    
     the  NEB  is  so  aware   of  that  as  is  our  parent                                                                    
     department, the  Natural Resources  Canada. I  guess 10                                                                    
     years ago  who thought we  were going to be  seeing $50                                                                    
     oil!  I find  that really  hard to  imagine. We've  got                                                                    
     NAFTA, too.  So, I'm sure there's  some arrangements in                                                                    
     NAFTA that talk about this....                                                                                             
                                                                                                                                
REPRESENTATIVE  CHENAULT considered  that  the  same rules  could                                                               
pass that would only allow us to accept so much from Canada                                                                     
                                                                                                                                
CHAIR SAMUELS asked  if NEB chose to order an  expansion and FERC                                                               
chose  not  to order  an  expansion,  even  though they  had  the                                                               
ability to, it  can only order expansion on the  pipeline that is                                                               
physically in Canada and FERC could  only order it for what is in                                                               
the U.S. He asked  if that issue would be in  the MOU between the                                                               
organizations and  how many political  battles are  there between                                                               
the two now.                                                                                                                    
                                                                                                                                
MR. KATZ responded:                                                                                                             
                                                                                                                                
     I  don't  think  we've  ever  had any  such  and  as  a                                                                    
     reality, no shipper  is going to sign up to  pay a rate                                                                    
     if they  don't know that  their gas can get  to market.                                                                    
     So,  I  think it  would  be  exceedingly unlikely  that                                                                    
     shippers  would sign  up for  a rate  and start  paying                                                                    
     reservation charges  or whatever  else if  they weren't                                                                    
     assured that  there was  a way to  get the  gas through                                                                    
     Canada....                                                                                                                 
                                                                                                                                
MR. CUPINA added:                                                                                                               
                                                                                                                                
     In our experience...there have been  a number of cross-                                                                    
     border  projects...and   they  match  up   because  the                                                                    
     commercial realities  required that  they match  up. We                                                                    
     have  a  good  relationship  with  the  NEB  and  we'll                                                                    
     continue  that,  but that's  not  the  only grounds  on                                                                    
     which these types of communications will occur.                                                                            
                                                                                                                                
REPRESENTATIVE  HAWKER  said  that a  certain  Canadian  interest                                                               
believes it  has grounds for  a position  that says they  have an                                                               
exclusive  right to  construct  any gas  pipeline  that might  be                                                               
constructed  and asked  if  it was  across Canada  or  just in  a                                                               
certain province.                                                                                                               
                                                                                                                                
MS.  LOWKE replied  that  it was  in Alberta  going  down to  the                                                               
existing Foothills pipeline and through the Yukon.                                                                              
                                                                                                                                
REPRESENTATIVE HAWKER asked how that issue could be resolved.                                                                   
                                                                                                                                
MS. LOWKE replied:                                                                                                              
                                                                                                                                
     Absent  the federal  government  coming  out with  some                                                                    
     kind  of policy  that would  say something,  which they                                                                    
     have not done or an act  that would say that they would                                                                    
     have  exclusive  authority  and  making  it  absolutely                                                                    
     clear that they  do. I assume the matter  would have to                                                                    
     come  before  the  NEB  either  through  the  Foothills                                                                    
     proposal that might require  some modifications to what                                                                    
     they have or through  another proponent applying to the                                                                    
     board and then Foothills could,  if they wanted at that                                                                    
     point, challenge  the board's jurisdiction to  hear the                                                                    
     matter.... If  an application is  filed with us  by any                                                                    
     of the  other groups, we  will examine it  to determine                                                                    
     whether  it is  complete and  absent anything  else, we                                                                    
     will set  it down for a  hearing. We can tell  you that                                                                    
     there  have been  meetings at  the NEB  with the  other                                                                    
     groups. The  producers as a  group has been  in talking                                                                    
     to us.  The board has not  said to them and  we have no                                                                    
     grounds to say to them  that we will not consider their                                                                    
     application.                                                                                                               
                                                                                                                                
REPRESENTATIVE  HAWKER  asked if  anyone  had  filed a  claim  or                                                               
protest with the NEB.                                                                                                           
                                                                                                                                
MS.  LOWKE replied  no  and  she didn't  think  any filings  were                                                               
imminent. She  could only think  of one circumstance in  the last                                                               
20 years  when expansions  didn't go  through, which  was because                                                               
market  conditions changed  - the  Millennium Pipeline.  The FERC                                                               
approved it  and NEB was  still in  the process, but  the project                                                               
just  cratered.  A  lot  of   expansions  had  happened  for  oil                                                               
pipelines  and the  regulatory agencies  managed to  come to  the                                                               
same decisions.                                                                                                                 
                                                                                                                                
MR.  CUPINA added  that he  wouldn't characterize  the Millennium                                                               
project  as having  cratered. Millennium  is  working with  other                                                               
agencies that have  related statutes to FERC's and  it remains to                                                               
be  seen  where  those  discussions  lead.  There  is  talk  that                                                               
Millennium would amend its project.                                                                                             
                                                                                                                                
MS. LOWKE  said her point  is that  there were no  disparate FERC                                                               
and NEB decisions with respect to the pipeline.                                                                                 
                                                                                                                                
MR. CUPINA agreed.                                                                                                              
                                                                                                                                
PANEL DISCUSSION ON  THE REGULATION OF THE  PHYSICAL AND ECONOMIC                                                             
WASTE                                                                                                                         
                                                                                                                                
COMMISSIONER  DANIEL SEAMOUNT,  ALASKA OIL  AND GAS  CONSERVATION                                                               
COMMISSION (AOGCC), said he would  begin by giving an overview of                                                               
a preliminary  study done by the  owners and how AOGCC  fits into                                                               
that. He  also would talk about  the statute and the  orders that                                                               
would  be appropriate  to the  North Slope  gas project  and give                                                               
more  details  about a  review  of  a  study  the owners  did  to                                                               
determine what  kinds of volumes  to expect from major  gas sales                                                               
out of  Prudhoe Bay, which  resulted in  an estimate of  what the                                                               
impact would be  on liquids recovery as a result  of bringing the                                                               
project on.  He would  then recommend what  future work  would be                                                               
needed.                                                                                                                         
                                                                                                                                
     If  Prudhoe Bay  were  to be  developed  for oil  only,                                                                    
     recovery   would  be   over  13   billion  barrels   of                                                                    
     hydrocarbon liquids.  That includes oil  condensate and                                                                    
     natural   gas   liquids.  Currently,   the   cumulative                                                                    
     production from  Prudhoe Bay has  been over  11 billion                                                                    
     barrels,  which   exceed  the  original   1977  reserve                                                                    
     estimates  by 2  billion  barrels. The  field has  been                                                                    
     managed very  well -  very efficiently.  It has  been a                                                                    
     world-class operation up to this  point. Gas sales will                                                                    
     add about  3.5 billion  barrels of oil  equivalent. You                                                                    
     can put  gas on now or  30 years from now  probably and                                                                    
     you're  not going  to  have  any conservation  problems                                                                    
     with bringing  the gas  on. There  is a  question about                                                                    
     the  timing and  rate that  would affect  how much  oil                                                                    
     you're going to recover.                                                                                                   
                                                                                                                                
