Legislature(2007 - 2008)HOUSE FINANCE 519

04/27/2007 01:30 PM FINANCE

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01:44:35 PM Start
01:52:44 PM HB177
03:01:45 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Introduction of AGIA:
Tom Irwin, Commissioner, Dept. of Natural
Resources; Pat Galvin, Commissioner,
Dept. of Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 27, 2007                                                                                           
                         1:44 P.M.                                                                                              
CALL TO ORDER                                                                                                                 
Co-Chair Chenault called the House  Finance Committee meeting                                                                   
to order at 1:44:35 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; Representative  Mark Neuman;                                                                   
Representative  Woodie   Salmon;  Tom  Irwin,   Commissioner,                                                                   
Department  of Natural Resources;  Pat Galvin,  Commissioner,                                                                   
Department   of  Revenue;   Kurtis   Gibson,  Acting   Deputy                                                                   
Director,  Division of  Oil and  Gas,  Department of  Natural                                                                   
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                                                                    
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.                                                                           
1:46:55 PM                                                                                                                    
Co-Chair  Meyer disclosed  a potential  conflict of  interest                                                                   
stating he  works for  Conoco-Philips during the  legislative                                                                   
interim;  he   asked  to   be  excused  from   participating.                                                                   
Representative Joule  OBJECTED.  Co-Chair  Chenault commented                                                                   
that Co-Chair Meyer  would be required to participate  in the                                                                   
TOM  IRWIN, COMMISSIONER,  DEPARTMENT  OF NATURAL  RESOURCES,                                                                   
noted the Administration is diligently  working on the Alaska                                                                   
Gas Inducement  Act (AGIA), to  move Alaska to  move forward.                                                                   
He voiced full support, stating  that the purpose of the plan                                                                   
takes a business  approach.  The fair open  process gears the                                                                   
proposal request, trading Alaska's  gas as a business to move                                                                   
the gasoline forward.                                                                                                           
Commissioner  Irwin   addressed  gas  volumes   belonging  to                                                                   
Alaskans.   There  are significant  volumes, over  thirty-six                                                                   
trillion cubic  feet of gas,  which has been  identified when                                                                   
looking for oil.  Those are certifiable  reserves that can be                                                                   
Commissioner  Irwin directed his  comments to the  producer's                                                                   
intent  to  take  care  of their  business;  of  course,  the                                                                   
Administration's  work is  to protect  the State's  business.                                                                   
The newest estimate  of identified gas is 262  trillion cubic                                                                   
feet, which is  a significant quantity.  Alaska  is rich with                                                                   
gas potential.                                                                                                                  
Commissioner Irwin mentioned gas  hydrates, identified by the                                                                   
U.S.G.S.  as over  32,000 trillion  cubic feet.   At  present                                                                   
time, the  recovery technology is  not available &  may never                                                                   
happen; however,  there is  significant time  to work  on the                                                                   
gas  hydrates.    The  bottom  line  is  that  Alaska  has  a                                                                   
significant future in gas reserves.                                                                                             
1:52:44 PM                                                                                                                    
Commissioner Irwin  addressed previous negotiation  language,                                                                   
claiming  that   if  the  State  only  negotiates   with  the                                                                   
producers,  no one  wins.  The  previous deal  gave away  all                                                                   
judicial  rights of  the  State.   If that  language  passed,                                                                   
during the next 45-years, our  upcoming generation would have                                                                   
no judicial  right on the  slope.  The  State entered  into a                                                                   
highly unbalanced  arbitration process.  The  State, in front                                                                   
of  a single  arbitrator, was  responsible  for showing  non-                                                                   
diligence,   through   surrendering   judicial   rights   and                                                                   
restricting the  ability to sue.   That bill  would eliminate                                                                   
the State's administrative  rights to manage leases.   It was                                                                   
not acceptable that  large quantities of money  could be lost                                                                   
through  various  definitions  of  the contract.    AGIA  was                                                                   
created through determining how  "business" is handled in the                                                                   
world.   Proposals are common.   At this time, Alaska  is not                                                                   
trusted by any of the companies.                                                                                                
Commissioner  Irwin  recommended   providing  inducements  to                                                                   
certain  areas   and  protecting   the  State's   future  gas                                                                   
development.   The Administration has defined  "must have's",                                                                   
