Legislature(2005 - 2006)HOUSE FINANCE 519
06/06/2006 01:00 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB2003 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB2003 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
June 6, 2006
1:13 P.M.
CALL TO ORDER
Co-Chair Chenault called the House Finance Committee
meeting to order at 1:13:50 PM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Jim Holm
Representative Reggie Joule
Representative Mike Kelly
Representative Beth Kerttula
Representative Carl Moses
Representative Bruce Weyhrauch
MEMBERS ABSENT
Representative Kevin Meyer, Co-Chair
Representative Richard Foster
Representative Mike Hawker
ALSO PRESENT
Denny DeWitt, Special Assistant, Office of the Governor;
Louisana W. Cutler, Attorney, Counsel, Preston, Gates,
Ellis, Anchorage
SUMMARY
HB 2003 An Act establishing the Alaska Natural Gas
Pipeline Corporation to finance, own, and manage
the state's interest in the Alaska North Slope
natural gas pipeline project and relating to that
corporation and to subsidiary entities of that
corporation; relating to owner entities of the
Alaska North Slope natural gas pipeline project,
including provisions concerning Alaska North
Slope natural gas pipeline project indemnities;
establishing the gas pipeline project cash
reserves fund in the corporation and establishing
the Alaska natural gas pipeline construction loan
fund in the Department of Revenue; making
conforming amendments; and providing for an
effective date.
HB 2003 was HEARD and HELD in Committee for
further consideration.
HOUSE BILL NO. 2003
An Act establishing the Alaska Natural Gas Pipeline
Corporation to finance, own, and manage the state's
interest in the Alaska North Slope natural gas
pipeline project and relating to that corporation and
to subsidiary entities of that corporation; relating
to owner entities of the Alaska North Slope natural
gas pipeline project, including provisions concerning
Alaska North Slope natural gas pipeline project
indemnities; establishing the gas pipeline project
cash reserves fund in the corporation and establishing
the Alaska natural gas pipeline construction loan fund
in the Department of Revenue; making conforming
amendments; and providing for an effective date.
1:15:06 PM
DENNY DEWITT, SPECIAL ASSISTANT, OFFICE OF THE GOVERNOR,
noted that Ms. Cutler would provide a "walk-through" of the
version of the bill before the Committee.
1:17:03 PM
LOUISANA W. CUTLER, ATTORNEY, COUNSEL, PRESTON, GATES,
ELLIS, ANCHORAGE, provided the bill's background.
Ms. Cutler explained that the role of the Alaska Natural
Gas Pipeline Corporation [Alaska Pipe] has been misleading
to date and offered to overview the Alaska Pipe. It will
be a public corporation by which the Administration
proposes, the State own the interest in the pipeline. It
would be the mainline, limited-liability {LLC} entity,
holding ownership interest in other segments of the
projects. The mainline LLC would be the entity which would
build the pipeline in Alaska; it is anticipated that the
Alaska Pipe would spin-off subsidiaries to hold other
aspects of the project, holding the interest in feeder
lines on the slope. The details have not yet been defined.
The intent of the legislation would provide the necessary
flexibility to complete the project.
1:21:03 PM
Ms. Cutler explained that the model used to develop the
legislation was taken from successful corporations existing
throughout the State such as the Permanent Fund
Corporation, the Alaska Housing Finance Corporation (AHFC),
& the Alaska Industrial Development Export Authority
(AIDEA) statutes. The Alaska Pipe project would be a
different magnitude from anything the State has ever been
involved in.
Ms. Cutler highlighted the unique features of the
legislation. The Alaska Pipe would be the entity through
which the State would finance the venture. The legislation
establishes the issuance of revenue bonds either with or
without authorization. It would set-up the corporation as
separate and independent, so that the liability and
revenues would be closed-off from being connected to the
State, which is important to protect the State's interest.
1:22:02 PM
Vice Chair Stoltze asked what the distinctions would be
between the proposed entity and any existing corporations.