     Just  a  short  technical   explanation  of  where  the                                                                    
     concerns  might be  -  this  is a  cartoon  of a  slice                                                                    
     through Prudhoe  Bay field. It  can be any oil  and gas                                                                    
     field in  the world. But normally,  oil field practices                                                                    
     produce  as  much  of  the oil  as  possible  and  then                                                                    
     produce the gas later -  after you're done with the oil                                                                    
     and that way  you'll maximize recovery of  both oil and                                                                    
     gas and you'll minimize the  waste of the oil. So, what                                                                    
     you want to  do is produce all this oil  down here; the                                                                    
     gas cap will expand. After  the gas cap has expanded as                                                                    
     far  as it  will reasonably  go and  you've gotten  all                                                                    
     your oil, then you blow down the gas cap.                                                                                  
                                                                                                                                
     Normally, you  need this to  recycle the gas  back into                                                                    
     the  reservoir to  maintain pressure.  This allows  for                                                                    
     mixing of  EOR (enhanced oil recovery)  fluids to cause                                                                    
     the oil  to flow  easier and also  maintaining pressure                                                                    
     that pushes  the oil out of  the ground up to  the well                                                                    
     bores  and  into  the pipeline.  Generally,  early  gas                                                                    
     withdrawal  causes some  challenges  regarding loss  of                                                                    
     oil. What we're talking about  now with the North Slope                                                                    
     gas pipeline  project is  actually an  early withdrawal                                                                    
     of oil.                                                                                                                    
                                                                                                                                
     Where  the   AOGCC  comes  in  is   we  have  statutory                                                                    
     responsibility   to   regulate   reservoir   management                                                                    
     including   the   timing   and   off-take   rates   for                                                                    
     conservation  purposes.  From  this  preliminary  study                                                                    
     that the owners  did, the result was it  looks like gas                                                                    
     sales will  negatively impact total  liquid hydrocarbon                                                                    
     recovery.  The reduction  could be  in the  hundreds of                                                                    
     millions  of barrels.  It's a  very preliminary  study.                                                                    
     More study  needs to  be done to  see if  it's actually                                                                    
     going  to be  that  high or  not.  The greatest  impact                                                                    
     would  occur  with earlier  sales  of  higher off  take                                                                    
     rates. However,  the good  news is  that the  timing of                                                                    
     the sales  and the  gas production rate  doesn't appear                                                                    
     to   significantly   affect   the   total   hydrocarbon                                                                    
     recovery.  That's when  you consider  both oil  and gas                                                                    
     and total  barrels of  oil in  place if  you look  at a                                                                    
     reasonable life  of the field.  If you don't  think the                                                                    
     field  is going  to  last -  if  the infrastructure  is                                                                    
     going  to go  down, if  it's aging  and you  don't last                                                                    
     past 2050,  you probably  won't lose  that much  oil in                                                                    
     reality,  less than  100 million  barrels. But  further                                                                    
     evaluation  is required  to validate  these preliminary                                                                    
     findings.                                                                                                                  
                                                                                                                                
     So, where  do we fit in?  This is a pretty  busy slide.                                                                    
     It  compares industry  with  DNR,  with AOGCC's  roles.                                                                    
     There's been  a lot of  confusion about where  an AOGCC                                                                    
     fits in  especially since all  of the  bru-ha-ha that's                                                                    
     been going on in  the Valley regarding coalbed methane.                                                                    
     The  AOGCC's   role  is   only  regulatory;   it's  not                                                                    
     proprietary. DNR's role is  proprietary. It manages the                                                                    
     resource and Director Myers might  have some comment on                                                                    
     this later.  The DNR manages its  resources for revenue                                                                    
     and  other  values  and  promotes  prevention  of  both                                                                    
     physical  and economic  waste through  unitization. The                                                                    
     AOGCC  doesn't  worry  about value  and  economics,  it                                                                    
     regulates  for  conservation   issues,  prevent  waste,                                                                    
     protect relative  rights and promote  greater recovery.                                                                    
     It's worried  more about saving the  resource than what                                                                    
     the economic implications are. A  lot of times both the                                                                    
     economic  and physical  waste  issues are  intertwined.                                                                    
     Mostly the AOGCC  regulates subsurface activities. DNR,                                                                    
     DEC and  other agencies have regulatory  authority over                                                                    
     most the surface activities.                                                                                               
                                                                                                                                
     AOGCC   was  established   under   the   Oil  and   Gas                                                                    
     Conservation Act,  AS 31, before statehood  in the late                                                                    
     50s.  It's an  independent quasi-judicial  agency where                                                                    
     we report to the people  of the state as represented by                                                                    
     you, the legislature. We have  authority over all lands                                                                    
     in Alaska,  not just state  lands - state,  federal and                                                                    
     private  lands.  Our  duties are  to  protect,  prevent                                                                    
     physical   waste  of   the  resource,   insure  greater                                                                    
     ultimate recovery, protect  relative rights and protect                                                                    
     underground sources of drinking water.                                                                                     
                                                                                                                                
     As far as relating to  the major gas sales project, our                                                                    
     main  concerns  are  to  prevent  waste  and  insure  a                                                                    
     greater ultimate  recovery. We have  been investigating                                                                    
     to determine whether or not  waste exists or is eminent                                                                    
     and, as I say, the operators  have done a very good job                                                                    
     on  Prudhoe Bay.  We have  had very  few concerns  over                                                                    
     waste in the  last 20 years. We have  required plans of                                                                    
     reservoir  development   and  operation  and   we  will                                                                    
     require  plans for  the future  development. Under  the                                                                    
     statute,  this would  include  regulating the  quantity                                                                    
     and rate of production of oil and gas.                                                                                     
                                                                                                                                
     The  definition   of  waste  in  the   statute  is  the                                                                    
     inefficient,   excessive   or   improper  use   of   or                                                                    
     unnecessary   dissipation   of  reservoir   energy   or                                                                    
     operating  or  producing  in a  way  that  reduces  the                                                                    
     amount  of  oil  or   gas  recovered  under  operations                                                                    
     conducted   in   accordance   with   good   oil   field                                                                    
     engineering  practices. Like  I said  before, gas  blow                                                                    
     down or gas  production is normally delayed  to the end                                                                    
     of a productive oil life  to maximize the oil recovery.                                                                    
     While  Prudhoe  Bay is  very  unique,  it's in  a  very                                                                    
     hostile  environment. The  oil infrastructure  - you've                                                                    
     got to be able to handle  the oil. It's not that simple                                                                    
     at  Prudhoe Bay.  This is  something that  needs to  be                                                                    
     looked at really carefully.                                                                                                
                                                                                                                                
     Under  applicable rules,  Conservation Order  341(d) is                                                                    
     the  pool  rules that  govern  Prudhoe  Bay. The  three                                                                    
     rules  under  that  conservation order  that  would  be                                                                    
     applicable to  the gas  line project  would be  rule 9,                                                                    
     which  gives a  maximum off  take rate  of 2.7  billion                                                                    
     standard cubic feet per day.  This was written in 1977.                                                                    
     It contemplated  2 BCF/day pipeline saleable  gas rate.                                                                    
     Right now about 300 MCF/day of  that 2 BCF are used for                                                                    
     enhanced  oil  projects within  the  field  and in  the                                                                    
     satellite fields.                                                                                                          
                                                                                                                                
