Legislature(2007 - 2008)HOUSE FINANCE 519
04/30/2007 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB177 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 177 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
April 30, 2007
1:41 P.M.
CALL TO ORDER
Co-Chair Chenault called the House Finance Committee meeting
to order at 1:41:31 PM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Harry Crawford
Representative Les Gara
Representative Mike Hawker
Representative Reggie Joule
Representative Mike Kelly
Representative Mary Nelson
Representative Bill Thomas Jr.
MEMBERS ABSENT
Representative Richard Foster
ALSO PRESENT
Representative Anna Fairclough; Pat Galvin, Commissioner,
Department of Revenue; Antony Scott, Commercial Analyst,
Division of Oil and Gas, Department of Natural Resources;
Don Shepler, Consultant, Greenberg Traurig
SUMMARY
HB 177 An Act relating to the Alaska Gasline Inducement
Act; establishing the Alaska Gasline Inducement
Act matching contribution fund; providing for an
Alaska Gasline Inducement Act coordinator; making
conforming amendments; and providing for an
effective date.
HB 177 was HEARD and HELD in Committee for further
consideration.
HOUSE BILL NO. 177
An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming
amendments; and providing for an effective date.
Co-Chair Chenault pointed out that there had been an
amendment passed in the House Resource Committee (HRC),
which had not been incorporated into the version before the
House Finance Committee. A corrected draft of the bill will
be forthcoming. The change left out was to Page 15, Line
15, a conceptual amendment proposed by Representative Roses,
inserting: "50% of the licensee net cost".
1:43:32 PM
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, continued
his previous discussion of the bill, beginning with the
section starting on Page 19, Line 10:
· Section 43.90.250 establishes the Alaska Gasline
Inducement Act (AGIA) coordinator position, designed
& created by amendments created in previous
committee hearings. The position would continue
for one year after commencement. He listed the
duties of that position.
· Section 43.90.260 describes the expedited review and
action of the State agencies.
· Article 3 identifies the resource inducement
including Section 43.90.300, which indicate the
qualifications for resource inducement.
1:48:22 PM
Commissioner Galvin continued:
· Section 43.90.310 addresses the royalty inducement
on Page 20, Line 31, which might result in
deductions for transportation; it is a current
contractual right of the State.
Co-Chair Chenault inquired if stipulations had been included
regarding the size of a gas contract. Commissioner Galvin
explained that the royalty arrangements are implemented
through the Department of Natural Resources and with regard
to AGIA, that scenario is addressed through the actual
inducement, establishing the evaluation. The Department
avoids individual contracts. The price is established
through the published price.
1:52:13 PM
Representative Gara pointed out the bill attempts to make
the bidding process attractive to potential pipeline
builders. Commissioner Galvin noted that up-stream
inducement is tied to the commitment of the value provided
to the lessee in exchange for making that commitment.
Representative Gara asked the estimated revenue value.
Commissioner Galvin suggested that query be directed to Mr.
Scott in the Division of Oil and Gas.
1:53:41 PM
ANTONY SCOTT, COMMERCIAL ANALYST, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, advised that during the
process, the Division had looked at the value associated
within the State's provision and that it is estimated it is
worth approximately 2% of the final destination price.
1:54:44 PM
Commissioner Galvin continued:
· Section 43.90.310 clarifies the royalty inducement
aspects, which will minimize retroactive adjustments
to the monthly value of the Sate's royalty share of
gas production and provide a method for establishing
a fair market value for each component of the
State's royalty gas, based on pricing data from
reliable and widely available industry trade
publications. It uses appropriate adjustments. He
addressed two aspects of the royalty commitment and
highlighted the complications resulting in a change
in the lease provisions.
1:59:26 PM
Representative Kelly questioned the solidity of the
commitment to the producer. Commissioner Galvin explained
that the length of the inducement would be as long as the
transportation commitment is in place. If they make a
commitment, the contractual right ends. The producer will
be linked in time, value and volume to the transportation
commitment.
2:01:09 PM
Commissioner Galvin continued, Page 23, Line 19:
· Section 43.90.320 describes the gas production tax
exemption, which provides a method for a tax
exemption equal to the tax rate change, receiving a
credit to lower the level they pay. The original
intent was that the right be contractual. The bill
has been structured to rest on the transportation
commitment; however, previous committees have
changed the constitutionality of the original
intent. The exemption provides a steady tax rate
and remains in place for the first 10-years, gas
flows. It could be changed any time in future
legislatures.
· Section 43.90.330 addresses the inducement vouchers.
When purchasing gas at the wellhead and through the
voucher system, the producer makes a transportation
commitment through obtaining a voucher and
transferring it, which offers value to the party
making the commitment. It is an opportunity for
additional participation through maximizing the
number of players.