Ms. Cutler replied she would address that later in the
testimony, reiterating that this project would be the
largest & most complicated partnership with the private
sector. The structure would differ from other public
corporations.
The Board would slightly differ from other boards and would
have seven members:
· Two commissioners, one from the Department of
Transportation & Public Facilities and one from the
Department of Revenue
· Five for-cause public members, not serving at the
pleasure of the Governor
She added Board members would need to be insulated from
changes occurring in the political structure every four
years. The idea is to create a stable board, making
decisions over the long haul. The learning curve for the
members will be big. The board members would serve a six-
year term. There would be no legislative confirmation,
protecting political behavior, functioning independently.
Ms. Cutler highlighted other features including not
required compliance with the Alaska Open Meetings Act. She
foresaw many concerns, requiring quick decisions.
1:27:03 PM
Ms. Cutler said the State does not anticipate open
meetings, however, realizes the importance for conveying
public information.
Another feature regarding the Public Records Act includes
language specifying exemptions. The Public Records Act
contains a catch-all, subject to disclosure. The Courts
have been reluctant to read the exemption broadly enough.
She added trade secrets should not be subject to
disclosure.
1:30:02 PM
Ms. Cutler highlighted provisions relating to the LLC so
Alaska Pipe can accomplish what is important. In the
context of other agreements, the Alaska Pipe would be
located in the private sector. It is typical for parties
to agree that if obligations are not met, certain rights
are lost and the authority to do that would be in the
statute, which would not be typical language.
1:33:17 PM
Ms. Cutler identified other features including the anti-
indemnification exception, a specific provision in State
law, making that approach illegal. Also, it would be
exempt from compliance with the procurement code in order
that the State can enter into projects, receiving required
services. The Alaska Railroad Association is exempt from
some codes including the procurement code. They are not
required to comply with statutory or budgetary statutes;
however, the Legislative Budget & Audit (LBA) Committee
could audit that group.
Ms. Cutler commented on the ownership financing, provided
through bonding authority & commercial loans. Alaska Pipe
will have the authority to participate in financing. The
Department of Revenue could carry the loan fund,
anticipating that the Legislature would appropriate
directly into that fund. She commented on language
establishing for-profit subsidiaries, similar to that in
the tobacco litigation.
1:37:01 PM
Vice Chair Stoltze asked about the "conflict of interest"
section. Ms. Cutler acknowledged that a conflict of
interest section had been included & that members of the
Board would be covered through the Ethics Act, indicating
their conflicts.
1:39:01 PM
Ms. Cutler overviewed the House Judiciary Committee
version/G of the bill, including the important "findings"
section. She believed that the undertaking would be in the
best interest for the State. The findings sections [(1) &
(2)], deal with Article 8 of the Constitution.
Section 9, Pages 2 & 3, stipulate that it must be in the
best interest for the State to acquire ownership and
participate in financing construction of the project.
1:42:02 PM
Vice Chair Stoltze pointed out those findings sections are
usually not supported by the House Finance Committee. Ms.
Cutler understood and recognized that it was the choice of
the Committee; however, given the magnitude of the project,
it is important to include a finding section. Courts use
the findings useful during challenges.
1:44:02 PM
Vice Chair Stoltze reiterated his concern with inclusion of
that language.
Representative Holm voiced concern that HB 2003 had not
been a legislative proposal, instead came through the
Governor. He recommended that Ms. Cutler correct her
terminology, indicating that the concept is only a
"proposal before the Committee". He added his added
concern with inclusion of the findings. Ms. Cutler
apologized and stood corrected.
1:46:01 PM
Co-Chair Chenault pointed out that language on Page 3,
Lines 16-31, discuss material previously mentioned. Ms.
Cutler agreed.
1:48:02 PM
Ms. Cutler referenced Page 4, Section 2, Line 5, which
addresses establishment of the corporation as a State
separate instrument and is important language to include.
Alaska Pipe should be established as a separate corporation
with independence, yet separate from the Legislature and
Governor and should be outside any normal State agency
structure.