     Rule  12  basically  says  that  the  operator  has  to                                                                    
     maintain  reservoir pressure  high enough  so that  the                                                                    
     EOR gas mixes  with the oil to make it  flow easier and                                                                    
     also to keep  the pressure up so that the  oil can flow                                                                    
     out of the well bores.                                                                                                     
                                                                                                                                
     Rule 17 is a more recent  rule and it deals with - it's                                                                    
     a very ingenious  idea where you inject  water into the                                                                    
     gas cap  to displace the  gas to keep the  pressure up.                                                                    
     This could be a  very important mitigation measure when                                                                    
     you start  taking the gas  off. It  may save up  to 100                                                                    
     million  barrels  of  oil just  by  replacing  the  gas                                                                    
     you're taking out with the water.                                                                                          
                                                                                                                                
     Things about  Rule 9 -  AOGCC approval is  required for                                                                    
     sales rates  in excess of  2.7 BCF/day. It also  may be                                                                    
     advisable  that we  revisit rule  9 assumptions,  since                                                                    
     that rule was written in  1977 at the field's start up.                                                                    
     It's a  very old  model. It's  now obsolete;  there was                                                                    
     very  little  information  on the  production  at  that                                                                    
     time.  Now we  have so  much more  information and  the                                                                    
     technology is  so much better.  The vitals are  so much                                                                    
     more improved  that it's time  to relook at  this. When                                                                    
     we come up  with the off take rules, we  hope they will                                                                    
     be  based  on  current knowledge  and  sound  reservoir                                                                    
     management. With a project of  this magnitude and cost,                                                                    
     it's  critical  that  we  be  given  adequate  time  to                                                                    
     evaluate prior to approval.  We started that evaluation                                                                    
     in August  2002 when we  hired an expert  consultant on                                                                    
     reservoir  simulations,   Frank  Vlaskovich,   who  has                                                                    
     experience  in  working  on  the  North  Slope  in  the                                                                    
     Prudhoe Bay  reservoir. He completed  a report  in June                                                                    
     2003 and  we have  to emphasize  that the  results were                                                                    
     based  on very  preliminary work  by the  owners and  a                                                                    
     very rough projection; so, today  we can't come up with                                                                    
     an  answer of  what the  exact  effect will  be on  the                                                                    
     liquids  recovery.  We  looked  at  sensitivities,  the                                                                    
     effect of  a sales  rate between  2.9 and  4.3 BCF/day,                                                                    
     the effect  of sales timings looking  at starting dates                                                                    
     between  2010  and 2020  and  a  number of  options  to                                                                    
     mitigate the oil loss. One  of them I mentioned earlier                                                                    
     was  gas cap  water injection  - increasing  that. That                                                                    
     could  mitigate  the oil  loss  by  up to  100  million                                                                    
     barrels. And then CO2 injection.  Prudhoe Bay gas is 12                                                                    
     percent CO2, which is about 3.5  to 4.5 TCF of CO2. CO2                                                                    
     has been  very successful in  other parts of  the world                                                                    
     as  an enhanced  oil  recovery  fluid. Further  studies                                                                    
     could  show that  much of  the oil  could be  recovered                                                                    
     just  by injecting  the CO2.  There are  also potential                                                                    
     uses  of  the CO2  because  of  the recent  scare  over                                                                    
     global  warming  and   CO2  sequestration.  People  are                                                                    
     starting  to  look at  places  like  Oklahoma where  55                                                                    
     billion barrels  of oil  have been  left in  the ground                                                                    
     because  it was  not  produced  correctly. Now  they're                                                                    
     thinking  that putting  CO2  in  those reservoirs  will                                                                    
     recover a  lot more  of the oil.  If they  had produced                                                                    
     the fields  in Oklahoma  at the  beginning of  the last                                                                    
     century  the  same  way  that   Prudhoe  Bay  has  been                                                                    
     produced,  they   probably  could  have   recovered  30                                                                    
     billion barrels of that lost  55 billion. So, that just                                                                    
     goes  back  to  the  fact  that  this  field  has  been                                                                    
     operated in a very efficient way.                                                                                          
                                                                                                                                
     This next slide is probably  redundant. I've beat it to                                                                    
     death  enough.  As  far  as  the  reduction  in  liquid                                                                    
     hydrocarbons, that's  dependent on a number  of factors                                                                    
     - field  depletion optimization, mitigation  measures -                                                                    
     a couple  of which  I just described  and also  just by                                                                    
     producing  the gas,  the field  life will  be extended.                                                                    
     So, that gives more opportunity  to produce more of the                                                                    
     oil. I'm not saying that  the end result is we're going                                                                    
     to lose hundreds  of millions of barrels.  It's we just                                                                    
     need to do more study on it.                                                                                               
                                                                                                                                
CHAIR  SAMUELS  said he  assumed  that  was specific  to  certain                                                               
fields.                                                                                                                         
                                                                                                                                
MR. SEAMOUNT  replied yes, but  he was  just at the  beginning of                                                               
looking at Prudhoe Bay and hasn't  looked at Pt. Thompson at all,                                                               
except  for   some  initial  discussions  of   possible  ways  of                                                               
developing it.                                                                                                                  
                                                                                                                                
MR. MARK MYERS, Director, Division  of Oil and Gas, Department of                                                               
Natural   Resources  (DNR),   said   there   are  two   plausible                                                               
development centers at Pt. Thompson.                                                                                            
                                                                                                                                
     One is a  gas cycling project where you  take the high-                                                                    
     pressure gas  and condensate. You  cycle it out  of the                                                                    
     well to the  surface, take out the liquids  and put the                                                                    
     gas  back  in.  You  continue  to  just  pull  out  the                                                                    
     liquids.  Then   you  later  blow   down  as   Dan  was                                                                    
     describing.                                                                                                                
                                                                                                                                
     The second scenario would be  to immediately start with                                                                    
     gas  sales, in  which case,  you recover  less liquids,                                                                    
     but you  recover most  of the energy  back in  gas. So,                                                                    
     again, there's  economic and physical trade  offs. It's                                                                    
     a very  different reservoir  mechanism that  is present                                                                    
     at Prudhoe Bay. Pt.  Thompson pressure is almost double                                                                    
     that of  the original  Prudhoe Bay  reservoir pressure.                                                                    
     It's a very high-pressure  reservoir. Prudhoe is a more                                                                    
     standard pressure reservoir. Prudhoe  has a much larger                                                                    
     oil lake under laid by a  water lake with a gas cap and                                                                    
     Pt. Thompson  is a  condensate with  a little  lake and                                                                    
     then a little bit of  water underneath it. So, they are                                                                    
     different  animals  and each  field  has  to be  looked                                                                    
     individually   and  optimized.   It's   not  a   simple                                                                    
     equation, but for  the gas line, it's  mainly those two                                                                    
     fields, at least for initial production.                                                                                   
                                                                                                                                
CHAIR SAMUELS asked  if he had the geologic  information he needs                                                               
on the various fields to make the trade off decision.                                                                           
                                                                                                                                
MR. MYERS replied  that he has the information  from Prudhoe Bay;                                                               
there's lots of production data.                                                                                                
                                                                                                                                
