Legislature(2013 - 2014)HOUSE FINANCE 519

04/08/2014 01:30 PM FINANCE


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01:34:38 PM Start
01:35:21 PM Presentation: Legislative Legal Services: Review of Mou
02:54:34 PM 379
03:22:56 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Legislative Legal Services: Don Bullock - Review TELECONFERENCED
of MOU
+ HB 379 OIL & GAS PROPERTY TAX TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 8, 2014                                                                                            
                         1:34 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:34:38 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Austerman called the House Finance Committee                                                                           
meeting to order at 1:34 p.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Alan Austerman, Co-Chair                                                                                         
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Mark Neuman, Vice-Chair                                                                                          
Representative Mia Costello                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Lindsey Holmes                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Donald Bullock,  Legislative Counsel, Division of  Legal and                                                                    
Research     Services,    Legislative     Affairs    Agency;                                                                    
Representative Benjamin Nageak,  Sponsor; Jacob Adams, Chief                                                                    
Administrative Officer, North  Slope Borough, Barrow; Angela                                                                    
Rodell, Commissioner, Department of Revenue.                                                                                    
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 379    OIL & GAS PROPERTY TAX                                                                                                
                                                                                                                                
          HB 379 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
PRESENTATION: LEGISLATIVE LEGAL SERVICES: REVIEW OF MOU                                                                         
                                                                                                                                
                                                                                                                                
^PRESENTATION: LEGISLATIVE LEGAL SERVICES: REVIEW OF MOU                                                                      
                                                                                                                                
1:35:21 PM                                                                                                                    
                                                                                                                                
DONALD BULLOCK,  LEGISLATIVE COUNSEL, DIVISION OF  LEGAL AND                                                                    
RESEARCH SERVICES, LEGISLATIVE  AFFAIRS AGENCY, relayed that                                                                    
he and  Emily Nauman were  the primary drafters for  oil and                                                                    
gas  issues. He  stated that  the legislature  would not  be                                                                    
voting  on the  Heads of  Agreement (HOA)  or Memorandum  of                                                                    
Understanding (MOU). He detailed  that the legislature would                                                                    
vote on  legislation that  would empower  the administration                                                                    
to enter  into certain agreements. He  provided a PowerPoint                                                                    
presentation titled "Memorandum  of Understanding MOU" (copy                                                                    
on file). He addressed slide 2 titled "Parties":                                                                                
                                                                                                                                
     State of Alaska, through the commissioners of natural                                                                      
     resources and revenue                                                                                                      
                                                                                                                                
     TransCanada Alaska Company, LLC and                                                                                        
     Foothills Pipe Lines, Ltd. (Jointly as Licensee)                                                                           
                                                                                                                                
     TransCanada Alaska Development Inc.                                                                                        
                                                                                                                                
Mr. Bullock  elaborated that TransCanada and  Foothills were                                                                    
the  licensees  under  the  Alaska  Gasline  Inducement  Act                                                                    
(AGIA). TransCanada  Alaska Development  Incorporated (TADI)                                                                    
was  expected to  have a  limited partner  interest for  the                                                                    
portion  of the  pipeline  TransCanada  would initially  own                                                                    
under the MOU.  He relayed that ExxonMobil  had been working                                                                    
with  TransCanada on  the Alaska  Pipeline Project,  but was                                                                    
not  a part  of the  MOU. Additionally,  the Alaska  Gasline                                                                    
Development Corporation  (AGDC) did  not participate  in the                                                                    
MOU.                                                                                                                            
                                                                                                                                
1:37:23 PM                                                                                                                    
                                                                                                                                
Mr. Bullock turned to "MOU Issues" on slide 3:                                                                                  
                                                                                                                                
     Should the state have an ownership interest?                                                                               
                                                                                                                                
     How should the state transition from AGIA?                                                                                 
                                                                                                                                
    Should the state share its interest with a partner?                                                                         
                                                                                                                                
Mr.   Bullock  expounded   on  slide   3.  He   referred  to                                                                    
discussions about how  the state would finance  a project if                                                                    
it chose  to have no  partners. He  relayed that one  of the                                                                    
purposes  of the  MOU was  to enter  into an  agreement with                                                                    
TransCanada;  TransCanada  would  own part  of  the  project                                                                    
initially, which  would represent the state's  percentage of                                                                    
gas on the  North Slope that would be produced  and what the                                                                    
state would receive  in the form of  royalty-in-kind and the                                                                    
TransAlaska Pipeline System (TAPS).  He noted that there had                                                                    
been  a  major   focus  on  the  open   season  during  AGIA                                                                    
discussions; it  had been expected that  producers and other                                                                    
shippers would  commit to use  the project. Part of  the MOU                                                                    
required the state to enter  into the type of agreement that                                                                    
would have  been acquired  in a  successful open  season. He                                                                    
detailed that the  state would pay the  cost of transporting                                                                    
its gas for the term of the contract (20 to 25 years).                                                                          
                                                                                                                                
Mr. Bullock  relayed that  the MOU  was a  cost and  was not                                                                    
like  TAPS.  He used  a  grocery  store  as an  example  and                                                                    
explained  that  a  delivery  truck would  be  part  of  the                                                                    
store's cost as opposed to  an independent profit center. He                                                                    
communicated  that terms  of identifying  tariffs, operating                                                                    
as a  common carrier,  allowing an  owner to  recover costs,                                                                    
and return  on investment  were all  TransCanada's business.                                                                    
He addressed  what the connection  would be between  the MOU                                                                    
and AGIA  if TransCanada was  the same  party in the  MOU as                                                                    
the  licensee under  AGIA. He  expressed  intent to  discuss                                                                    
several ways  to get out  of AGIA.  He noted that  under the                                                                    
MOU  TransCanada  would   initially  own  approximately  one                                                                    
quarter   of  the   project;  the   state  would   have  the                                                                    
opportunity  to buy  into TransCanada's  limited partnership                                                                    
interest.  He detailed  that the  limited partnership  would                                                                    
continue to  own one quarter  of the project subject  to the                                                                    
limitation  that TransCanada  could  not sell  more than  40                                                                    
percent of its interest and  TransCanada could not have less                                                                    
than  14 to  15 percent  of  the overall  project after  the                                                                    
state acquired its equity interest.  He detailed that if the                                                                    
state's interest was about 25  percent (with royalty and tax                                                                    
combined)  and  TransCanada  had  14  percent,  the  state's                                                                    
interest in  the overall project  would be  approximately 10                                                                    
to 11 percent.                                                                                                                  
                                                                                                                                
1:41:22 PM                                                                                                                    
                                                                                                                                
Mr. Bullock turned to slide 5 titled "State Ownership":                                                                         
                                                                                                                                
     How does the state acquire an equity interest in the                                                                       
     midstream part of the Alaska LNG Project?                                                                                  
                                                                                                                                
     How will the state finance an investment in a project?                                                                     
                                                                                                                                
Mr. Bullock elaborated on slide  5 and relayed that AGDC had                                                                    
the power to issue revenue  bonds. He detailed that AGDC was                                                                    
a  separate  corporation that  was  intended  to shield  the                                                                    
state from some liability.  When bonding a project, decision                                                                    
makers  determined whether  a project  was a  good idea  and                                                                    
bond purchasers  determined whether it  was a good  deal. He                                                                    
added  that  the interest  rate  would  change depending  on                                                                    
risk. He continued  that the interest in the  MOU related to                                                                    
the  part of  the project  north of  the liquid  natural gas                                                                    
(LNG)  facility. Under  the  agreement  terms the  midstream                                                                    
project started  at the transmission lines  from Prudhoe Bay                                                                    
and Point Thomson. He elaborated  the process of sending gas                                                                    
through the pipeline.                                                                                                           
                                                                                                                                
1:43:40 PM                                                                                                                    
                                                                                                                                
Mr. Bullock moved to slide 6 titled "State Ownership":                                                                          
                                                                                                                                
     Under the  MOU, an affiliate of  TransCanada would hold                                                                    
     that  portion of  the midstream  project  equal to  the                                                                    
     percentage of North Slope gas  the state may receive as                                                                    
     royalty in kind and production tax on gas paid as gas.                                                                     
                                                                                                                                