Representative Holm inquired if there had been discussion
regarding resident status of the Board members.
Ms. Cutler said originally, no residency requirement had
been proposed because of required expertise needed for that
work. She pointed out language indicated on Lines 6-9
requiring certain experience. She emphasized that the
project would be large and sophisticated. She understood
that a majority of board members would be from Alaska.
1:53:01 PM
Vice Chair Stoltze requested names of the Alaska residents
being considered. Ms. Cutler did not know.
Representative Joule added inquires regarding the make-up
of the Board, asking if it would include a major oil
company president. Ms. Cutler responded that current
language does not provide for that; it was not the intent
but instead getting people with oil and gas experience.
Representative Joule voiced concern including people from
the oil & gas industry; he worried that the State of Alaska
could become a minority member, negatively impacting
Alaska's well-being.
Mr. DeWitt pointed out the language of the "conflict of
interest" provision. There was discussion in the previous
Committee regarding corporate versus non-corporate level
person working for the company. That pool is large to
avoid any conflict of interest. Ms. Cutler added that
every partner would be a "minority-interest-holder"; no one
would carry more than 50% ownership interest.
Ms. Cutler pointed out inclusion of the commissioners from
both the Department of Revenue commissioner and the
Department of Transportation & Public Facilities and
language exception for those in the armed services.
2:00:01 PM
Ms. Cutler reiterated the need for extensive experience.
Mr. DeWitt interjected that the criteria provides a small
pool; the previous Committee {HJC} attempted to expand that
pool, keeping sideboards. Ms. Cutler had mentioned an
appointed designee, confusing HJC. The sentence was
removed.
Vice Chair Stoltze advised that some boards and commissions
address designees upon the death of a member. He was
troubled that it would be okay to designate an unconfirmed
deputy commissioner to make policy decisions. Ms. Cutler
advised that both commissioners serve on many different
boards and commissions, noting that the Permanent Fund has
operated in the proposed manner for many years. She
understood the concern, however, pointed out it could not
be expected that those individuals would be able to make
every meeting of the Alaska Pipe board. Mr. DeWitt agreed
that it is a logistical problem; each commissioner would be
involved but not always in attendance of all the meetings.
2:08:02 PM
Ms. Cutler reviewed provisions for board meetings.
· They would occur not less than once every three
months;
· They would be subject to the call of the chair,
allowing flexibility;
· They could occur through teleconference, standard
procedure; and
· The Board would be exempt from the Open Meetings Act
in order to do business quickly, discussing
confidentially materials.
Ms. Cutler reviewed requirements for the minutes, the $400
compensation and "removal for cause" clause of the board
members. She pointed out that the board could delegate
staff for day-to-day operations. The board requires that
the executive director or other members of the staff be
delegated with authority to be board spokesperson at
management level. The staff would serve at the pleasure of
the executive director and could be removed at any time by
the executive director without notice or cause.
Co-Chair Chenault asked if that was standard procedure.
Ms. Cutler affirmed that anyone in exempt service is in
that situation.
2:16:05 PM
Ms. Cutler reviewed the conflict of interest section,
pointing that they would be covered by a financial
disclosure statement. She observed that the Corporation
could sell, lease, exchange, donate, convey, or encumber in
any manner by mortgage, by creation of any other security
interest or otherwise, real or personal property owned by
it or in which, it has an interest, including any ownership
interest in the project or in a subsidiary entity, when, in
the judgment of the corporation, the action is in
furtherance of its corporate purposes; to enter into and
perform its obligations under contracts or agreements,
including contracts or agreements to own, construct,
manage, or operate the project, and do all things necessary
or convenient to carry out its corporate purposes and
exercise its powers.
Vice Chair Stoltze questioned if an upper threshold for the
elective officials would need to be met. Ms. Cutler said
that concern was addressed in:
(11) To enter into and perform its obligations under
contracts or agreements, including contracts or
agreements to own, construct, manage, or operate the
project, and do all things necessary or convenient to
carry out its corporate purposes and exercise its
powers.