including  creating an  incentive program,  in the amount  of                                                                   
$500 million,  not a  gift.  He  noted the  intent to  make a                                                                   
fair bidding process  to help move the project  forward.  The                                                                   
State defines the variables.                                                                                                    
2:00:08 PM                                                                                                                    
Commissioner  Irwin  stated  it  is critical  for  Alaska  to                                                                   
maintain pipeline  expansion and fair tariffs.   If companies                                                                   
do not have a  certainty to be able to monetize  their value,                                                                   
they  do  not explore.    He  reiterated  the need  for  fair                                                                   
tariffs  and an "expandable"  gas  line.  If  the line  moves                                                                   
through  Canada, two-thirds  of the rates  could be  "rolled-                                                                   
in".   The Administration maintains  the fields so  that they                                                                   
are affordable and  expandable.  There are no  other options.                                                                   
He emphasized  that there are  no risks to the  State through                                                                   
the AGIA  plan.  There  would be  clear definition  through a                                                                   
fair and  open process.   When the plan  is chosen,  then the                                                                   
Department will come back to the Legislature.                                                                                   
2:02:59 PM                                                                                                                    
PAT GALVIN, COMMISSIONER, DEPARTMENT  OF REVENUE, distributed                                                                   
a handout:   "The Palin-Parnell Administration  presents AGIA                                                                   
- the Alaska Gasline Inducement Act".  (Copy on File).                                                                          
Slide 2 highlights  AGIA designed to be a  commercial vehicle                                                                   
to create a  competitive playing field, providing  a pipeline                                                                   
on Alaska's terms through a transparent inducement process.                                                                     
2:04:59 PM                                                                                                                    
Commissioner Galvin noted Slide 3:                                                                                              
          ·    AGIA    uses    competitive    bidding,    not                                                                   
          ·    Successful bidding process requires AGIA's                                                                       
               inducement and without inducements, there                                                                        
               would be no 3 party bidders.  Without                                                                            
               bidders, the State has no ability to get a                                                                       
               pipeline on its own terms.                                                                                       
Representative  Joule  mentioned   the  competitive  process,                                                                   
recalling that  TransCanada had submitted an  application but                                                                   
since has  backed away.  He  asked which companies  remain in                                                                   
the  bid process.   Commissioner  Galvin  explained that  the                                                                   
bill attempts  to strike a  necessary balance to  provide the                                                                   
State  with  a  credible  opportunity   for  the  3   parties                                                                   
entering  the process.   The identified  parties within  that                                                                   
group are:                                                                                                                      
1.   Ambridge                                                                                                                   
2.   TransCanada                                                                                                                
3.   Mid American                                                                                                               
Commission  Galvin   pointed  out   that  the  message   from                                                                   
TransCanada  has  been  "warm"  and have  concerns  with  the                                                                   
portion  of  AGIA that  requires  the  State to  mandate  the                                                                   
applicant  to commit to  obtain a  Federal Energy  Regulatory                                                                   
Commission  (FERC)  certificate even  if  the  season is  not                                                                   
successful.  Mid American has  indicated they are comfortable                                                                   
with  the  current bill.    AGIA  will only  succeed  through                                                                   
maintaining competition.                                                                                                        
Commissioner   Irwin  interjected   that   no  producer   had                                                                   
specifically   indicated   they    would   not   participate.                                                                   
TransCanada has already invested  $200 million dollars in the                                                                   
process.  All  the companies are interested  in the reserves,                                                                   
but want to make  sure it is a fair process.   There are many                                                                   
other companies  closely watching what  Alaska is doing.   He                                                                   
reiterated the value of a fair process.                                                                                         
Representative  Gara  asked about  other  all-Alaskan  lines.                                                                   
Commissioner  Galvin  recognizes   that  the  Port  Authority                                                                   
presents a  unique case and do  have a viable  project, which                                                                   
could come  forward as a  proposal.  Criteria  and evaluation                                                                   
of all projects will compare them.                                                                                              
2:15:10 PM                                                                                                                    