     May be 20 - 25% of the total project depending on                                                                          
     amount of royalty gas in kind and production tax paid                                                                      
     as gas.                                                                                                                    
                                                                                                                                
Mr. Bullock  highlighted the importance  of the  issue given                                                                    
that it addressed the percentage  of production on the North                                                                    
Slope.  The  bill  included  a  new  section  pertaining  to                                                                    
production  tax that  allowed  producers  or lessees  paying                                                                    
royalty-in-kind the choice  to pay tax with  gas rather than                                                                    
dollars.  He  advised that  the  legislature  would need  to                                                                    
consider whether a company committing  to pay with gas would                                                                    
be  around  in  the  future. He  asked  the  legislature  to                                                                    
consider what  would happen if  a producer decided  to leave                                                                    
the  state or  sell  its interest  to  another producer.  He                                                                    
noted  that the  state was  considering locking  interest in                                                                    
for the initial  term of the contract, which could  be 20 to                                                                    
25 years; the  MOU referred to the initial  contract term as                                                                    
25 years, but also included  language stating the term would                                                                    
be nothing below  20 years. He reiterated  the importance of                                                                    
the  issue.  He communicated  that  the  state was  not  the                                                                    
driving force behind  the percentage of gas  the state would                                                                    
receive. He likened  the producers to train  engines and the                                                                    
state to  the caboose;  when the  producers decided  to move                                                                    
the state would  move, but until then there  was no movement                                                                    
on production.                                                                                                                  
                                                                                                                                
1:46:00 PM                                                                                                                    
                                                                                                                                
Mr.   Bullock   directed   attention   to   two   agreements                                                                    
anticipated under the MOU (slide 7):                                                                                            
                                                                                                                                
     Precedent  agreement  &  Firm  Transportation  Services                                                                    
     Agreement  commits the  State to  ship its  gas in  the                                                                    
     part of the midstream  project owned by TransCanada for                                                                    
     20 - 25 years.                                                                                                             
                                                                                                                                
     State may obtain an option  to buy 40% of TransCanada's                                                                    
     interest.                                                                                                                  
                                                                                                                                
Mr. Bullock  expounded on slide  7. The  precedent agreement                                                                    
was   the   first   step  to   moving   towards   the   firm                                                                    
transportation services agreement.  He detailed that Exhibit                                                                    
C  under  the MOU  specified  that  the firm  transportation                                                                    
services  agreement   was  expected   to  come   before  the                                                                    
legislature for  approval. TransCanada would be  the initial                                                                    
owner of the pipeline and the  state would have an option to                                                                    
buy in.  He relayed that  TransCanada was a  transporter (it                                                                    
did  not  own  or  market  gas) and  was  not  in  the  same                                                                    
alignment as producers shipping gas. He looked at slide 9:                                                                      
                                                                                                                                
     AGDC   may  participate   in   the   LNG  plant   while                                                                    
     TransCanada   initially  holds   an  interest   in  the                                                                    
     midstream portion that the state  may have an option to                                                                    
     acquire.                                                                                                                   
                                                                                                                                
Mr.  Bullock  shared that  AGIA  had  discussed a  competing                                                                    
natural  gas  pipeline,  but  the  relevant  piece  for  the                                                                    
current discussion was the allowable  500 million cubic feet                                                                    
per day.  He continued that at  one point the amount  was an                                                                    
estimate of  the gas  needed to fill  in-state demands  at a                                                                    
reasonable cost.  He asked the legislature  to consider what                                                                    
gas would be  taken out of the state's share  of royalty and                                                                    
tax for in-state delivery because  the quantity would not be                                                                    
available  to be  liquefied  or exported.  He  pointed to  a                                                                    
comparison of revenue  the state would receive  for the sale                                                                    
of gas  in-state versus the sale  of gas to Asia.  He shared                                                                    
that the issue had come up  in discussions on Cook Inlet and                                                                    
the regulation  of Enstar; legislation  had been  passed due                                                                    
to Enstar's  argument that Cook  Inlet gas was subject  to a                                                                    
broader market  and more cost.  He advised the  committee to                                                                    
keep in  mind the amount  of the  state's gas that  would be                                                                    
using the  facility when it  considered the part of  the LNG                                                                    
project it  should participate in.  He communicated  that if                                                                    
the  state had  greater  ownership in  the  LNG facility  or                                                                    
pipeline  it  was  the  part  of the  project  that  may  be                                                                    
flexible  to  new  producers  and  new  forms  of  gas.  The                                                                    
producers'  part  of the  pipeline  would  be dedicated.  He                                                                    
compared it  to the transmission  lines on the  North Slope;                                                                    
it was what it took to  get the producers' gas liquefied and                                                                    
shipped.  The   state's  offtakes  also  pertained   to  the                                                                    
regulation.  The discussion  had  been  that the  producers'                                                                    
part of the  project would be just a cost;  the in-state gas                                                                    
would be  subject to different regulation.  He was uncertain                                                                    
how the issue would be handled.                                                                                                 
                                                                                                                                
1:51:20 PM                                                                                                                    
                                                                                                                                
Mr. Bullock  directed attention to  slides 10 and  11 titled                                                                    
"Enabling  Legislation." He  discussed that  there had  been                                                                    
"must  haves" in  AS  43.91.30 for  AGIA  that talked  about                                                                    
expectations for  applications. He referred to  the enabling                                                                    
legislation  as  a  jack-in-the-box  where  the  legislature                                                                    
would decide on what it wanted,  the size, and what could go                                                                    
into it, but  it could not know what would  come out when it                                                                    
came to contracts.                                                                                                              
                                                                                                                                
Mr. Bullock  moved to slide  12. He believed it  was unclear                                                                    
which components of the  enabling legislation were critical.                                                                    
He  surmised  that  legislation  would  be  enabling  if  it                                                                    
empowered the administration to act  on items in the MOU and                                                                    
HOA; if the  legislature decided that the MOU  should not go                                                                    
into effect, any changes would  raise the issue of who would                                                                    
participate in state ownership. He turned to slide 14:                                                                          
                                                                                                                                
     Is there a situation in which enabling legislation may                                                                     
     allow the Heads of Agreement to go forward, but not                                                                        
     the MOU?                                                                                                                   
                                                                                                                                
     Ask!                                                                                                                       
                                                                                                                                
Mr.  Bullock  elaborated  that TransCanada,  AGDC,  and  the                                                                    
producers were all  parties to the HOA. He  remarked that it                                                                    
would   be   helpful   to    receive   guidance   from   the                                                                    
administration. He  added that the cost  would be protected.                                                                    
He discussed  the range of  acceptable tax rates in  the HOA                                                                    
and   advised  the   legislature  to   consider  whether   a                                                                    
comfortable range was built in.                                                                                                 
                                                                                                                                
1:53:54 PM                                                                                                                    
                                                                                                                                
Mr. Bullock turned to slide 16 titled "AGIA":                                                                                   
                                                                                                                                
     Transition out of AGIA                                                                                                     
                                                                                                                                
          To Alaska LNG Project?                                                                                                
                                                                                                                                
          Is the AGIA Project to Alberta uneconomic under                                                                       
          AS 43.90.240?                                                                                                         
                                                                                                                                
Mr. Bullock referred to a  memorandum from Legislative Legal                                                                    
Services  [addressed to  Representative  Mike Hawker,  dated                                                                    
February 15, 2013] (copy on  file). The memorandum addressed                                                                    
some  of the  risk  associated with  ending  AGIA. He  asked                                                                    
whether  the project  was the  Alberta project  or something                                                                    
else.  Additionally,   he  queried  whether  there   was  an                                                                    
acceptable  modification in  the amendments  to the  project                                                                    
entered   into   by   the   administration   that   required                                                                    
TransCanada to look at the LNG option.                                                                                          
                                                                                                                                
Mr. Bullock turned to slide 17:                                                                                                 
                                                                                                                                
     MOU addresses "uneconomic" exit from AGIA in the                                                                           
     recitals.                                                                                                                  
                                                                                                                                
     What if enabling legislation fails to pass?                                                                                
                                                                                                                                