     The question  is of optimization. With  that the amount                                                                    
     of oil loss you'll see  is directly proportional to the                                                                    
     amount of  mitigation. The  more water  you put  in the                                                                    
     gas  cap, the  more efficient,  but it  costs money  to                                                                    
     reinject  more water,  but  it  maintains the  pressure                                                                    
     higher. More in injection in  oil lake of water or CO2,                                                                    
     a faster  cycling time on  the reservoir. All  of those                                                                    
     would increase  ultimate recovery, but they  cost money                                                                    
     and they  trade off  energy used in  compression versus                                                                    
     gas you  could sell. So, there's  an optimization issue                                                                    
     that goes  on and  really Prudhoe Bay  is at  the stage                                                                    
     where  the  knowledge  base  isn't  going  to  increase                                                                    
     dramatically. It's  merely a  matter of  optimizing the                                                                    
     time of sales  and then optimizing the  amount of money                                                                    
     you spend on the various mitigation strategies.                                                                            
                                                                                                                                
     Pt. Thompson has yet to  be developed. So, we have some                                                                    
     good well control and we  have some seismic; we have no                                                                    
     production history  and a lot less  certainty about the                                                                    
     reservoir.  So, there's  more  uncertainty around  that                                                                    
     and as you  start in production you gain  more and more                                                                    
     certainty.  So, some  tough decisions  will have  to be                                                                    
     made on  Pt. Thompson  that are  economic and  they are                                                                    
     also  reservoir related.  We have  some good  reservoir                                                                    
     modeling that was done by  the partners. We have a fair                                                                    
     amount of good  well control, but there is  still a lot                                                                    
     of uncertainty on  the fringes of the  reservoir of the                                                                    
     ultimate size of  the prize and the  best technology to                                                                    
     use to produce it.                                                                                                         
                                                                                                                                
CHAIR SAMUELS asked if the CO2 injection technology has already                                                                 
been developed and does it cost more to operate.                                                                                
                                                                                                                                
MR. MEYERS replied  that all the technologies  talked about today                                                               
are existing technologies, but the  biggest challenge with CO2 is                                                               
corrosion and  requires use of  stainless steel and  changing out                                                               
some parts and pumps; there is money involved in doing that.                                                                    
                                                                                                                                
MR. SEAMOUNT explained another point:                                                                                           
                                                                                                                                
     That   with  proper   engineering,  total   hydrocarbon                                                                    
     recovery  -  that's  barrels of  oil  equivalent  -  is                                                                    
     relative  insensitive to  gas sales  and sales  rate if                                                                    
     you assume a reasonable end  of life of the field. This                                                                    
     is where  Prudhoe Bay may  be unique in that  there may                                                                    
     be a  time element where you  have to get this  gas out                                                                    
     before everything  craters or something goes  wrong and                                                                    
     2050 is a  long time out. It's insensitive  out to 2050                                                                    
     when you bring on the gas sales and what rate it is.                                                                       
                                                                                                                                
     Some of our recommendations here  is with the AOGCC you                                                                    
     should be part  of a process of  further evaluation. We                                                                    
     need to participate before a  decision is made to spend                                                                    
     all this  money starting the  project up. We  should be                                                                    
     active  in  setting  the producing  rate  or  at  least                                                                    
     according to  the statutes. We must  have adequate lead                                                                    
     time to complete  due diligence and this  will insure a                                                                    
     good technical  review that  will help  the legislature                                                                    
     and  others make  informed decisions.  The owners  have                                                                    
     told  us they  plan to  continue updating  the existing                                                                    
     reservoir  and  facilities  models.  So  far  the  work                                                                    
     they've done is a very  good start. We need to continue                                                                    
     on this work, update  our predictive tools and optimize                                                                    
     our operating strategies to  maximize oil recovery. Can                                                                    
     oil  losses  be  effectively mitigated?  What  are  the                                                                    
     effects on  the other pools and  reservoirs that depend                                                                    
     upon Prudhoe Bay  gas for their EOR  projects for their                                                                    
     future pools  and reservoirs? The  owners have  told us                                                                    
     we will be part of the reservoir evaluation process.                                                                       
                                                                                                                                
REPRESENTATIVE REGGIE JOULE asked him to explain updating                                                                       
predictive tools.                                                                                                               
                                                                                                                                
MR. SEAMOUNT replied:                                                                                                           
                                                                                                                                
     These would  be the reservoir model,  the software, the                                                                    
     programs run to  predict what kinds of  rates to expect                                                                    
     and what  kinds of recoveries  to expect. You  take raw                                                                    
     information from  the wells, from the  production, from                                                                    
     pressure  data  and  you  run  it  through  a  computer                                                                    
     simulator and it  will spit out predictions  as to what                                                                    
     kinds of recoveries  you can expect of  oil, what kinds                                                                    
     of gas, natural gas liquids.                                                                                               
                                                                                                                                
REPRESENTATIVE JOULE asked if AOGCC has all this information.                                                                   
                                                                                                                                
MR. SEAMOUNT replied, "Yes we do. We have access to it."                                                                        
                                                                                                                                
REPRESENTATIVE JOULE asked if it had been interpreted.                                                                          
                                                                                                                                
MR. SEAMOUNT replied, "No, it takes a lot of man power, a lot of                                                                
computer time to take all this raw information, stick it in the                                                                 
computer. It gets very expensive."                                                                                              
                                                                                                                                
REPRESENTATIVE JOULE asked if AOGCC has the resources to do it.                                                                 
                                                                                                                                
MR.  SEAMOUNT replied  that it  doesn't have  the resources,  but                                                               
industry does. That's  why he is proposing to  work with industry                                                               
when they  are doing  the evaluations. He  has been  talking with                                                               
the owners now and then and they are getting along pretty well.                                                                 
                                                                                                                                
REPRESENTATIVE JOULE asked how far behind are we?                                                                               
                                                                                                                                
MR. MYERS replied:                                                                                                              
                                                                                                                                