Representative  Joule noted his  concern about which  options                                                                   
were  best for  Alaska.   He asked  if  a single  application                                                                   
would be  fair.  Commissioner  Galvin replied the  State does                                                                   
not know;  it should be  determined through an  evaluation of                                                                   
each proposal.   If  an application  meets all the  criteria,                                                                   
the bill proposes the commissioners  make that determination.                                                                   
Any proposal  is based  on expectation.   Commissioner  Irwin                                                                   
added that to  date, there have been two  confirmations made.                                                                   
Once a competitive  process is started, he  anticipated other                                                                   
producers coming on line.                                                                                                       
2:18:42 PM                                                                                                                    
Commissioner Galvin pointed out  the inducements indicated on                                                                   
Slide 4:                                                                                                                        
          ·    Midstream inducement  of $500 million dollars,                                                                   
               reducing  the licensee's  project  development                                                                   
               risks,  especially  the  independent  pipeline                                                                   
               licensee; and                                                                                                    
          ·    Upstream  tax and royalty inducements  coupled                                                                   
               with  the licensed  midstream project  to make                                                                   
               the  license more  valuable, encouraging  open                                                                   
               season  participation.   It  ensures that  the                                                                   
               State would stick with its licensed partner.                                                                     
          ·    The   requirement   to   obtain   a   pipeline                                                                   
               certificate reduces  the overall project risks                                                                   
               & improves the State's strategic position.                                                                       
2:27:30 PM                                                                                                                    
Commissioner Galvin said Slide  5 shows a proposed Project on                                                                   
State terms:                                                                                                                    
          ·    By creating a more  competitive playing field,                                                                   
               the State can specify some "must haves".                                                                         
          ·    Such factors focus  on the State's future such                                                                   
               as  creating a  pipeline quickly,  competitive                                                                   
               and  vibrant oil  and gas  industry, jobs  and                                                                   
               careers  not only from the pipeline,  but also                                                                   
               from a competitive  oil patch, bringing gas to                                                                   
Representative Thomas  inquired about the job  portion of the                                                                   
negotiated  project labor negotiation.   Commissioner  Galvin                                                                   
explained  that it  is the  intent of  the Administration  to                                                                   
provide  only a "broad"  overview  at this  meeting.  At  the                                                                   
meeting scheduled  for 4/28/07,  the Department  will provide                                                                   
an  analysis of  each  section,  reiterating  the intent  for                                                                   
Alaskan hire.                                                                                                                   
2:30:11 PM                                                                                                                    
Commissioner  Galvin  noted  Slide 6  indicates  the  State's                                                                   
"must haves" obtained through  the pipeline tariff and access                                                                   
terms that ensure a competitive oil and gas industry:                                                                           
          ·    Competitive  oil and  gas industry flowers  if                                                                   
               pipeline   ownership   provides  no   upstream                                                                   
               competitive advantage;                                                                                           
          ·    Jobs   and  careers  for  Alaskans   would  be                                                                   
               maximized  by ensuring a competitive  upstream                                                                   
               industry; and                                                                                                    
          ·    Cheap gas for Alaskans  will be enjoyed if the                                                                   
               pipeline expands regularly.                                                                                      
2:30:58 PM                                                                                                                    
Commissioner  Galvin explained  that  Slide  7 illustrates  a                                                                   
State of Alaska terms project.                                                                                                  
          ·    A pipeline more quickly                                                                                          
          ·    The required minimum of 70/30 debt/equity                                                                        
               ratio, ensuring reasonable base tariffs                                                                          
          ·    Expansion requirements ensuring the gas found                                                                    
               by any party could access the pipeline                                                                           
          ·    Rolled-in rate requirements guaranteeing that                                                                    