          What if the MOU is not implemented?                                                                                   
                                                                                                                                
Mr.  Bullock elaborated  on  slide 17  and  relayed that  if                                                                    
enabling  legislation passed  the commissioners  would begin                                                                    
the  process  of  determining the  project  under  AGIA  was                                                                    
uneconomic (a subsequent  section discussed that TransCanada                                                                    
would agree to  go along with the change).  He referred back                                                                    
to questions listed on slide 17.  He relayed that if the MOU                                                                    
was not  implemented the  state would be  back where  it was                                                                    
currently with AGIA.                                                                                                            
                                                                                                                                
1:55:48 PM                                                                                                                    
                                                                                                                                
Mr.  Bullock looked  at slide  18 and  discussed the  treble                                                                    
damages provision  under AS 43.90.440.  He listed  the three                                                                    
ways  to get  out  of  AGIA: 1)  the  licensee violated  the                                                                    
agreement terms;  2) the project  was deemed  uneconomic (if                                                                    
the  license   was  abandoned  the  state   would  have  the                                                                    
opportunity   to   pay   the  balance   of   the   qualified                                                                    
expenditures to  receive data compiled by  the expenses); or                                                                    
3)  via  the  treble  damages provision,  which  related  to                                                                    
whether  the state  was providing  similar inducements  to a                                                                    
competing pipeline.  He surmised  that due  to TransCanada's                                                                    
involvement in the project the  treble damages may not be an                                                                    
issue.  He observed  that  AS 43.90.440  did  not include  a                                                                    
waiver of any action that  TransCanada may have. He noted it                                                                    
would be a more pertinent  issue if the enabling legislation                                                                    
changed or the MOU did  not allow TransCanada to continue as                                                                    
an involved party.                                                                                                              
                                                                                                                                
Mr. Bullock turned to slide 20 titled "Why TransCanada?":                                                                       
                                                                                                                                
     Is the MOU the best deal?                                                                                                  
                                                                                                                                
     Should the state solicit proposals from others?                                                                            
                                                                                                                                
Mr. Bullock addressed the questions  on slide 20 and relayed                                                                    
that there  were not  many gas  pipeline companies  that had                                                                    
dealt  with the  northern environment;  TransCanada had  the                                                                    
experience. He did not  know about TransCanada's involvement                                                                    
with  gas treatment  plants; it  had been  a question  under                                                                    
AGIA whether TransCanada  would do the work  or hire another                                                                    
party. The company  Enbridge had a pipeline  from Alberta to                                                                    
Saskatchewan. He  advised that  the legislature may  want to                                                                    
consider what would happen in  the event of other proposals.                                                                    
He  noted that  the  state  did not  really  know about  the                                                                    
producers'  relationship  with   Canada.  He  remarked  that                                                                    
TransCanada  was  a  good  company  and  surmised  that  the                                                                    
relationship was  probably positive;  TransCanada's business                                                                    
was building  and operating pipelines.  He observed  that if                                                                    
three producers  had 75 percent  of the gas they  would have                                                                    
significant input on how the  project was built and would be                                                                    
concerned with cost. He advised  that it would be helpful to                                                                    
know   where  the   producers  stood.   He  continued   that                                                                    
TransCanada  was also  involved and  was looking  forward to                                                                    
participating in a competing project;  he referred to a 460-                                                                    
mile  pipeline  that  would   originate  in  Prince  Rupert,                                                                    
British Columbia.  He believed Alaska had  an advantage over                                                                    
the British Columbia project. He  noted that the natural gas                                                                    
and the  fields were  not developed in  northeastern British                                                                    
Columbia; the state had the  ability to produce and ship gas                                                                    
much sooner subject to limitations  on taking off the amount                                                                    
of gas.                                                                                                                         
                                                                                                                                
1:59:36 PM                                                                                                                    
                                                                                                                                
Mr.  Bullock turned  to  slide 24  titled  "Things We  Don't                                                                    
Know":                                                                                                                          
                                                                                                                                
     Things we don't know:                                                                                                      
                                                                                                                                
          What happened during the first open season in                                                                         
          2010? Why did it fail?                                                                                                
                                                                                                                                
          Why did it take from July 2010 to May 2012 to                                                                         
          conclude that the first open season failed?                                                                           
                                                                                                                                
Mr.  Bullock detailed  that TransCanada  had an  open season                                                                    
from  April through  July  2010. He  pointed  to the  second                                                                    
question  on  slide  24  and   noted  that  TransCanada  and                                                                    
ExxonMobil  had reported  to the  Federal Energy  Regulatory                                                                    
Commission  that  the  first  open  season  had  failed.  He                                                                    
advised  the committee  to think  of ways  to stay  informed                                                                    
about the process. He discussed  that the legislature always                                                                    
had the power to appropriate;  therefore it could always ask                                                                    
the hard questions (i.e. what  the state was getting for the                                                                    
money  and  what  the  status   was).  He  referred  to  the                                                                    
Legislative  Legal Services  memorandum  that addressed  the                                                                    
AGIA project  (copy on  file); the  memo specified  that the                                                                    
AGIA  project  would  go  down  the  highway  and  had  been                                                                    
considered in 2008. TransCanada  had been interested to know                                                                    
whether  anyone was  interested in  shipping gas  to an  LNG                                                                    
facility.  He continued  that even  though the  AGIA project                                                                    
was   the  highway   project,  TransCanada   was  soliciting                                                                    
proposals and  shipment commitments that would  have gone to                                                                    
tidewater. Therefore, the state  did not know what happened.                                                                    
He  believed  it  would  be   beneficial  to  know  why  the                                                                    
particular LNG  project did not move  forward if TransCanada                                                                    
had been discussing LNG. Since  that time the production tax                                                                    
structure  had changed,  which increased  the attractiveness                                                                    
of doing business on the oil fields.                                                                                            
                                                                                                                                
2:02:17 PM                                                                                                                    
                                                                                                                                
Mr. Bullock  remarked that the administration  had talked to                                                                    
the committee  about the  MOU. He thought  it would  be more                                                                    
advantageous to suggest things for  the legislature to think                                                                    
about in order to develop the  bounds to move forward on the                                                                    
project. The  administration had stated that  it would offer                                                                    
the  contracts  to  the   legislature  for  approval  before                                                                    
finalizing them.  He noted that former  Governor Sarah Palin                                                                    
had  relayed that  the  license  for AGIA  would  go to  the                                                                    
legislature for  approval. He remarked that  the approval of                                                                    
the  license was  controversial; the  effective date  of the                                                                    
legislation  had failed,  which meant  the contract  had not                                                                    
been  issued until  December 2008.  Under the  separation of                                                                    
powers there was a risk  that the administration could enter                                                                    
into   the  contract   without  legislative   approval;  the                                                                    
legislature   would   continue   to  have   the   power   to                                                                    
appropriate.  He expounded  that  generally the  legislature                                                                    
designed the bounds under which  the administration may act;                                                                    
an  executive  function  was different  than  a  legislative                                                                    
function. He hoped  it would not happen, but  it depended on                                                                    
how contentious the  issue was. He advised  the committee to                                                                    
be aware  of the  separation of  powers issue.  He commented                                                                    
that  whether  the  governor could  exercise  his  executive                                                                    
power without  legislative involvement had recently  come up                                                                    
related to some of the governor's appointments.                                                                                 
                                                                                                                                
2:04:53 PM                                                                                                                    
                                                                                                                                
Representative  Gara thanked  Mr. Bullock  for his  work. He                                                                    
had concerns  about the issue  but wanted  to find a  way to                                                                    
vote for it. He wondered  whether it would be constitutional                                                                    
if the governor decided to  lock in tax rates or royalty-in-                                                                    
kind provisions for  20 or 30 years with  the oil companies.                                                                    
He stated that  in the past oil companies  had wanted fiscal                                                                    
certainty  (i.e.   a  20-year   lock-in).  He   referred  to                                                                    
memorandums  written  by   Mr.  Bullock  addressing  whether                                                                    
preventing  a  future  legislature  or  voters  from  making                                                                    
changes was unconstitutional.                                                                                                   
                                                                                                                                