     There are  varying levels of  accuracy in which  you do                                                                    
     this.  Think of  a computer  model; think  of a  grid -                                                                    
     think of  a grid the  size of  a chessboard or  you can                                                                    
     have a grid with thousands  of little squares. The more                                                                    
     detail, the more computer intense  and the more certain                                                                    
     your model  is. So, the  level of detail, the  model we                                                                    
     have  right now  is  pretty good  at  smaller than  the                                                                    
     chess board size, but not the  tiny dot size. As you go                                                                    
     through and  get closer to  the reality of a  gas line,                                                                    
     you  get more  and more  detail.  What we  have now  is                                                                    
     pretty  darn  good.  It gives  you  confidence  in  the                                                                    
     initial  conclusions  that  there  will  be  a  minimal                                                                    
     amount of oil  loss, but there will be  some. Then it's                                                                    
     the obligation of  what mitigation you put  in. So, the                                                                    
     results we have  now show us ... if we  start gas sales                                                                    
     at this date, we expect to  have this much oil loss, if                                                                    
     no  additional mitigation.  If more  water goes  in the                                                                    
     gas  cap,  it  might  be this  much;  if  more  cycling                                                                    
     occurs, it'll be  this much. But we  can't predict what                                                                    
     investments companies  are going to be  willing to make                                                                    
     at the  time. That's  why this joint  work that  Dan is                                                                    
     talking about. So, you have  to start running the what-                                                                    
     ifs  and   the  optimization  of  gas   off  take.  For                                                                    
     instance,  if  the producers  propose  2.5  BCF out  of                                                                    
     Prudhoe Bay  versus 3.5  BCF, there's  a big  impact in                                                                    
     oil loss differential unless you  pump a lot more water                                                                    
     into the  gas cap.... The  baseline model work  is done                                                                    
     and  we're  pretty  confident  that  the  oil  loss  if                                                                    
     nothing  is  done  and  the   gas  sales  in  the  2012                                                                    
     timeframe, the  maximum oil loss  might be  500 million                                                                    
     barrels,  but you  recover a  lot more  energy in  gas.                                                                    
     Conversely,  there   are  cases   where  you   can  run                                                                    
     scenarios with enough pressure  injection where that is                                                                    
     way down to  less than 100 million  barrels. We already                                                                    
     know that  and we already have  good production decline                                                                    
     curves  for   Prudhoe  given   the  current   level  of                                                                    
     investment. But  if that  level of  investment changes,                                                                    
     if they change  the rate of production  in Prudhoe, any                                                                    
     number of  things could  happen. If  they do  commit to                                                                    
     reinject CO2  as miscible  injectant, that  changes the                                                                    
     equation. Current  development plans don't have  any of                                                                    
     those long-term  things in  there. There  is sort  of a                                                                    
     segregation in the companies  between those working the                                                                    
     oil issue  and those working  the gas line and  the gas                                                                    
     sales.  So, right  now  Prudhoe is  managed  as an  oil                                                                    
     reservoir to  maximize oil recovery. They  haven't made                                                                    
     the  switch  over  to  gas,   yet.  So,  all  of  these                                                                    
     scenarios  are hypothetical....  Both  agencies have  a                                                                    
     say  in   what  oil   loss  should   be  to   meet  the                                                                    
     requirements of physical and economic waste.                                                                               
                                                                                                                                
CHAIR SAMUELS asked  if they are going to  participate before the                                                               
decision in reference to page 15.                                                                                               
                                                                                                                                
MR. SEAMOUNT replied:                                                                                                           
                                                                                                                                
     We  have been  participating. We  haven't got  into the                                                                    
     next stage of  final evaluation, yet, but  we were able                                                                    
     to participate.  We were  able to  at least  review the                                                                    
     first simulation that was run.                                                                                             
                                                                                                                                
SENATOR LINCOLN asked how AOGCC is  going to achieve the goals he                                                               
listed to be part of a review.                                                                                                  
                                                                                                                                
MR. SEAMOUNT replied:                                                                                                           
                                                                                                                                
     We  reviewed  their  first simulation  study  and  they                                                                    
     allowed  us in  to review  it and  come back  with some                                                                    
     information. That was the first  step. The next step is                                                                    
     when they  begin building their final  new and improved                                                                    
     model. We would  like to be a part of  that. We haven't                                                                    
     made any agreements on that yet.                                                                                           
                                                                                                                                
CHAIR   SAMUELS  asked   if  there   was  a   barrier  to   their                                                               
participation now that he needs help with.                                                                                      
                                                                                                                                
MR. SEAMOUNT replied  that he didn't see a barrier  as the owners                                                               
are working with him now.                                                                                                       
                                                                                                                                
SENATOR ELTON  said he assumed  that the state  had a lot  of the                                                               
information on  throughput already, but  if it doesn't,  how much                                                               
more time  does the AOGCC  need to  advise the legislature  so it                                                               
can make a good decision.                                                                                                       
                                                                                                                                
MR. SEAMOUNT answered that part of it depends on industry and                                                                   
how soon they would do their final evaluation. It would take                                                                    
AOGCC two years and $2 million to do it on its own.                                                                             
                                                                                                                                
SENATOR DYSON asked if gas sales and other waste might be useful                                                                
in recovery of the heavy oil in West Sak.                                                                                       
                                                                                                                                
MR. MYERS replied:                                                                                                              
                                                                                                                                
     The gas line,  again, until there is  final approval by                                                                    
     AOGCC  and by  DNR on  state  lands, there  will be  no                                                                    
     authority  to authorize  any  significant  off take  of                                                                    
     gas.  So,  fundamentally,  there's a  separate  process                                                                    
     independent  of the  pipeline  proposals, because  that                                                                    
     sale event  won't occur until  2010 to  2016, depending                                                                    
     on who you talk to.  So, fundamentally, that process of                                                                    
     approval  will   occur  much  later  that   probably  a                                                                    
     sanctioning of  the pipeline project.  There will  be a                                                                    
     period of time  in which folks will  determine what gas                                                                    
     they  want to  nominate  knowing full  well they  still                                                                    
     need agencies'  approvals. It won't be  a carte blanche                                                                    
     that once  you cut a deal  that a pipeline will  go and                                                                    
     the pipeline  goes to open  season and  people nominate                                                                    
     gas. They  will be taking  risk in nominating  that gas                                                                    
     if they do not have approval  to off take that gas. So,                                                                    
     the processes are separate.  The companies must believe                                                                    
     at  the   point  they  nominate   gas  that   they  can                                                                    
     demonstrate  there will  not  be  physical or  economic                                                                    
     waste or  they're taking  a big  risk in  that process.                                                                    
     Again,  DNR's  &  AOGCC's processes  are  separate  and                                                                    
     distinct, but  they are somewhat  aligned in  the issue                                                                    
     of having to  deal with physical waste.  The closer you                                                                    
     are  to the  final  development is  when  you run  your                                                                    
     final simulations and you go for agency approval....                                                                       
                                                                                                                                
TAPE 04-27, SIDE A                                                                                                            
                                                                                                                                
MR. MEYERS continued:                                                                                                           
                                                                                                                                
     We won't  have that distinct information  or a blessing                                                                    
     and  approval   at  the  open  season   time  for  this                                                                    
     pipeline,  because that  final  engineering work  won't                                                                    
     have been  done, because  it'll be  years and  years in                                                                    
     advance  and they  know they're  going to  have to  run                                                                    
     their  models again  later, because  they'll have  that                                                                    
     much more information to find  and they would have done                                                                    
     that  much  more  mitigation  in   the  field.  In  the                                                                    
     meantime, the field will be  managed for minimizing oil                                                                    
     loss,  which again  is  AOGCC's responsibility  through                                                                    
     their pool rules....                                                                                                       
                                                                                                                                