               all  parties have  the  economic incentive  to                                                                   
               explore for the  gas.  The competition for oil                                                                   
               and  gas and  all of Alaska's  gas could  move                                                                   
               into that pipeline.                                                                                              
2:35:46 PM                                                                                                                    
KURTIS GIBSON,  ACTING DEPUTY  DIRECTOR, DIVISION OF  OIL AND                                                                   
GAS, DEPARTMENT OF NATURAL RESOURCES,  explained that Slide 8                                                                   
represents  the costs  of delays  on the  project and/or  the                                                                   
benefit  resulting from  the  acceleration  of getting  under                                                                   
way.    With prices  at  the  $7 dollar  range,  the  project                                                                   
acceleration  represents nearly five  times what  the State's                                                                   
capital  contribution  is.   Delays  are  costly.   The  AGIA                                                                   
process establishes  a competitive  process for developing  a                                                                   
framework for the State.  The  slide indicates a $500 million                                                                   
dollar capital contribution value.                                                                                              
2:37:45 PM                                                                                                                    
Mr. Gibson continued,  Slide 9 represents the  tariff & State                                                                   
revenue  effects of  a debt-equity  structure, referenced  in                                                                   
the FERC rate-making.   The slide does not  indicate anything                                                                   
related to  the capital structure of  the project nor    does                                                                   
the bill.  It would protect the  State's low tariff interests                                                                   
ensuring  that no  less  than  a 70/30  split  would be  used                                                                   
instead  of  the  mentioned split  of  50/50,  including  the                                                                   
associated  tariff benefit of  41 cents.   The State  revenue                                                                   
benefits would total approximately $2.5 billion dollars.                                                                        
2:39:32 PM                                                                                                                    
Mr. Gibson  addressed the  expansion provisions indicated  on                                                                   
Slide  10.    He  pointed  out  the  difference  between  the                                                                   
likelihood and  interest of expanding a pipeline,  hinging on                                                                   
whether  the  owner  is  an  integrated   energy  company  or                                                                   
independent  pipeline company.   Integrated energy  companies                                                                   
will  not commit  capital to  a  project with  roughly a  14%                                                                   
projected rate  of return.   An independent pipeline  company                                                                   
is interested  in projects  with regulated  and low-risk  and                                                                   
low-rates of return  in the neighborhood of 12%-14%.   In the                                                                   
event  that  an  explorer  wanted  to  get  the  gas  to  the                                                                   
pipeline, the  expansion provisions  not included  and delays                                                                   
could result, ultimately becoming a strong deterrent.                                                                           
Mr. Gibson highlighted  Slide 11, illustrating  the expansion                                                                   
provisions  addressing the  cost of delays  to the  explorer,                                                                   
outlining  net present  value  (NPV).   He acknowledged  that                                                                   
expansion  provisions   exist  and  that   a  non-independent                                                                   
pipeline company  could act as  the pipeline operator,  which                                                                   
could result in significant delays to the explorers.                                                                            
2:42:18 PM                                                                                                                    
Representative  Gara asked  for more  information on  the net                                                                   
present  value (NPV)  in relationship  to time/valued  money,                                                                   
questioning if it were the same  for the State as it would be                                                                   
for  a  private  investor.    Mr.  Gibson  advised  that  the                                                                   
discount  rates apply  to private  enterprise  as opposed  to                                                                   
those used  by the government.   The figures used  indicate a                                                                   
5% State discount rate in terms of delayed project costs.                                                                       
Representative  Gara questioned what  had been factored  into                                                                   
the State's  rate of return.   Commissioner Galvin  responded                                                                   
that the nature  of the question is determined by  when it is                                                                   
spent.   He  suggested  that a  5%  rate or  discount  return                                                                   
factor is an  appropriate cost approximation  for opportunity                                                                   
lost.   The  State  recognizes different  opportunities  when                                                                   
creating projected  revenue streams.  He maintained  that the                                                                   
State  is better  off  having  access to  the  money now  for                                                                   
investment  purposes.   He acknowledged  that 5%  is a  lower                                                                   
rate than most  businesses want to assume.   Mr. Gibson added                                                                   
that there is a portion of the  royalty revenue collected and                                                                   
placed  into the  Permanent  Fund  Division included  in  the                                                                   