Mr. Bullock replied that Article  9, Section 1 of the Alaska                                                                    
Constitution stated that  the power of the tax  would not be                                                                    
surrendered  or  contracted  away.  He  relayed  that  under                                                                    
former  Governor  Frank   Murkowski's  initial  contracts  a                                                                    
dispute   had  occurred   about  whether   taxes  could   be                                                                    
solidified for  a given period  of time. He stated  that the                                                                    
words to  the constitution prevented setting  taxes in stone                                                                    
for a given  time period and included  a prohibition against                                                                    
dedicated  funds.  Additionally,  he pointed  to  unforeseen                                                                    
occurrences such  as earthquakes  or floods. He  shared that                                                                    
the provisions  were consistent  with language  that advised                                                                    
against  giving  away the  state's  power  to tax  and  from                                                                    
preventing  future legislatures  from  demanding for  needs.                                                                    
Along the same  lines there had been  discussions related to                                                                    
payment in lieu of taxes; it  also brought up whether it was                                                                    
constitutional  to set  aside the  state's power  to tax  in                                                                    
exchange  for contractual  payment. He  noted the  issue was                                                                    
similar to whether a city  council or borough assembly could                                                                    
bind future assemblies or councils from making tax changes.                                                                     
                                                                                                                                
Mr. Bullock  continued that the  legislature always  had the                                                                    
opportunity   to   pass   a   law   that   may   be   deemed                                                                    
unconstitutional;  it was  up to  the legislature  to decide                                                                    
whether  it  wanted to  take  the  risk.  He referred  to  a                                                                    
University of Alaska  lands case that was  struck down three                                                                    
years after  the law had  been implemented. In the  past the                                                                    
legislature had  decided to not  risk the possibility  a law                                                                    
may be unconstitutional. He spoke  to the current version of                                                                    
SB 138 that had been amended  in the Senate and in the House                                                                    
Resources Committee.  A provision  in the  bill added  a new                                                                    
section to  the production  tax AS 43.55.014,  which allowed                                                                    
producers  who  agreed  to pay  royalty-in-kind  or  royalty                                                                    
adjustments to  have the option  of paying  their production                                                                    
tax in  the form  of gas.  He did not  believe the  idea was                                                                    
bad, but he  was uncertain about how the tax  in the form of                                                                    
gas related  to the tax percentage.  Additionally, the state                                                                    
would be committed to using  a fraction of the pipeline that                                                                    
would represent the amount of  gas the state was expected to                                                                    
receive. He remarked  that royalty was a  sure-thing and had                                                                    
flexibility that  tax did  not; there  was authority  in the                                                                    
gas  leasing  statute  AS 38.05.180  defining  that  certain                                                                    
fields  needed a  royalty  reduction in  order  to make  the                                                                    
fields feasible.                                                                                                                
                                                                                                                                
2:11:44 PM                                                                                                                    
                                                                                                                                
Mr.  Bullock  continued  to  address  Representative  Gara's                                                                    
question. He  addressed what would occur  if the legislature                                                                    
increased the  tax; if tax was  paid in the form  of gas the                                                                    
state would  need to  look at expanding  its portion  of the                                                                    
pipeline.  Similarly, if  the state  legislature decided  to                                                                    
lower the tax rate it would  be short on gas. He believed it                                                                    
was  an important  consideration. He  noted that  an earlier                                                                    
version  of  the  bill  included  language  specifying  that                                                                    
paying  the tax  in the  form of  gas was  an irreconcilable                                                                    
election.  Whether  someone  could  sell out  had  not  been                                                                    
discussed. He  did not believe  it was clear  whether future                                                                    
owners or  producers would honor the  agreement. He stressed                                                                    
that the  issue was a big  deal because it would  impact the                                                                    
extent the state would commit to a project.                                                                                     
                                                                                                                                
Representative  Gara  referred to  what  he  believed was  a                                                                    
tilted  relationship with  TransCanada. He  spoke about  the                                                                    
idea of  a tax  rate lock in  for 20 to  30 years.  He noted                                                                    
that the  legislature was  split on  the issue.  He believed                                                                    
the legislature  would be  playing with  constitutional fire                                                                    
if it locked  the state in. He was  concerned about spending                                                                    
millions of  dollars while risking  that the locked  in rate                                                                    
may be  deemed unconstitutional and that  producers may walk                                                                    
away. He  wondered about including a  provision stating that                                                                    
in   the  event   that  parts   of  the   law  were   deemed                                                                    
unconstitutional  it did  not give  producers  the right  to                                                                    
walk away from the project.                                                                                                     
                                                                                                                                
2:15:06 PM                                                                                                                    
                                                                                                                                
Mr.  Bullock replied  that all  of the  agreements would  be                                                                    
between the producers and initially  TransCanada. Due to the                                                                    
MOU  the  state  was  not  at the  project  table.  The  MOU                                                                    
included   a  provision   specifying   that   some  of   the                                                                    
negotiations TransCanada  engaged in would  be confidential.                                                                    
He stated that contracts had  risks and the state could only                                                                    
cover  itself  as  much  as  possible.  He  noted  that  the                                                                    
project's primary  driver was  the market  for gas  and what                                                                    
sellers  could expect  to receive.  He communicated  that it                                                                    
did not  matter how much  the project  cost if there  was no                                                                    
market; if  there was  a market the  question became  how to                                                                    
get the  product to  market at the  lowest cost.  He relayed                                                                    
that TransCanada had  brought some of its  projects in under                                                                    
budget,  but contracts  were inherently  risky. He  believed                                                                    
binding  producers  to a  contract  would  be difficult  and                                                                    
would result in litigation.                                                                                                     
                                                                                                                                
Representative  Wilson pointed  to  the current  partnership                                                                    
with TransCanada. She wondered  whether the state would need                                                                    
to go through  a process to terminate the  partnership if it                                                                    
chose to do so.                                                                                                                 
                                                                                                                                
Mr.  Bullock  answered  that TransCanada  was  the  licensee                                                                    
under AGIA  and there  were ways to  statutorily get  out of                                                                    
AGIA. He detailed  that the MOU specified that  if the state                                                                    
signed  the  option to  purchase  part  of the  project  and                                                                    
secured  firm transportation  agreements, TransCanada  would                                                                    
agree   that  the   Alberta  project   was  uneconomic.   He                                                                    
elaborated  that   if  the   legislation  did   not  satisfy                                                                    
TransCanada  the uneconomic  issue  would  persist and  AGIA                                                                    
would   remain.   Currently   under   the   agreement   with                                                                    
TransCanada  the state  was reimbursing  accrued costs  that                                                                    
had been expended since December 31, 2013.                                                                                      
                                                                                                                                
Representative Wilson  wondered if it  was possible to  do a                                                                    
cost comparison  on what it would  cost the state if  it had                                                                    
to prove  using TransCanada  was uneconomical  versus moving                                                                    
forward with the agreement under  discussion. She pointed to                                                                    
potential court  cases that would  occur if the  state chose                                                                    
not  to continue  a partnership  with  TransCanada. She  was                                                                    
wondering if the state had an  opportunity to get out of the                                                                    
contract  with TransCanada  without significant  court costs                                                                    
and other.                                                                                                                      
                                                                                                                                
2:19:04 PM                                                                                                                    
                                                                                                                                
Mr. Bullock responded  that there may be a  way to determine                                                                    
the  different costs.  He referred  to language  in the  MOU                                                                    
stating that  the commissioners would  move forward  to show                                                                    
that the project  was uneconomic because there  was not room                                                                    
for  two  pipelines. He  referenced  the  AGIA provision  AS                                                                    
43.90.440  that  discussed  competing pipelines  versus  the                                                                    
abandonment  provision AS  43.90.240  that was  based on  no                                                                    
money at the wellhead  (transportation costs were too high).                                                                    
He questioned whether the project  was already uneconomic if                                                                    
it was the  Alberta project. He stated that  if the argument                                                                    
was that the  state had drawn back from  the allegation that                                                                    
the Alberta  project was the  only option, there would  be a                                                                    
dispute about  whether modifications had turned  the project                                                                    
into something  else. He agreed that  if litigation occurred                                                                    
it could  "go on." He addressed  what it would take  for the                                                                    
state to  enter the  project on its  own. He  discussed that                                                                    
the state  would pay TransCanada  to operate its  portion of                                                                    
the project under the agreement;  if the state chose to move                                                                    
forward alone it would be  responsible for bonding costs and                                                                    
taking  on its  own  risk.  He observed  that  there was  no                                                                    
simple solution to determine the best course of action.                                                                         
                                                                                                                                