     In  a sense  of the  amount of  gas and  where it  gets                                                                    
     used,  certainly a  miscible injectant  into the  heavy                                                                    
     oil will help  recovery. The question is  where is that                                                                    
     miscible injectant  going to  come from and  the timing                                                                    
     of  it. Ultimately,  if you  have a  gas pipeline,  you                                                                    
     will put  that down  the pipeline. So,  what's happened                                                                    
     is in  all these fields  like Kuparak and  Prudhoe Bay,                                                                    
     miscible injectant  has been created and  injected into                                                                    
     the main  reservoir. At some point,  it's less economic                                                                    
     to put that miscible  injectant into the main reservoir                                                                    
     and they'll shift it over to  the West Sak, in the case                                                                    
     of  Kuparak or  Milne from  the Kuparak  formation into                                                                    
     the  Schrader   Bluff.  So,  we'll  see   MI  (miscible                                                                    
     injectant)  moving  around  the  field  that's  already                                                                    
     being used.  They'll keep recycling and  reinjecting at                                                                    
     Kuparak,   at  some   time,   when   it  becomes   more                                                                    
     economically efficient  to put  in the heavy  oil zone.                                                                    
     At  the   same  time,  CO2  is   a  wonderful  miscible                                                                    
     injectant  for heavy  oil. So,  they could,  if it  was                                                                    
     optimized, just use  a CO2 flood in a lot  of the heavy                                                                    
     oil. So,  there'll be  this optimization  between sales                                                                    
     and delivery of gas and  where they take and the timing                                                                    
     of that  versus the use  of miscible injectant.  It's a                                                                    
     balancing act. It's coming  from multiple sources; it's                                                                    
     already in the fields and  they'll probably use that as                                                                    
     their  first  miscible  injectant  for  the  heavy  oil                                                                    
     zones.                                                                                                                     
                                                                                                                                
SENATOR  DYSON said  he has  followed the  Canadian efforts  with                                                               
their heavy oil and there is  some talk about in situ combustion.                                                               
He asked  if that  is a  scenario that  could work  with Alaska's                                                               
heavy oil.                                                                                                                      
                                                                                                                                
MR. MYERS  replied probably not  - for  two reasons. One  is that                                                               
our  heavy  oil  is actually  at  the  light  end,  16 -  23  API                                                               
(American  Petroleum Institute)  gravity, which  can be  produced                                                               
better through conventional means in multi-lateral wells.                                                                       
                                                                                                                                
In  situ burning  would only  be applicable,  hypothetically, for                                                               
some  of  the shallower  parts  of  the  heavy  oil in  the  Ugnu                                                               
Formation  that  is at  8  -  12  API  that probably  isn't  very                                                               
moveable.                                                                                                                       
                                                                                                                                
     The problem  is that  you've got cold  temperatures and                                                                    
     permafrost.... My  gut feeling is that  there's a whole                                                                    
     lot more studies  that need to be done  before you even                                                                    
     consider it....  Most of  the oil in  the next  15 will                                                                    
     probably be  this lighter end  of the heavy  oil, which                                                                    
     is volumetrically  where they can  get out of  a multi-                                                                    
     lateral well  15,000 barrels per day.  That far exceeds                                                                    
     the advantage of an in situ  burning or a huff and puff                                                                    
     steam type mechanism that they use in Alberta.                                                                             
                                                                                                                                
SENATOR  DYSON   mentioned  that  Representative   Berkowitz  has                                                               
discussed a  win-win where the  state gets paid  for sequestering                                                               
CO2  and use  that  for  driving oil  recovery  and  asked if  he                                                               
thought that might work for us sometime.                                                                                        
                                                                                                                                
MR. SEAMOUNT  answered that there are  a lot of CO2  emissions on                                                               
the North Slope through flue-gas.                                                                                               
                                                                                                                                
     If they come  up with credits for  CO2 sequestration to                                                                    
     industry, that would be the  first place to start. Then                                                                    
     if you  get really  creative, possibly  re-injection of                                                                    
     the  produced CO2  that'll get  you  both enhanced  oil                                                                    
     recovery and some tax credits.  But that may be pushing                                                                    
     it a bit.                                                                                                                  
                                                                                                                                
MR.  MYERS said  there would  be another  opportunity in  the gas                                                               
hydrate zones  where gas  is present  in crystalline  form that's                                                               
just below the  permafrost. The estimates are  that those volumes                                                               
exceed  that  of  the  conventional   gas  at  Prudhoe  Bay.  CO2                                                               
replacement of hydrates is very efficient.                                                                                      
                                                                                                                                
     So,  there are  all  sorts of  other potential  advance                                                                    
     technologies  and  uses  for CO2  sequestration,  which                                                                    
     could  aid additional  methane  production  as well  as                                                                    
     heavy  oil   production.  CO2  will   become  extremely                                                                    
     valuable  rather than  being  a nuisance  on the  North                                                                    
     Slope.                                                                                                                     
                                                                                                                                
MR.  SEAMOUNT  said they  didn't  know  what kind  of  mitigation                                                               
measures are  going to be  required or  even be possible.  A more                                                               
in-depth study is needed.                                                                                                       
                                                                                                                                
MR.  MYERS said  that DNR  and  the AOGCC  have some  overlapping                                                               
authority. DNR's authority is limited  to state lands and AOGCC's                                                               
authority goes to federal and  private ownership. DNR's authority                                                               
is established in  AS 38 and it is a  broad mandate over economic                                                               
and physical  waste, conservation of resource  and protections of                                                               
the state's best interest. The  Supreme Court has confirmed that.                                                               
A  lot  of DNR's  authority  comes  through its  ability  through                                                               
unitization,  which is  putting  oil and  gas property  together,                                                               
multiple leases to produce from a single set of facilities.                                                                     
                                                                                                                                
     The  Supreme Court  said  that unitization  development                                                                    
     and  conservation of  all natural  resources belong  to                                                                    
     the state for the maximum benefit of its people....                                                                        
                                                                                                                                
     We  also have  regulatory functions....  A lot  of them                                                                    
     focus  around  unitization....   The  commissioner  may                                                                    
     establish,  change,   revoke  drilling   producing  and                                                                    
     royalty  requirements of  leases. So  the state  has an                                                                    
     active  role.   It  can  help  regulate   the  rate  of                                                                    
     drilling, the  number of exploration  wells in  a unit.                                                                    
     The commissioner can also modify  that through plans of                                                                    
     development  over   time  -  and  development   of  the                                                                    
     quantity  and   the  rate  of  production   within  the                                                                    
     units....                                                                                                                  
                                                                                                                                
     We're,  again, required  under  unitization  to make  a                                                                    
     public finding that it's in  the public interest and to                                                                    
     meet certain  standards. Those  standards that  we have                                                                    
     to justify  in unitization  or in plans  of development                                                                    
     promote   conservation   of   the   resource...promote,                                                                    
     prevent, economic and physical waste.                                                                                      
                                                                                                                                
An example  of physical waste  is when  you flare gas  instead of                                                               
paying to  have it reinjected. A  pure economic waste is  like at                                                               
Prudhoe Bay if the operator chose  to put the gas down a pipeline                                                               
rather than  reinject it  and we lost  economic value  because we                                                               
produced  less  oil.  Drilling  too  many wells  in  an  area  is                                                               
economic waste of resources.                                                                                                    
                                                                                                                                
MR. MYERS  explained a slide  of optimizing oil and  gas geologic                                                               
structures.                                                                                                                     
                                                                                                                                
CHAIR SAMUELS asked  if there are any other  mechanisms the state                                                               
has to insure access to the pipeline other than RIK or RIV.                                                                     
                                                                                                                                
MR. MYERS  replied RIK and RIV  are the only mechanisms  in which                                                               
the state would  have total control. With  proper negotiations it                                                               
is  possible to  do  things like  require  mandatory seasons  for                                                               
expansion at  various times. The  federal legislation  gives FERC                                                               
the ability to mandate access if it passes.                                                                                     
                                                                                                                                