General Fund.                                                                                                                   
2:46:43 PM                                                                                                                    
Representative  Kelly observed  the value  of a present  cost                                                                   
calculation, pointing out the  volatility of the oil industry                                                                   
and  the explosive  price fluctuations.    Mr. Gibson  agreed                                                                   
that price could be one of the most volatile factors.                                                                           
Mr.  Gibson  spoke  to  Slide 14,  the  rolled  in  expansion                                                                   
provision  options.   He mentioned  that the  cost-of-delays,                                                                   
pointing out  that all shipper  prices could come  down under                                                                   
the FERC expansion.  The transportation  rate would be driven                                                                   
up  due to  increases  in  fuel rates.    There  would be  an                                                                   
incrementally  calculated  transportation  rate.   Under  the                                                                   
lower  48 FERC  regulations, there  is  a looping  expansion,                                                                   
which could drive the price up.                                                                                                 
2:50:54 PM                                                                                                                    
Mr.  Gibson  reviewed  Slide  12,  which  compares  the  AGIA                                                                   
expansion  rate policy to  the normal  lower 48 FERC  policy.                                                                   
He  thought  the  AGIA mechanism  would  look  different  for                                                                   
explorers under that,  rolling in all the expansion  costs up                                                                   
to 115% of the  shipper's tariff rate.  The  difference could                                                                   
be a 15% up-lift of the original transportation costs.                                                                          
2:52:57 PM                                                                                                                    
Mr. Gibson continued, Slide 13  indicates scenarios on how an                                                                   
explorer should  view the program depending if  the expansion                                                                   
rate  treatment was  rolled-in  or incremental.     Rolled-in                                                                   
rates would be  spread evenly to all shippers  and within the                                                                   
incremental, all  the costs of  the expansion, and  fall upon                                                                   
the expansion shipper.                                                                                                          
2:55:14 PM                                                                                                                    
Commissioner Galvin  pointed out that Slide  14 indicates the                                                                   
transparency  issues of the  public making decision  process.                                                                   
The process  will be competitive,  not negotiated;  bids will                                                                   
be submitted, commented upon and  then evaluated.  A "winner"                                                                   
should be chosen  by the commissioners; their  decision would                                                                   
be reviewed by the Legislature.                                                                                                 
Commissioner  Galvin hoped  the risks  and inducements  would                                                                   
also  be transparent,  providing contrast  to the  previously                                                                   
proposed contract.  There would  be a cap on the contribution                                                                   
with a clearly defined role for the State.                                                                                      
Commissioner   Galvin  summarized   that   the  State   needs                                                                   
competition to  encourage participants to reach  for the best                                                                   
and  most competitive  proposal.   Without  competition,  the                                                                   
State  is placed  into a  leveraged position  of waiting  for                                                                   
producers  to  move  the  project  ahead.    AGIA  creates  a                                                                   
competitive  arena while  establishing commercial  incentives                                                                   
for all interested parties.                                                                                                     
2:59:29 PM                                                                                                                    
Representative    Hawker   requested   further    information                                                                   
regarding   the  $10   million   dollars   of  the   previous                                                                   
Administration.  Commissioner Galvin agreed.                                                                                    
3:00:17 PM                                                                                                                    
In   response  to   a   question  by   Representative   Gara,                                                                   
Commissioner  Galvin  revisited   Slide  13,  explaining  how                                                                   
rolled-in rates  encourage exploration.   He reiterated  that                                                                   
the Administration is "excited"  by the proposed AGIA plan; a                                                                   
sectional analysis  will be presented  at the  next scheduled                                                                   
hearing on the bill.                                                                                                            
3:01:45 PM                                                                                                                    
Representative Kelly requested  information regarding how the                                                                   
Administration  intends to  execute the  plan.   Commissioner                                                                   
Galvin agreed to provide that data.                                                                                             
HB 177 was HELD in Committee for further consideration.                                                                         
The meeting was adjourned at 3:02 P.M.                                                                                          

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