2:07:48 PM
Commissioner Galvin discussed Page 24, Line 28 of the bill:
· Article 4, the miscellaneous provisions consisting
of Section 43.90.400, the Alaska Gasline Inducement
Act (AGIA) matching contribution fund, disbursements
& audits.
· Section 43.90. 410 identifies the regulations. The
commissioner will adopt regulations for the purpose
of implementing the provisions of the chapter.
· Section 43.90.420 defines the statute of
limitations, clarifying that a party may not bring a
judicial action challenging the constitutionality of
the chapter of the license issued under the chapter,
unless that action is commenced in a court, within
90-days after the date that a license is issued.
Representative Gara asked how the 90-day constitutional
challenge language relates to the 30-day to 2-year challenge
times within the Statute of Limitations. Commissioner
Galvin advised that the producer would need to make a
commitment not to challenge. The decision of the
commissioners would be the final action once the Legislature
had approved it, given the 30-day administrative appeal time
from that point.
2:11:13 PM
Commissioner Galvin provided a quick overview on:
· Section 43.90.430 - interest
· Section 43.90.440 - the licensed project assurances.
Representative Kelly inquired if that language indicates a
ceiling limiting the exposure. Commissioner Galvin
responded that the limit would be the amount expended by the
licensee, based on the expectation of what the licensee
might be spending and depends upon the amount matched by the
State.
2:17:16 PM
Commissioner Galvin continued:
· Section 43.90.450 deals with the assignments of the
license.
Representative Kelly questioned if that section would
provided an "absolute right to approve". Commissioner
Galvin explained it provides the right to stop action.
2:18:50 PM
Commissioner Galvin continued:
· Section 43.90.460 addresses the conflicting State
and federal laws.
· Section 43.90.470 identifies State pipeline
employment development.
· Section 43.90.900 elaborates the general provisions
and definitions, the conforming amendments to other
statutes and affects the procurement code. That
language indicates a Public Records Act.
2:22:13 PM
Representative Joule referenced Section 43.90.440 and asked
if the State could be gamed-taxed. Commissioner Galvin
explained those provisions were intended to provide
licensing debt unless there was a violation of the terms of
the provision. If they abide by the terms under their
license, that language clarifies that the State would not
choose an alternate project. It is incumbent upon the State
to assure that the licensee would fulfill their part of the
agreement with the State regarding the risk gain, in order
to move the project forward.
AT EASE: 2:27:45 PM
RECONVENE: 2:28:23 PM
DON SHEPLER, ATTORNEY & CONSULTANT, GREENBERG TRAURIG,
explained his background and distributed a handout, the
Alaska Gasline Inducement Act, House Finance, 4/30/07.
(Copy on File).
2:29:50 PM
Mr. Shelper provided an overview of the Federal Energy
Regulatory Commission (FERC) issues & highlighted the
information on Slide 2:
· FERC's new mandatory expansion authority
· AGIA's rolled in rate provisions, and
· Negotiated versus recourse rates.
2:31:08 PM
Mr. Shelper noted Slide 3, FERC's authority to order
expansions, which could be problematic because:
· No rate subsidy
· No adverse effect on financial or economic viability
of the project
· No adverse effect on overall operations of the
project
· Can not diminish the contractual rights of existing
shippers to previously subscribed certificated
capacity
· Finding the adequate down-stream capacity exists or
will exist
2:32:48 PM
Slide 4 explains the Section 105 provisions, which could
invite litigation. That statute is unprecedented and has
not been tested in Court. Section 105 criteria are
potentially ambiguous and fertile ground for litigation.
Once litigation happens, it delays and uncertainty becomes
involved and the duration of the delay would likely be
measured in years, not months.
Mr. Shepler contrasted the federal process in regard to the
proposed AGIA, taking the mandatory expansion off the table.
AGIA requires testing of the market and expansion under
reasonable terms. AGIA avoids the uncertainty regarding
expansion issues.
2:39:05 PM
Representative Gara questioned if the AGIA contract would
fall into a mandatory expansion under the intent of FERC.
Mr. Shepler emphasized it would not; the mandatory expansion
provision provides a situation where a pipeline company
could refuse expansion at which time, the State initiates
litigation.
Mr. Shepler explained that violation of the license occurs
when the pipeline company refuses to expand. Representative
Gara understood there would be no recourse for the State.
Mr. Shepler thought the State will have other remedies.
2:41:51 PM
Mr. Shepler discussed rolled-in rates indicated in Slide 6.