REPRESENTATIVE GARA  had a question  on page 9 of  Mr. Seamount's                                                               
presentation regarding rule 9 on  the maximum gas off take that's                                                               
allowed.  Some  people  are  talking  about  a  3.5  BCF/day  gas                                                               
pipeline and the current rule  says the maximum allowable rate is                                                               
2.7 BCF/day.  "Why isn't  it absolutely time  to revisit  that to                                                               
provide people with some certainty  who are considering investing                                                               
in a gas pipeline?"                                                                                                             
                                                                                                                                
MR. SEAMOUNT replied that a hearing would probably happen soon.                                                                 
                                                                                                                                
REPRESENTATIVE GARA  asked when he anticipated  having a reliable                                                               
ruling.                                                                                                                         
                                                                                                                                
MR.  SEAMOUNT  said  that  is   difficult  to  answer  until  the                                                               
testimony at  the hearing is  complete. He said the  answer would                                                               
be easier  if the AOGCC had  a new complete reservoir  model that                                                               
it could rely upon and it does not have that yet.                                                                               
                                                                                                                                
REPRESENTATIVE  GARA commented,  "And there  are two  flip sides.                                                               
One is the  rule that says as the leaseholder,  you're allowed to                                                               
produce  this  amount of  gas  and  so  maybe after  the  hearing                                                               
process, it  would be  increased from 2.7  bcf/day to  the amount                                                               
needed  for the  pipeline. What  about the  flip side?  Would the                                                               
rule also  say to the lessees  that you're required to  allow the                                                               
release of that amount of gas or  else that would be waste if you                                                               
don't allow the release of that amount of gas?"                                                                                 
                                                                                                                                
                                                                                                                                
MR. SEAMOUNT said  he cannot see how producing more  gas would be                                                               
required. He asked Representative Gara  if he was saying it would                                                               
aid in the ultimate recovery.                                                                                                   
                                                                                                                                
REPRESENTATIVE GARA asked  if it could be seen  that not allowing                                                               
enough gas out to make a pipeline feasible could be a waste.                                                                    
                                                                                                                                
MR.  SEAMOUNT  said it  could  be  an economic  waste.  Regarding                                                               
physical waste,  he said he could  see that if one  could foresee                                                               
that the  infrastructure is going  to go down  in a few  years so                                                               
that if it is not taken out now, it never will be.                                                                              
                                                                                                                                
REPRESENTATIVE GARA said if Rule 9  was updated to the 3.5 number                                                               
as  Mr.  Seamount anticipates,  all  Rule  9  would say  is  that                                                               
leaseholders would be  allowed to send 3.5 bcf/day  but would not                                                               
be required to.                                                                                                                 
                                                                                                                                
MR. SEAMOUNT said that is correct.                                                                                              
                                                                                                                                
MR.  MYERS  pointed  out  that   the  size  of  the  pipeline  is                                                               
determined  by   the  pipeline  builders  who   will  be  heavily                                                               
influenced  by the  nomination process.  The  pipeline will  have                                                               
limited  specifications  -  it will  only  have  certain  optimum                                                               
ranges  that  are  economically feasible.  However,  within  that                                                               
range, the builders  will ask who wants to send  gas through that                                                               
line. If  only 3  bcf is  nominated, the  builders will  design a                                                               
pipeline  that can  provide a  reasonable tariff  for 3  bcf. The                                                               
companies nominating that  gas will have to believe  they can get                                                               
regulatory  approval to  produce  from those  fields and  prevent                                                               
physical and  economic waste.  If they don't  have the  gas, they                                                               
will be  exploring to get the  gas from the NPRA  or Foothills if                                                               
they can't get  the gas from Prudhoe Bay.   He emphasized that it                                                               
is the  individual companies, not  the fields that  will nominate                                                               
the gas in  and they will have to believe  and have agreements to                                                               
produce  that  gas  and   regulatory  approval.  Therefore,  just                                                               
because the  pipeline is designed  for 4.5  bcf does not  mean at                                                               
the  end  of  the open  season  process  it  will  be a  4.5  bcf                                                               
pipeline.  For example,  if  6 bcf  gets  nominated from  credit-                                                               
worthy parties, the  builders will try to build a  6 bcf pipeline                                                               
from day  one. He noted it  is a commercial process  that is used                                                               
to design the  size of the pipeline but that  must be backstopped                                                               
by good  faith that  the regulatory approval  will come  and that                                                               
the economic standards can be met in the future.                                                                                
                                                                                                                                
REPRESENTATIVE GARA asked  if the estimated available  3.5 bcf of                                                               
natural gas includes Point Thomson.                                                                                             
                                                                                                                                
MR. MEYER said the public numbers  for the North Slope range from                                                               
33 and 35  trillion cubic feet of known  proven reserves, largely                                                               
from Prudhoe Bay and Point  Thomson with some associated gas with                                                               
other oil  fields. He noted  the undiscovered  resource potential                                                               
in the NPRA is significantly larger.  He said the Prudhoe Bay and                                                               
Point Thomson  gas would supply  18 to 20 years  at the 4  to 4.5                                                               
range and  the rest of the  gas would come from  elsewhere. Or by                                                               
the  time  of  the  actual   development  of  the  pipeline,  the                                                               
companies will be taking less gas  from those two fields and more                                                               
from other sources.                                                                                                             
                                                                                                                                
CHAIR  SAMUELS asked  for suggestions  of  where the  legislature                                                               
wants to  "go from here" and  said he would start  by bringing up                                                               
the local hire issue. He felt  that although local hire cannot be                                                               
mandated, knowing  what jobs would  be required in  advance would                                                               
allow the legislature to take steps  to insure that the jobs that                                                               
are available could  be filled by people who  would not otherwise                                                               
have jobs and  deteriorate the economy. He said he  would like to                                                               
get more information along those  lines so that adequate training                                                               
could be provided.                                                                                                              
                                                                                                                                
SENATOR LINCOLN said  she would like to expand that  idea so that                                                               
Alaska businesses are utilized.                                                                                                 
                                                                                                                                
CHAIR  SAMUELS agreed  and said  he  was not  satisfied with  his                                                               
questions  or the  answers  to Exxon  about  marketing. He  again                                                               
asked members to think about where they wanted to go from here.                                                                 
                                                                                                                                
SENATOR ELTON  thought that given  the issues that have  been put                                                               
before the  committees, from a process  perspective, members need                                                               
to consider how  to keep those issues alive so  that they can get                                                               
a better sense of where those  who testified are going and follow                                                               
what they  are doing. He  suggested using existing  committees or                                                               
creating  a subgroup  of legislators  and  coordinating with  the                                                               
Executive  Branch  to  avoid  a lot  of  duplication  and  create                                                               
synergy between the two groups.                                                                                                 
                                                                                                                                