Representative Guttenberg  pointed to Mr.  Bullock's caboose                                                                    
and  engine analogy.  He wondered  how the  state guaranteed                                                                    
production or  delivery of gas  when the state did  not have                                                                    
control  of  production. He  wondered  if  the cost  of  the                                                                    
state's ability to market gas  was devalued. He asked if the                                                                    
contracts considered the situation.                                                                                             
                                                                                                                                
Mr.  Bullock  answered  that   purchasers  would  take  into                                                                    
consideration how reliable the  gas supply was. He continued                                                                    
that if the seller did not  have the power to ensure supply,                                                                    
it may result in reduced  cost. Additionally, if there was a                                                                    
slowdown in production  the state would be  competing in the                                                                    
same market with  three of the best energy  companies in the                                                                    
world; the  state would have  one pot to draw  from, whereas                                                                    
the other  entities could probably find  another LNG source.                                                                    
He thought  it was logical  that the state's price  may have                                                                    
to reflect some of the risk, but he could not quantify it.                                                                      
                                                                                                                                
Representative  Guttenberg noted  that  the producers  would                                                                    
own 75  percent of  the project  and that  TransCanada would                                                                    
build and  operate it. He  wondered if there  were scenarios                                                                    
built  in   that  would  allow  the   producers  to  decline                                                                    
participation.                                                                                                                  
                                                                                                                                
Mr.  Bullock replied  that  there had  been  talk about  the                                                                    
advantage  of  having  TransCanada  as  a  skilled  pipeline                                                                    
builder  and operator,  but the  state was  not included  in                                                                    
discussions  related  to who  would  build.  He stated  that                                                                    
under the  MOU the decision  would be between  the producers                                                                    
and TransCanada.  He noted that  the producers  had northern                                                                    
experience (albeit  not with a  project as large as  the one                                                                    
proposed), but  they may  have another  builder in  mind. He                                                                    
believed  the producers  would discuss  the option  of using                                                                    
TransCanada  as a  builder. He  opined that  producers would                                                                    
approach the project  with a goal of keeping  costs down. He                                                                    
compared the project  to TAPS, which was  a regulated common                                                                    
carrier  owned by  producers  (owners  received profit).  In                                                                    
1986 when  wellhead prices had  been low the state  had been                                                                    
concerned about  continued production.  He noted that  if an                                                                    
entity owned  the production  and received  a return  on the                                                                    
pipeline  and  retail outlets  it  could  afford to  take  a                                                                    
financial hit somewhere  along the way. He stated  that if a                                                                    
pipeline was  not an independent profit  center costs should                                                                    
be minimized to receive the maximum revenue from the gas.                                                                       
                                                                                                                                
2:25:30 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  observed that producers  had done                                                                    
well under  TAPS when they  could keep their tariffs  up and                                                                    
the  wellhead  price  down.  He   remarked  that  the  state                                                                    
received  less  money  at the  wellhead  but  producers  had                                                                    
recouped their charges by costing back to themselves.                                                                           
                                                                                                                                
Mr. Bullock  replied that  it was  a business.  He expounded                                                                    
that when tariffs  had been higher wellhead  prices had been                                                                    
low,  but the  municipalities taxing  the pipeline  property                                                                    
had   been   in   a  better   position;   there   had   been                                                                    
dissatisfaction with  the TAPS  tariff settlement  that kept                                                                    
tariffs  down, which  devalued the  pipeline. The  state was                                                                    
now looking  at increasing tariffs  partly due to  the value                                                                    
change to the pipeline and to lower throughput.                                                                                 
                                                                                                                                
Vice-Chair Neuman wondered if  TransCanada would continue to                                                                    
collect money from  the state at a  90 percent reimbursement                                                                    
(until  the  passage  of  legislation)  if  AGIA  was  found                                                                    
uneconomic under the abandonment clause.                                                                                        
                                                                                                                                
Mr.  Bullock   replied  that  AGIA   was  still   alive.  He                                                                    
elaborated  that  in  the current  post-first  season  phase                                                                    
costs  that  were  qualified expenditures  under  AGIA  were                                                                    
reimbursable at  the 90 percent  rate. He  communicated that                                                                    
AGIA would  end if  the MOU went  into effect.  He explained                                                                    
that the  liability to reimburse  TransCanada would  enter a                                                                    
different phase, which  would refer to certain  costs in the                                                                    
MOU. He detailed  that if the state  terminated the contract                                                                    
it  would be  liable to  pay different  amounts of  money to                                                                    
TransCanada depending  on when the contract  was terminated.                                                                    
He  noted that  although the  reimbursement rate  under AGIA                                                                    
was 90  percent, the  costs were  more easily  identified by                                                                    
what  they  related to.  The  MOU  included a  provision  to                                                                    
provide a  credit for reimbursement paid  after December 31,                                                                    
2013. The agreement and  the administration both anticipated                                                                    
that AGIA would  end in the first half of  the current year.                                                                    
He noted  that Legislative  Legal Services had  become aware                                                                    
of  the  administration's  intent  when  the  Department  of                                                                    
Natural Resources' (DNR) budget  did not include funding for                                                                    
the pipeline  office that worked  with the AGIA  project. He                                                                    
reiterated that the expectation that  AGIA would end on June                                                                    
30, 2014 would change if  enabling legislation did not reach                                                                    
expectations  or if  the state  took  a different  ownership                                                                    
approach.                                                                                                                       
                                                                                                                                
2:29:44 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Neuman wondered  if  TransCanada could  encumber                                                                    
funds or enter into contracts  for work to be performed that                                                                    
went  beyond the  trigger event.  Mr. Bullock  answered that                                                                    
the legislature  had enacted AGIA  in a  reimbursement mode;                                                                    
reimbursing  costs that  were expended  protected the  state                                                                    
from  costs  that had  not  been  paid by  TransCanada.  The                                                                    
effort had  been to  avoid funding  the license  upfront. He                                                                    
shared  that  the  Department of  Revenue  had  published  a                                                                    
report in January related to AGIA.                                                                                              
                                                                                                                                
Vice-Chair    Neuman    referred   to    development    cost                                                                    
reimbursement under the  MOU. He noted that  if the contract                                                                    
was  terminated  for  reason other  than  the  execution  of                                                                    
transition  agreements,   the  state  would  be   liable  to                                                                    
reimburse  TransCanada  for  all   post  December  31,  2013                                                                    
development costs  (less the amount  equal to  the allowance                                                                    
for funds used during construction  at a rate of 7.1 percent                                                                    
and at  the AGIA reimbursement  rate). He asked  Mr. Bullock                                                                    
to elaborate.                                                                                                                   
                                                                                                                                
Mr.  Bullock  replied that  AGIA  was  still a  contract  to                                                                    
reimburse  qualified  expenditures,   which  would  continue                                                                    
until the license ended. He  detailed that the provision was                                                                    
included  in Exhibit  C  under the  section  related to  the                                                                    
termination  of  the  agreement   (page  8).  The  provision                                                                    
related  primarily  to  the   reimbursement  of  costs  that                                                                    
TransCanada would  have expended; it also  included a credit                                                                    
for  any  payments  that  had been  made  to  the  affiliate                                                                    
TransCanada Alaska (the licensee).                                                                                              
                                                                                                                                