He noted that in the Alaska Natural Gas Pipeline Development
Authority (ANGPA) statute, open season regulations should
"promote competition in the exploration, development and
production of Alaska natural gas." He added that the FERC
directive is "incremental pricing of expansion, which could
put expansion shippers at a significant rate disadvantaged
compared with initial shippers, and accordingly, could
discourage exploration, development and production of Alaska
natural gas." He provided members with a copy of the FERC
discussion. (Copy on File.)
He added that FERC requires that any new pipeline must be
based on incremental rates for expansion; however, departure
from lower-48 policy is based on recognition of Alaska's
unique circumstances.
2:47:13 PM
Mr. Shepler referenced Slide 8, indicating that a rate
increase will not necessarily provide a subsidy. FERC left
open the question of whether to allow rolled-in rates at a
level that is not higher than the initial rate without
subsidies. Total government contributions reduce rates by
15%.
2:50:20 PM
Mr. Shepler referenced Slide 10, explaining that AGIA would
not intrude on FERC's authority. AGIA requires the licensee
to propose rolled-in rates and FERC disposal. AGIA prevents
producers from negotiating rates with themselves, precluding
collection of the rolled-in rates. He emphasized the
importance of the rolled-in pricing as it comes as a trickle
down from a congressional mandate. It is a good model for
the State.
2:52:25 PM
Slide 12 indicates negotiated versus recourse rates. He
noted that recourse rates are old fashioned, cost-based
rates, such as utility rates and are based on the cost of
providing the service. FERC has stipulated that shippers
must have access to recourse rates as an alternative to
negotiated rates because they are a "lifeline" to the
shippers. Negotiated rates are negotiated; anything can be
negotiated, such as a reserve capacity, however, negotiated
rates are presently the norm in the lower 48. FERC
establishes the recourse rates though a regulatory process;
whereas, negotiated rates move through the commercial
process.
2:55:40 PM
Mr. Shepler addressed Slide 15. AGIA requires commitment by
the licensee not to enter negotiated rate contracts that
preclude rate increases due to roll-in of expansion costs up
to 15% above the original negotiated rates. By spreading
the expansion costs over all the billing determinants, AGIA
ensures that the rolled-in rate treatment can be offered to
expansion shippers. The applicant is required to commit
that they will not collect past that point.
2:57:38 PM
Slide 16 identifies the Rockies Express Open Season notice,
a project that used negotiated rates. He provided back-up
for the project. (Copy on File.)
The second page illustrates an estimated recourse rate of
$1.42 with a negotiated rate of $1.09 and an adjustable rate
of $1.04 - $1.14, depending on the price of steel. Those
rates would be in place till the end of the project.
3:00:23 PM
Representative Kelly questioned which rate an "anchor"
shipper receives. Mr. Shepler explained they get the
negotiated rate. The project will occur in three phases and
he referenced the third phase, the end-to-end rate used to
illustrate the point.
3:01:56 PM
Representative Gara commented that the Administration had
requested that pipeline owners not challenge the rolled-in
rates proposed in AGIA. Mr. Shepler explained that rolled-
in rates could hit AGIA twice; once as the pipeline and then
again in up-stream inducements. Applicants are being asked
to propose rolled-in treatment for expansions, which he did
not think was fair to ask them not to oppose what they asked
for. He acknowledged advantages that occur with FERC
establishing the regulations, commenting that FERC has an
easier time applying policy without opposition.
3:05:42 PM
In response to a question by Representative Kelly, Mr.
Shepler noted that the recourse rate would be "whatever it
is". It is impossible to determine the costs of building
the pipeline because the price of steel is uncertain.
Companies are estimating on the high-side. Recourse rates
are based on a number of factors, which can vary while
negotiated rates remain stable. It could fall below the
recourse rate, but most likely that will not happen until
the end. That concluded the testimony of Mr. Shepler.
3:08:27 PM
ANTONY SCOTT, COMMERCIAL ANALYST, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, provided members with an
overview of rolled-in rates. (Copy on File).
He noted several key points regarding rolled-in rates:
· Rolled-in rates are fair & everyone pays the same
price for the same service.
· Rolled-in rates are effective.
· Rolled-in rates are required for Alaska.
3:12:19 PM
Mr. Scott noted that AGIA rolled-in rates promote
competition, exploration and development. Rolled-in rates
are in the State's interest given uncertainty of where
expansion of gas will come from. He added that despite
protests to the contrary, the objective evidence indicates
that rolled-in rates impose relatively modest costs on
producers; which are significantly off-set by AGIA's $500
million and are unlikely to affect the producer's decision
to ship.
3:17:27 PM
Mr. Scot continued, Slide 7 observes that incremental fuel
costs are higher if expansion shippers have to pay them,
resulting in a significant jump in the rates. The initial
shippers under the lower 48 FERC policy are still paying
$1.96, but expansion shippers would be paying close to $3
dollars. In Slide 8, it is supposed that in 2023, the
pipeline would again expand and could be achieved through
looping. The incremental costs of looping would be
significant, but would not require extra fuel. The rolled-
in fuel rate provides a benefit to the initial shippers,
which could arguably be subsidized.