Ms. Cutler explained that the State might want to pay off
its interest to another party. The corporation might want
to sell off part of that ownership interest. The amount of
interest should be discussed at the discretion of the
Governor.
Representative Holm voiced concern with inclusion of the
provision in Section 8, Page 9. He said it was not in the
best interest for the program. Ms. Cutler and Mr. DeWitt
agreed, noting it was added by the previous Committee, HJC.
2:23:23 PM
Representative Holm referenced item #6, Page 8, regarding
operation of the project and asked about that "vision".
Ms. Cutler explained that it was the intent of the
corporation to take the ownership interest in the project,
asking to design the corporation in a way that if the
project takes a number of years to get going, could the
Legislature see fit to establish it before the approval of
a contract. Alaska Pipe could then move forward with the
project. She thought that some State employees could be
loaned to the operations.
Representative Kerttula observed that it would run similar
to the Joint Pipeline Office, subsection (6) [power of the
board to operate any project of any portion of the
project]. Ms. Cutler observed that Alaska Pipe would not
be building the pipeline itself, however, the intent is to
give them all the necessary power.
2:29:01 PM
Vice Chair Stoltze inquired if names had been registered.
Ms. Cutler said no. She highlighted the powers of the
corporation & noted that the partners had voiced concern
with the State's ability to meet the financial obligations
under the contract. There was discussion regarding failure
to do that could result in forfeiture:
(22) Except for a statutory change made by initiative
or in response to a final nonappealable court order,
to agree that, as part of an agreement to form an owner
entity of the project, its voting rights and its access
to confidential information otherwise provided for
under the terms of the agreement may be restricted if
this chapter is amended or another statute is enacted
and that law has a material adverse effect on the
corporation's ability to perform its obligations under
that agreement; however, the corporation may not agree
to any terms that attempt to limit the legislature's
authority to exercise police powers of the state.
Ms. Cutler explained that Section 22 would provide Alaska
Pipe authority to enter into an agreement that could have
voting rights curtailed if it had an adverse effect on the
corporation's ability to perform the obligation under that
agreement.
2:35:02 PM
In response to Representative Kerttula, Ms. Cutler explained
it is important that no action adverse impact Alaska Pipe's
ability to meet obligations. The intent is to design the
agreement so that it is in accordance with Delaware case-
law, which addresses the material adverse effect upon
standards. The fiscal contract would be Alaska law and the
LLC would be Delaware law.
Representative Kerttula emphasized that the State would be
giving up their ability to pass law, impacting it. She
urged further discussion of what "material adverse effect"
is & the differences between Alaskan and Delaware law
regarding that.
Ms. Cutler highlighted Section [23] dealing with the power:
(23) In furtherance of the satisfaction of its
obligations, including, without limitation, its project
costs and financing obligations, to instruct any person
making a payment or distribution to the corporation to
make or the payment or distribution directly to any
person specified by the corporation.
She explained the intent to assure that the Alaska Pipe has
ability to pay debts directly. The LLC would be the major
source of revenue for Alaska Pipe and the LLC would
eventually 'spin off' revenue to all members through
dividends. Section 22 allows the Alaska Pipe, through the
LLC, to pay bond or loan holder's account, language
recommended by the State financial advisors.
2:39:01 PM
Ms. Cutler referenced (24) (b):
(b) Notwithstanding (a) of this section and other
provisions of law, the corporation or any
subsidiary entity of the corporation may not
sell, transfer, or otherwise dispose of an
interest in the Alaska North Slope natural gas
pipeline without the approval of the governor.
The above section provides language to allow subsidiaries to
be established as proposed in the overview. The Alaska Pipe
would be in control of those subsidiaries. Canadian law
could carry different requirements. Subsection (b) allows
the subsidiaries to transfer assets to the subsidiary. The
HJC did change Section (c), Lines 7-11, allowing for
interlocking boards. In Canada, residency requirements
exist; that language addresses those concerns.
Representative Joule asked about the Board's composition and
if members could be other than U.S. citizens. Ms. Cutler
said they could.