2:32:43 PM                                                                                                                    
                                                                                                                                
Representative  Holmes expressed  concern  about exhibit  B.                                                                    
She pointed  to Section 3  of Exhibit B (equity  option term                                                                    
sheet)  where   TransCanada  had  the  right   to  make  all                                                                    
decisions on behalf of the  limited partnership with several                                                                    
exceptions. She  believed the language  provided TransCanada                                                                    
with  the  seat at  the  table  with  producers on  the  gas                                                                    
treatment  plant  and  pipeline decisions.  She  pointed  to                                                                    
discussions in  the legislature that  the state  appeared to                                                                    
bare 100 percent  of the financial risk, but had  no seat at                                                                    
the  table. She  thought the  idea made  no sense.  She read                                                                    
from   Section  8   that   "the   parties  acknowledge   the                                                                    
confidentiality  provisions   of  the  Alaska   LNG  project                                                                    
agreements  to which  the limited  partnership may  become a                                                                    
party,  may  prohibit  or  restrict  disclosure  of  project                                                                    
information  to the  state." She  summarized  that she  felt                                                                    
uncomfortable that  the state would  bare all  the financial                                                                    
risk, would  have no  say in  the project  negotiations, and                                                                    
may not have access to the information.                                                                                         
                                                                                                                                
Mr.  Bullock  answered  that   under  AGIA  TransCanada  was                                                                    
responsible for  10 percent  of the  qualified expenditures.                                                                    
He surmised that the company  was probably paying additional                                                                    
costs   because   there   were  limitations   on   qualified                                                                    
expenditures.  He remarked  that under  the MOU  it was  not                                                                    
clear  to him  what  costs the  state  would reimburse.  The                                                                    
state would pay the costs  plus the allowance for funds used                                                                    
during construction (7.1 percent).  He agreed that under the                                                                    
MOU  the  parties  developing the  project  were  the  three                                                                    
producers and  TransCanada and  that TransCanada  would ship                                                                    
the gas  received by the  state through the project  that it                                                                    
owned and  managed. At  some point if  the state  decided to                                                                    
buy into  the project it  would be liable for  the operating                                                                    
costs as  well. He  relayed that between  July 30,  2010 and                                                                    
May 2012 the  state had not been privy to  the status of the                                                                    
project, the success of the  open season, or conditions that                                                                    
had  prevented  the  open  season. The  MOU  did  include  a                                                                    
confidentiality  agreement that  may restrict  TransCanada's                                                                    
ability to share  information. He stated that  the MOU could                                                                    
be looked  at as  a draft.  He believed  it should  be taken                                                                    
into consideration  so the  state would  know as  costs were                                                                    
accrued  up  to  various   termination  points  whether  the                                                                    
project was viable.                                                                                                             
                                                                                                                                
2:37:31 PM                                                                                                                    
                                                                                                                                
Mr. Bullock returned to the  issue of reimbursement. The MOU                                                                    
specified seven ways  the MOU could be  terminated (page 7).                                                                    
Only  the execution  delivery of  all transition  agreements                                                                    
did not potentially  involve the state paying  money. He was                                                                    
not  attempting to  provide an  opinion on  the MOU,  but to                                                                    
provide questions the committee could think about.                                                                              
                                                                                                                                
Representative  Holmes   observed  that  the  MOU   was  not                                                                    
currently binding. Mr. Bullock  interjected that one part of                                                                    
the  MOU was  binding  pertaining to  development costs.  He                                                                    
explained that if  the MOU did not go into  effect page 7 of                                                                    
the memorandum addressed  what the state would  be liable if                                                                    
the MOU was  terminated for any other reason  other than the                                                                    
passage of enabling legislation.                                                                                                
                                                                                                                                
Representative   Holmes   noted   that  the   MOU   included                                                                    
references   that  if   enabling   legislation  passed   the                                                                    
commitment by the  state and TransCanada to  move forward to                                                                    
terminate AGIA as uneconomic was binding.                                                                                       
                                                                                                                                
Mr. Bullock replied  that the agreement did  not mention the                                                                    
termination of AGIA  due to a competing  pipeline, which was                                                                    
risky.  Additionally,  the  MOU  did  not  contain  language                                                                    
specifying that regardless of  the uneconomic provision that                                                                    
TransCanada  and the  administration mutually  agree to  end                                                                    
the  license.  He referred  to  a  discussion in  the  House                                                                    
Resources Committee  about what would happen  if TransCanada                                                                    
did not  agree. The commissioner  of DNR had  testified that                                                                    
the  state would  take advantage  of arbitration  provisions                                                                    
included  in the  uneconomic provision  and  that the  state                                                                    
would have a good chance.  He relayed that the commissioners                                                                    
and  TransCanada could  determine that  the Alberta  project                                                                    
was  uneconomic; however,  if it  went to  arbitration there                                                                    
would be more objective  standards the panel would consider.                                                                    
He elaborated  that the  panel would look  at what  it would                                                                    
cost to  get the gas to  market and whether there  was money                                                                    
to  be  made  in  selling  or  shipping  gas  or  purchasing                                                                    
affordable  gas. He  noted that  the in-state  project faced                                                                    
the same  issue where  delivery costs  were low  enough that                                                                    
purchasers were not paying more than they would for oil.                                                                        
                                                                                                                                
2:42:07 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze  recalled sitting through the  AGIA vote in                                                                    
August 2008.  He believed TransCanada had  bullied the state                                                                    
in the  past. He wondered how  to determine when and  if the                                                                    
state should discontinue moving forward with a partner.                                                                         
                                                                                                                                
Mr. Bullock  replied that it  came down to the  market (i.e.                                                                    
who  would  buy the  state's  gas  and  how much  they  were                                                                    
willing to pay). Once the  market had been established and a                                                                    
range of prices had been  determined the state could look at                                                                    
the project  itself to determine  whether it could  keep the                                                                    
cost of delivery down low enough  and make money on the gas.                                                                    
He noted  that the state  would only  earn money on  the gas                                                                    
(transportation would  be a cost  until the state  reached a                                                                    
point  where another  entity could  pay it  to transport  or                                                                    
liquefy  the gas).  Once a  market had  been identified  the                                                                    
producers  and  TransCanada  would  determine  how  to  move                                                                    
forward  to  protect the  project  from  cost increases.  He                                                                    
noted  that  both  the  producers  and  TransCanada  had  an                                                                    
interest in  keeping costs  low. The state  would only  be a                                                                    
shipper of gas,  which was why it had entered  into the firm                                                                    
transportation   services  agreement;   the   state  was   a                                                                    
customer, not a transporter.                                                                                                    
                                                                                                                                
Co-Chair Stoltze believed the  House Resources Committee had                                                                    
discussed  the issue  and appeared  to be  proceeding on  an                                                                    
option that included TransCanada. He  noted that it would be                                                                    
part  of the  House  Finance  Committee's responsibility  to                                                                    
discuss the issue.                                                                                                              
                                                                                                                                
Mr.  Bullock  believed  consultants  would  speak  with  the                                                                    
committee later  in the week  about options  for alternative                                                                    
financing and  its impact. He  relayed that the  state would                                                                    
take  on significant  liabilities  if it  took on  ownership                                                                    
upfront (in addition  to ensuring a market  existed to cover                                                                    
the state's  costs). There was  also the  consideration that                                                                    
the agreement with TransCanada was  possibly a good deal; it                                                                    
took on  some of the  state's risk and potentially  what the                                                                    
state paid above cost would be reasonable.                                                                                      
                                                                                                                                
Co-Chair Stoltze noted  that the issue needed  to be vetted.                                                                    
He  wondered if  the deal  was  a good  or bad.  He had  not                                                                    
received a straight answer from consultants.                                                                                    
                                                                                                                                
Mr.  Bullock  advised  the  legislature   not  to  vote  for                                                                    
something   it  did   not   understand.   He  compared   the                                                                    
legislature  to   a  jury   receiving  advice   from  expert                                                                    
witnesses who had the role  of providing information to make                                                                    
the decision  makers comfortable. He believed  the committee                                                                    
should consider what the state  would receive from ownership                                                                    
of the pipeline.                                                                                                                
                                                                                                                                
2:49:47 PM                                                                                                                    
                                                                                                                                
Co-Chair Austerman  asked Mr. Bullock for  confirmation that                                                                    
he would  be available to  discuss the topic in  the future.                                                                    
Mr. Bullock replied  in the affirmative. He  remarked on the                                                                    
importance of the  issue and noted that  the decisions would                                                                    
impact the future of Alaskans.                                                                                                  
                                                                                                                                