CHAIR SAMUELS  told members that during  the previous legislative                                                               
session, Senate  President Therriault appointed  Senators Stevens                                                               
and Guess  and Speaker Kott  appointed Representatives  Joule and                                                               
Weyhrauch  to be  the liaisons  between the  legislature and  the                                                               
administration during  the interim. He  joined that group  as the                                                               
chair  of the  Legislative  Budget and  Audit  Committee, as  did                                                               
Senator Therriault.  When they met with  the administration, they                                                               
told the administration that their  understanding of the Stranded                                                               
Gas Act  was to prevent  all 60 legislators from  "throwing rocks                                                               
at each other"  for political reasons. The point was  the act was                                                               
to establish  one negotiating point.  In addition, they  told the                                                               
administration  what  issues  came up  during  their  legislative                                                               
committee hearings.  He pointed out  such a meeting  has occurred                                                               
already [during this interim].                                                                                                  
                                                                                                                                
REPRESENTATIVE JOULE  commented, regarding the question  of state                                                               
ownership,  he  believes  that  needs  to  be  explored  further,                                                               
particularly the RIK and RIV issue.                                                                                             
                                                                                                                                
REPRESENTATIVE STOLTZE  said he pursued that  line of questioning                                                               
in  the Finance  Committee  but he  didn't feel  that  he got  an                                                               
answer.  The  question  there  was  if the  state  does  have  an                                                               
ownership, what  percentage would it  need to have an  impact and                                                               
whether there is a minimum amount  and he would like to follow up                                                               
on that.                                                                                                                        
                                                                                                                                
REPRESENTATIVE HAWKER  said he would  like to further  pursue the                                                               
state's participation  in the broadest  sense. He would  like the                                                               
committee  to expand  into whether  the state  should participate                                                               
and to hear  more from the capital market  people about financing                                                               
and cost of capital alternatives,  especially since the committee                                                               
will  only have  30 days  to  review [any  agreement]. He  noted,                                                               
"Secondly,  the other  one that  really peaks  my interest  - and                                                               
again  we've got  a  regulatory authority  person  here saying  I                                                               
won't get into  that one because it's such  an undetermined issue                                                               
and it  seems to me  to be a pretty  significant issue -  a route                                                               
that  would  go  across  Canada  if,  in  fact,  we  are  legally                                                               
prescribed going across Canada."                                                                                                
                                                                                                                                
SENATOR LINCOLN said what she finds  troubling is that there is a                                                               
whole mass of  people that are a part of  this process. Right now                                                               
the administration  is negotiating  and no  one knows  where that                                                               
negotiation will  lead or the  timing. She said in  addition, the                                                               
AOGCC's role,  its goals and  interactions with  the legislature,                                                               
the role of the commissioner of  DNR, which is very broad, ANGDA,                                                               
and the  role of the  Senate Resources Committee, all  play parts                                                               
and  she  is   unsure  how  they  fit   together  in  legislative                                                               
deliberations and pursuing the best course of action.                                                                           
                                                                                                                                
CHAIR SAMUELS  thought the  committee can  apply pressure  to any                                                               
mechanism it wants to, whether that  be ANGDA or another, but the                                                               
reality is  that the legislature will  have a minimum of  30 days                                                               
to approve  a contract and it  will be deciding on  a product put                                                               
before  it. He  thought  members  need to  be  familiar with  the                                                               
subjects, such  as the trade-off for  RIK or RIV, or  the choices                                                               
and trade-offs  that were  made in the  contract. He  pointed out                                                               
that some  of the  issues raised by  members, such  as vocational                                                               
education,  will  be  important  to   know  about  for  the  next                                                               
legislature so that it can plan for training.                                                                                   
                                                                                                                                
REPRESENTATIVE JOULE said  all legislators will want  to be ahead                                                               
of the  curve on the  local hire  issue and that  the legislature                                                               
now  has some  experience  under its  belt and  the  luxury of  a                                                               
little bit  of time.  He felt  the more  that opportunity  can be                                                               
maximized, the better off the state will be.                                                                                    
                                                                                                                                
SENATOR DYSON  noted that although  all members  are enthusiastic                                                               
about  Alaska  hire,  there  will   be  great  pressure  for  the                                                               
construction  to  occur under  project  labor  agreements and  he                                                               
guesses  that will  happen.  He pointed  out  that project  labor                                                               
agreements  are  often  touted  as the  best  tool  available  to                                                               
guarantee Alaska hire. He is sympathetic  to that but some of the                                                               
bargaining units  have internal rules  that do not allow  them to                                                               
add new people into the Alaska  rolls if someone elsewhere in the                                                               
Northwest  bargaining unit  is  unemployed.  He suggested  adding                                                               
incentives or doing  something to help qualified  Alaskans to get                                                               
into  those bargaining  units  ahead of  other  workers from  the                                                               
Northwest.  He complimented  Chair Samuels  and Senator  Ogan for                                                               
organizing  these educational  hearings. He  then asked  that the                                                               
presenters  not use  acronyms, as  not all  members are  familiar                                                               
with them.                                                                                                                      
                                                                                                                                
CHAIR SAMUELS said he would  consider and work on getting another                                                               
meeting together in approximately one month.                                                                                    
                                                                                                                                
SENATOR SEEKINS  thanked the  co-chairs as  well, and  then noted                                                               
that, to  quote from  Dr. Martin Luther  King, "without  a dream,                                                               
the people will  perish." He said a  gas line is a  dream of many                                                               
Alaskans and  that with every dream,  there is an intent  to kill                                                               
it. He said  he feels relatively certain that any  final gas line                                                               
dream  will not  be  what  he or  any  other  member prefers.  He                                                               
believes the challenge for members  is to not kill any reasonable                                                               
dream just because  it is not exactly what each  member wants. He                                                               
hoped all  members could work  with the administration  and other                                                               
participants  to  bring  this  dream  to  fruition  and  make  it                                                               
profitable for  those in  the business and  for the  residents of                                                               
Alaska, Canada and the United States.                                                                                           
                                                                                                                                
REPRESENTATIVE  GARA said  the process  of the  Stranded Gas  Act                                                               
almost  requires   the  legislature  to  say   something  to  the                                                               
administration  sooner   rather  than  later.  He   said  if  the                                                               
committee keeps all  of the information it has  gathered over the                                                               
last two  years internal, the  administration will not  know what                                                               
the committee is thinking and will  enter into a deal it believes                                                               
is best, leaving the legislature the  right to only say yes or no                                                               
to it. He said he believes  the legislature has punted, and to be                                                               
fair  to the  administration,  the legislators  can probably  all                                                               
agree on some  issues that have been discussed  in these meetings                                                               
but  the  administration  does  not know  which.  He  thought  if                                                               
committee  members can  agree on  some of  the concepts,  such as                                                               
access to the  gas by in-state users, creative ways  to deal with                                                               
local hire, that  it is important to convey  those agreements now                                                               
so that  the committee does not  address those after the  deal is                                                               
done.                                                                                                                           
                                                                                                                                
CHAIR SAMUELS repeated  that a group of legislators  has met with                                                               
the  administration and  discussed specific  topics and  that the                                                               
administration  was  open  to  discussions.   He  said  he  would                                                               
organize another  meeting with the administration.  Chair Samuels                                                               
then asked members  to contact him or any  other subgroup members                                                               
about  individual concerns,  which will  also be  relayed to  the                                                               
administration.   He  said   he  would   work  on   getting  more                                                               
information on the issues of ownership and capital markets and                                                                  
adjourned the meeting at 3:45 p.m.                                                                                              
                                                                                                                                

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