2:45:35 PM
Ms. Cutler briefly addressed Article 3, which covers all
financing obligations & bonding provisions. Page 16, Lines
18-22, addresses moral obligations of revenue bonding.
Co-Chair Chenault asked if the bonding provisions would be
the same in both the U.S. and Canada. Ms. Cutler explained
the intent is to provide subsidiary power, issuing bonds if
authority is provided. She offered to research that.
Ms. Cutler commented on Article 4, Page 19, Line 11,
regarding establishment of the cash reserve fund, pulling
money for the Alaska Pipe from the Legislature, using for
the purpose of securing a credit line.
Co-Chair Chenault pointed out that would be only the initial
investment. Ms. Cutler believed it would last for the life
of the fund. Co-Chair Chenault assumed that could be
identified in the fiscal note, indicating core receipts with
no General Fund match. Initially, he thought it would be a
General Fund match. Ms. Cutler said Mr. Porter indicated
there were appropriations in the Capital Budget for that
purpose. It would be up to the Legislature to determine how
that would be paid. Ms. Cutler thought that the
appropriation could come through the normal operating budget
proceedings.
Representative Joule questioned the State's exposure. Ms.
Cutler acknowledged that the corporation would be
established as a separate and independent entity so that
only those assets would be exposed. It is important to make
sure that the liability is limited only to the assets of
Alaska Pipe and set up as a separate public corporation.
Representative Joule did not understand that; he wondered if
there would be an 80% liability. Ms. Cutler replied the LLC
would be limited only to the assets of Alaska Pipe. Alaska
Pipe will hold an ownership interest with three other
partners. Those partners will hold a percentage of
ownership, which means the financial obligations, would
amount to 20% of equity and would include a debt percentage
structure. As long as the corporation is the only entity
undertaking the obligations, what is exposed would be the
corporation, which may or may not be a 20% match. The
General Fund would not be exposed. There is concern whether
the Alaska Pipe would be "credit-worthy" enough and if there
should be State involvement.
2:56:02 PM
Vice Chair Stoltze referenced Article 4 - the relationship
to operations and questioned limiting the "political
activity" language. Ms. Cutler explained there is a purpose
to limit that language and the statement should be included
for the appropriate tax-exempt ruling from the Internal
Revenue Service (IRS). In discussion of those activities,
it is assumed that the Alaska Pipe would not be able to go
to Congress to participate in what the loan guarantee
program would look like; hence, the language was narrowed.
Ms. Cutler pointed out Article 5, Page 20, the financial
statements provided to the Governor and the Legislative
Budget and Audit Committee (LBA), providing for audits of
the books; a non-subsidary entity could not be audited.
Section 41.42.510 was borrowed from the Permanent Fund
statute and requires reports and publications including
financial statements. It requires that the corporation
establish a website for public access. She highlighted
specific exemptions listed Lines 16-29, Page 21.
1. Information pertaining to the particulars of the
business or affairs of an owner entity of the project,
including, without limitation, tax returns, financial
statements, and business plans;
2. Information containing a trade secret or other
proprietary information of the corporation or of an
owner entity of the project;
3. Information that is confidential or privileged under
the laws of the state, whether at common law or by
statute or court rule;
4. Information that is required to be kept confidential
under an agreement with an owner entity of the project,
or with other participants in an owner entity of the
project;
5. Information that would affect the competitive position
of the corporation or an owner entity of the project;
and
6. Information of the corporation or an owner entity of
the project that has commercial value that might be
significantly diminished by public disclosure.
3:05:02 PM
Ms. Cutler added:
· Subparagraph (b) provides information in the
possession of an owner entity of the project is
confidential.
· Subsection © allows situations in which disclosure
information is confidential, when it can be
disclosed such as to lenders.
Representative Kerttula clarified that the information held
by the LLC would not be public. She asked about the
information coming from Alaska Pipe Co to the LLC. Ms.
Cutler replied information to the LLC would not be covered
by the Public Records Act and would not be subject to
disclosure requirements associated with the Act.