Co-Chair Austerman thanked Mr. Bullock for his service.                                                                         
                                                                                                                                
2:50:46 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:54:03 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
#379                                                                                                                            
HOUSE BILL NO. 379                                                                                                              
                                                                                                                                
     "An Act relating to the limitation on the value of                                                                         
     property taxable by a municipality; and providing for                                                                      
     an effective date."                                                                                                        
                                                                                                                                
2:54:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BENJAMIN NAGEAK, read from a prepared                                                                            
statement on HB 379:                                                                                                            
                                                                                                                                
     Thank you for  having me here today to  present HB 379,                                                                    
     "An  Act relating  to the  limitation on  the value  of                                                                    
     property taxable  by a municipality; and  providing for                                                                    
     an effective date."                                                                                                        
                                                                                                                                
     HB  379  seeks to  make  a  legislative change  to  the                                                                    
     formula  how a  municipality may  use oil  and gas  tax                                                                    
     revenue. This  is not a  bill to  raise taxes; it  is a                                                                    
     bill to  give municipalities  the flexibility  to raise                                                                    
     the cap  which they  can then  use for  their operating                                                                    
     budgets.                                                                                                                   
                                                                                                                                
     I have  a long history  with this issue,  having served                                                                    
     on  the North  Slope  Borough Assembly  and as  Borough                                                                    
     Mayor and  can go  on and  on about it  - which  as you                                                                    
     know I  am very happy to  do! But also here  today from                                                                    
     the North Slope  Borough is Mr. Jake  Adams, who served                                                                    
     on the  first North Slope  Borough Assembly and  as the                                                                    
     second mayor  of the Borough  and was here at  the very                                                                    
     beginning  of the  process that  got all  this started.                                                                    
     At the  committee's pleasure Mr. Adams  is available to                                                                    
     take  you  through a  little  of  the history  and  the                                                                    
     importance of this issue to the Borough.                                                                                   
                                                                                                                                
     Mr. Chairman I  also have two other  employees from the                                                                    
     North  Slope Borough,  John Bitney  and Rob  Elkins, to                                                                    
     answer technical  questions about  the formula  and how                                                                    
     that would work with this bill.                                                                                            
                                                                                                                                
JACOB  ADAMS,  CHIEF  ADMINISTRATIVE  OFFICER,  NORTH  SLOPE                                                                    
BOROUGH,  BARROW,  thanked  the committee  for  hearing  the                                                                    
bill. He shared that his work  with the borough had begun in                                                                    
1972. He provided prepared remarks:                                                                                             
                                                                                                                                
     It was a struggle for us  in the early days to form the                                                                    
     North Slope Borough.  We were sued by the  state and by                                                                    
     the  oil  companies.  They  said  the  Eskimos  weren't                                                                    
     capable of governing  themselves and managing finances.                                                                    
     When the oil  and gas property tax laws  were passed in                                                                    
     1973 the cap was written  into state law about how much                                                                    
     property  tax  revenue  could  be  used  for  municipal                                                                    
     operating  budget. That  was 40  years  ago. Today  the                                                                    
     North Slope Borough is my home  and it's the home of my                                                                    
     children and  grandchildren. It is a  success story due                                                                    
     to the wealth of resources  that are on the North Slope                                                                    
     Borough.  We've   built  up  our   infrastructure  with                                                                    
     schools,  roads,  airports,  water  and  sewer  system,                                                                    
     health clinics,  and others. We pay  for these services                                                                    
     that  are provided  by  the State  of  Alaska and  many                                                                    
     other  regions. We  basically pay  for  it while  other                                                                    
     areas depend  on the state  for financial  resources to                                                                    
     pay for those services.  For example, we provide rescue                                                                    
     services for  the entire  North Slope.  We also  have a                                                                    
     fish and  wildlife department that  cooperatively works                                                                    
     with the North Slope, the  State of Alaska, and federal                                                                    
     government.  We  have  built  up  these  services  with                                                                    
     property  tax revenues  allowed by  the state  law. The                                                                    
     state taxes on oil and  gas properties are at 20 mills.                                                                    
     The North Slope Borough  has always kept property taxes                                                                    
     lower  than the  State of  Alaska. We  take all  of the                                                                    
     revenues  available  to  us and  have  been  taxing  at                                                                    
     primarily  about 18.5  mills  over the  last 40  years;                                                                    
     there has  been only one  exception when we went  to 19                                                                    
     mills. That's the only time  we have deviated from 18.5                                                                    
     mills.                                                                                                                     
                                                                                                                                
     The bill before  you today is a request to  allow us to                                                                    
     raise  the cap  on the  amount of  revenue that  can be                                                                    
     used for  our operating budget.  We will not  raise the                                                                    
     property tax  mill rate; we  need that 18.5 mill  to be                                                                    
     there so  we try hard not  to raise our mill  levy much                                                                    
     beyond 18.5 mills (most  other municipalities depend on                                                                    
     bond rating by rating agencies).  We simply do not need                                                                    
     as much  revenue for debt  services these  days because                                                                    
     we pretty much built all  of the infrastructure that we                                                                    
     need  in  our  communities,   but  need  the  operating                                                                    
     revenues   to  keep   the  maintenance   up  on   these                                                                    
     infrastructures. Thank you for your time today.                                                                            
                                                                                                                                
3:01:07 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze asked the department to join the table.                                                                        
                                                                                                                                
ANGELA RODELL,  COMMISSIONER, DEPARTMENT OF  REVENUE, shared                                                                    
that the  department had worked closely  with Representative                                                                    
Nageak  to  craft a  solution  to  address the  North  Slope                                                                    
Borough's  need  to   acquire  additional  operating  budget                                                                    
funds, while  refraining from impacting the  state's revenue                                                                    
received from  state property  tax, along  with the  need to                                                                    
keep as neutral as possible.  She believed the bill achieved                                                                    
all  of  the  aforementioned  purposes. She  pointed  to  an                                                                    
indeterminate  fiscal note  from the  Department of  Revenue                                                                    
(DOR). The note included a  potential impact of $10 million.                                                                    
She noted that currently the  North Slope Borough had a rate                                                                    
of  18.5 mills,  which had  been in  place for  a number  of                                                                    
years. The borough  had always had the opportunity  to go to                                                                    
20 mills; if  it chose to go  to 20 mills the  impact to the                                                                    
state  would  be  approximately  $10 million.  She  did  not                                                                    
believe   the  borough   should   be   criticized  or   held                                                                    
accountable for keeping its property  taxes low and allowing                                                                    
the  state to  collect  some of  its share  of  oil and  gas                                                                    
property tax.                                                                                                                   
                                                                                                                                
3:03:46 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze wondered  if  DOR was  satisfied with  the                                                                    
current  legislation. Commissioner  Rodell replied  that the                                                                    
department  had spoken  with the  borough and  sponsor about                                                                    
adding  a  couple  of  timing pieces  to  clarify  when  the                                                                    
multiplier would  be calculated with the  assessed value and                                                                    
when  the state  would  be  noticed. The  goal  would be  to                                                                    
remove any  confusion about when valuations  were locked in.                                                                    
The language had been provided  to the sponsor's office as a                                                                    
potential amendment.                                                                                                            
                                                                                                                                
Co-Chair   Stoltze   asked   his  staff   to   provide   the                                                                    
department's amendment language to committee members.                                                                           
                                                                                                                                
Representative Wilson wondered how  how pipeline revenue was                                                                    
collected by  the North Slope Borough  compared to Fairbanks                                                                    
North  Star Borough.  Commissioner Rodell  replied that  the                                                                    
calculation on  the value  of oil and  gas property  tax was                                                                    
done  separately from  traditional residential  property tax                                                                    
valuations. The  calculation was converted into  a mill rate                                                                    
and  adjusted. She  did not  believe Fairbanks  was anywhere                                                                    
near its limits.  She detailed that because  Fairbanks had a                                                                    
low mill  rate the bill would  allow the borough to  use the                                                                    
higher  end  of  the  375   percent  oil  and  gas  property                                                                    
valuation in the calculation evaluation for the mill rate.                                                                      
                                                                                                                                