3:20:05 PM
Page 9 indicates rate treatment, rolling in expansion costs,
rd
exceeding the cap. In the 3 expansion, shippers would pay
slightly higher rates by rolling-in the expansion costs.
Mr. Scott commented on why information regarding
determination of the rates matters to Alaska's future.
· Without rolled-in rates, it is unlikely that the 3
looped expansion would occur;
· Expected value of generic prospect is negative under
incremental rate treatment (-$15.7 million for the
OCS prospect & -$19.7 million for the on-shore
prospect)
· Expected value of generic prospect is positive under
the AGIA rate treatment ($18.1 million for OCS
prospect & $6.4 million for the on-shore prospect)
3:26:49 PM
Mr. Scott stated that the State does not know where gas from
an expansion would come from. The State is better off
accepting the provisions of AGIA. Slide 14 provides
examples of background scenarios ($5.50 gas) identifying
expansion costs.
3:28:32 PM
Mr. Scott continued with the stylized examples of three
cases contrasting different values, which might occur:
· Case A: State gas comes first through the expansion
from State lands
· Case B: All gas comes from National Petroleum
Reserve-Alaska (NPR-A) lands
· Case C: All gas comes from the outer continental
shelf
It is not known how it will play out; however, presenting
the scenarios allows for assessment of the basic interests.
Without rolled-in rates, it is unlikely that all expansions
could occur. Assuming real constant prices, the expected
value will be negative. However, what has been identified
is that without rolled-in rates, the last expansion could
not occur; hence, a loss to the State. Rolled-in rates
allow expansions to occur and prove to be a significant
return to the State. Due to the uncertainties, the State
would be better off using rolled-in rates.
3:32:57 PM
Mr. Scott addressed the relative burden, which rolled-in
treatment imposes on the producers, affecting their
investment measures. The assumption is that producers do
not own the pipeline. The required investment is at about
$4 billion dollars and assumes inclusion of Pt Thompson.
The scale of investment would be different if the pipeline
were owned. Slide 20 illustrates a worse case scenario if
none of the producers were carrying gas to the expansions.
The producers would received only the negative affects of
the rates from rolled-in rate treatment and none of the
benefits of the increased gas flow. That scenario is
unlikely.
3:37:03 PM
Mr. Scott stated that if producers do not own the pipeline,
they could invest as shippers, thereby, making a shipping
commitment. A lot of the value from the project has been
moved from the producers to the State because of the
effective tax rate, indicating downward movement.
3:38:25 PM
Slide 21 illustrates 50 different up-stream investment
opportunities & projects the producers currently have. The
Alaska project is near the "top" including the anticipated
rates of return. Rolled in rates should not be a burden to
producers. Presently, producers believe shouldering a risk
of net-back value is unattractive and that there are
realistic risks not changing the economics of rolled-in rate
projects. If there were no expansions, the producers would
receive roughly two-thirds with likelihood that the project
would generate at least $8 billion dollars. He discussed
how the internal rate of return could affect a project from
the profitability ratio perspective.
3:43:37 PM
Slide 25 highlights facts indicating that a rolled-in rate
provision would not present reasons to not commit to the
project.
Mr. Scott summarized:
· AGIA's rolled-in rate provisions promote
competition, exploration and development.
· Given the uncertainties, AGIA's rolled in rates are
clearly in the State's monetary interest.
· Protests notwithstanding, the objective evidence
indicates that AGIA's rolled-in provisions costs are
modest to the producer and that they are unlikely to
affect the initial investment decisions.
3:44:36 PM
Representative Kelly asked about the percentage of an
increase to the producers, generating new gas and requiring
expansions for the State. Mr. Scott responded that the
Administration had not investigated the query enough to make
a determination.
3:45:27 PM
Representative Kelly thought that the approach should
include the producer also. Mr. Scott acknowledged that
would be a reasonable assumption.
Mr. Scott assumed ConocoPhillips intended to own the
project.
3:46:39 PM
Representative Gara asked if building a pipeline to Alberta
with a spur-line to Valdez, would require an expansion. Mr.
Scott said yes.
Representative Gara inquired if there was a significant
difference between the rolled-in rates for a spur-line. Mr.
Scott thought there could be but was not presently, aware of
any structured modeling done by the Administration.
3:48:22 PM
Co-Chair Chenault requested that Mr. Scott be present during
the "round-table discussion" with producers and the
Administration.
HB 177 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting was adjourned at 3:49 P.M.
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