Representative Kerttula asked if the LLC could control
Alaska Pipe's behavior. Ms. Cutler compared any private
company that has information; it does not apply to private
sector entities.
Ms. Cutler noted that the definition section of the bill was
contained in Article 6, Page 22, beginning Line 23.
· Alaska North Slope natural gas pipeline project
· Board
· Corporation
· Financing obligations
· Owner entity of the project
· Ownership interest in the project
Vice Chair Stoltze asked about the forestall spur-lines of
the natural gas pipeline transportation system. Ms. Cutler
hoped that would not happen and that the definition was
intended to cover all aspects of the project.
Vice Chair Stoltze emphasized that the bill is about a
pipeline in Alaska through Canada. He did not want to see
something that would limit in-State options. Ms. Cutler
responded that the language deals with the main pipeline and
the infrastructure needed to connect that pipeline. Mr.
DeWitt agreed.
3:12:01 PM
Ms. Cutler pointed out that Sections 4 & 5 were technical
amendments addressing the State entities buying stock.
Section 6 establishes the loan fund within the Department of
Revenue, providing options for financing the obligations, a
typical loan fund with terms established by the
Commissioner.
Ms. Cutler noted that Section 7, Page 25, Line 5, provides
more technical amendments that place employees of the Alaska
Pipe into an exempt service. Section 8, Page 26, Line 16,
adds the Alaska Pipe staff to statute, requiring financial
disclosure. Section 9, Page 27, Line 7, does the same thing
for the Board. Section 10, Page 27, Line 9, adds a
conforming amendment clarifying that the subsidiary board
would not be governed by the Ethics Act because there would
already be a Canadian Ethics Act in place.
Section 11, Page 27, Line 18, outlines a conforming
amendment to the Public Records Act.
Sections 12 & 13, Pages 29-31, provides an indemnification
provision to the effective date. There is a statute and
common-law doctrine, which provides indemnification
agreements in construction contracts. The language provides
an exemption to the common-law doctrine, providing
indemnification in construction projects.
Ms. Cutler explained that when building a pipeline project,
it is common to indemnify the parties against mistakes and
bad conduct. She understood that was done because it would
be a large project. Sometimes mistakes result in liability
and sometimes, worse conduct occurs, which brings about
liability. In a project of this size, such potential must
be managed and provides for many provisions of
indemnification. That language could lower costs of the
construction.
3:22:36 PM
Representative Kelly inquired if entering into a LLC would
protect and adjust the corporate "veil". Ms. Cutler
understood, there would be mutual indemnifications. The
statute largely governs the Alaska Pipe.
Representative Kelly asked if that could provide a "level
playing field" or would it place the State in a vulnerable
position. Ms. Cutler thought there would be cross
indemnification authority. The language allows only the
authority providing for the cross indemnifications. She
could not guarantee that the agreement would accomplish
that, however, that was what it was designed for.
Ms. Cutler added that the Administration would like to take
the opportunity to respond to previous comments made by Mr.
Gildan's memorandum contained in the member's file packet.
Representative Kerttula interjected that Representative Gara
had presented an amendment regarding taxation to the State
and asked if indemnification would extend to financial
situations. Ms. Cutler responded that Representative Gara
was concerned that the ability to indemnify the LLC
construction of the project could be misinterpreted by the
State against tax royalty owed. She understood the intent
and that Mr. Gildan had testified that there might be a way
to interpret it that way. The State of Alaska's position
would like to reimburse the producer through a fiscal
contract. HB 2003 is not the vehicle for the fiscal
contract but rather the legislation, which would govern the
establishment and hold member's interest in the LLC. The
Administration would not support placing that language into
HB 2003 because that is not their position to the contract.
Representative Kerttula asked if the language would include
criminal behavior. Ms. Cutler said it would and that it is
statutory authority.
3:32:03 PM
Representative Kerttula requested more information regarding
that concern.
HB 2003 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting was adjourned at 3:31 P.M.
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