3:06:10 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  pointed  to  page 34  of  a  handout                                                                    
titled "Alaska  Taxable 2013" (copy  on file). She  asked if                                                                    
the Fairbanks  tax had  to go towards  debt service  and the                                                                    
operating budget.                                                                                                               
                                                                                                                                
Commissioner  Rodell   replied  that  the   calculation  was                                                                    
combined. She  explained that  the debt  service calculation                                                                    
was not capped and would  continue to be uncapped. There had                                                                    
been a cap  of 20 mills in practice on  the state's property                                                                    
tax  rate   because  the  local   property  tax   was  fully                                                                    
deductible   from  the   state   property   tax.  An   extra                                                                    
calculation was  required on the  valuation for oil  and gas                                                                    
property   in  addition   to  the   traditional  residential                                                                    
property  tax  to  compile an  overall  valuation  that  the                                                                    
operating  mill rate  was applied  to;  the calculation  was                                                                    
combined with the debt service  to determine an overall mill                                                                    
rate  (the figure  was typically  less than  20 mills).  She                                                                    
believed the current Fairbanks  rate was significantly below                                                                    
20 mills.                                                                                                                       
                                                                                                                                
Representative Wilson  wondered why  the state  mandated how                                                                    
communities used  the 12 mills  from the pipeline  (i.e. for                                                                    
debt  or operations).  She thought  communities should  have                                                                    
the ability  to choose  how to use  the funds.  She surmised                                                                    
that if residents were taxed  at 12 mills the pipeline could                                                                    
only be taxed  at 20 mills. She noted that  8 mills from the                                                                    
pipeline  tax  went  to  the   state.  She  understood  that                                                                    
initially  the structure  had been  a way  to encourage  the                                                                    
construction of  infrastructure in communities, but  she did                                                                    
not believe the calculations were needed any longer.                                                                            
                                                                                                                                
Commissioner Rodell  replied that  originally the  issue had                                                                    
been about fairness  on the state property tax and  a way to                                                                    
redistribute  oil and  gas  property  wealth throughout  the                                                                    
state to  communities that  may not  have the  same benefit.                                                                    
She  believed the  state was  indifferent about  whether the                                                                    
funds were  used for operating budgets  versus debt service.                                                                    
The  bill  addressed  reallocation  and  allowing  increased                                                                    
operation.  She relayed  that if  the percentage  was lifted                                                                    
all  together it  would create  a  substantial tax  increase                                                                    
because it  would triple the  valuation the  calculation was                                                                    
based   on;   that   tax  would   increase   the   cost   of                                                                    
transportation,   which   was   deductible  from   the   oil                                                                    
production tax. She  summarized that changes to  oil and gas                                                                    
property taxes had a direct cost to the state.                                                                                  
                                                                                                                                
Vice-Chair Neuman  wondered how the tiered  formula had been                                                                    
derived  and how  it would  impact other  municipalities and                                                                    
jurisdictions. Commissioner Rodell  answered that the tiered                                                                    
formula was an  effort to minimize the impact  on tax payers                                                                    
and the  state, while giving communities  the flexibility to                                                                    
determine  whether  they  wanted   property  tax  to  go  to                                                                    
operations or debt service. Additionally,  the goal had been                                                                    
to  ensure that  the  bill would  not  impact a  community's                                                                    
ability  to raise  or  lower their  mill  rate (whether  the                                                                    
community was  like Fairbanks  with a low  tax rate  or like                                                                    
Valdez with a tax rate at  20 mills). She concluded that the                                                                    
tiered  solution   had  been  the  most   balanced  and  had                                                                    
addressed concerns regarding oil and gas property tax.                                                                          
                                                                                                                                
3:11:45 PM                                                                                                                    
                                                                                                                                
Vice-Chair Neuman  asked if the department  proposed to work                                                                    
with  the  legislation  specifically  for  the  North  Slope                                                                    
Borough. Commissioner  Rodell replied  that the  North Slope                                                                    
Borough had  raised the concern.  The department  had worked                                                                    
with the borough to make the  bill as neutral as possible to                                                                    
limit the impact on the state's property tax collection.                                                                        
                                                                                                                                
Vice-Chair  Neuman  believed  the   response  to  his  prior                                                                    
question may have  been affirmative. He asked  how the issue                                                                    
would impact future gas pipelines  and taxation (whether the                                                                    
pipeline went  through the  North Slope,  Fairbanks, Mat-Su,                                                                    
or other).  He asked whether  the bill could reduce  the tax                                                                    
revenue to the state.                                                                                                           
                                                                                                                                
Commissioner  Rodell answered  that the  department was  not                                                                    
yet in  a position  to make any  recommendations on  oil and                                                                    
gas property  with respect  to the  Alaska LNG  project. She                                                                    
referred to the creation of  a municipal advisory group that                                                                    
allowed the  department to work with  communities from Kenai                                                                    
to  the North  Slope Borough  and communities  that may  not                                                                    
have the pipeline  but that were impacted by  a project like                                                                    
the gasline. After  the creation of an  advisory board there                                                                    
would  be discussion  about  property  tax implications  and                                                                    
impact payments.  She did not believe  the legislation would                                                                    
affect the discussion or prohibit  it from moving forward in                                                                    
any way.                                                                                                                        
                                                                                                                                
Vice-Chair Neuman surmised  that if there was  a natural gas                                                                    
pipeline running through the North  Slope Borough and others                                                                    
that  all communities  would expect  the same  gratitude. He                                                                    
believed it  would impact the state's  general fund revenue.                                                                    
He  remarked on  the expense  of a  pipeline sitting  on $45                                                                    
billion land.                                                                                                                   
                                                                                                                                
Commissioner  Rodell replied  that the  state would  have to                                                                    
work  with municipalities  on oil  and gas  property tax  in                                                                    
relation to AK LNG. For  example, law currently excluded LNG                                                                    
facilities  from  being  considered  taxable  property.  She                                                                    
believed  the state  would want  to  talk about  what a  $20                                                                    
billion  LNG  facility in  Nikiski  meant  for oil  and  gas                                                                    
property  tax;  it  was a  conversation  the  administration                                                                    
intended to  have with municipalities because  it would like                                                                    
to have  consensus with municipalities  on how  the property                                                                    
was taxed. There  were currently laws that would  need to be                                                                    
considered in light of the AK LNG project.                                                                                      
                                                                                                                                
Co-Chair  Stoltze  surmised  the gasline  proposal  must  be                                                                    
serious  because municipalities  had  broken their  previous                                                                    
silence on the issue.                                                                                                           
                                                                                                                                
3:16:37 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Neuman  asked about  the  effect  of the  fiscal                                                                    
note. He  asked for  verification that the  current analysis                                                                    
estimated a potential cost of $10 million per year.                                                                             
                                                                                                                                
Commissioner  Rodell  agreed  that  the cost  could  be  $10                                                                    
million per  year if the municipalities  all increased rates                                                                    
to  20 mills.  The department  did not  anticipate that  the                                                                    
communities would all implement the increase.                                                                                   
                                                                                                                                
Co-Chair  Stoltze  wondered  if the  department's  amendment                                                                    
would impact  the fiscal  note. Commissioner  Rodell replied                                                                    
in the negative.                                                                                                                
                                                                                                                                
Vice-Chair  Neuman asked  whether  the  North Slope  Borough                                                                    
currently received impact  assistance representing a certain                                                                    
percentage  of the  royalty paid  toward the  Permanent Fund                                                                    
Dividend. Mr.  Adams answered that  the North  Slope Borough                                                                    
and  communities within  the  National  Petroleum Reserve  -                                                                    
Alaska (NPRA)  received impact funds. He  estimated that the                                                                    
funds were about $4 million in the current year.                                                                                
                                                                                                                                
Representative Nageak  added that the state  distributed the                                                                    
funds to the communities.                                                                                                       
                                                                                                                                
Representative  Munoz addressed  the  North Slope  Borough's                                                                    
desire to allocate  a greater percentage of  its tax revenue                                                                    
to operations.  She wondered  whether the  legislation would                                                                    
provide sufficient  flexibility for  the borough to  pick up                                                                    
more debt if it chose.                                                                                                          
                                                                                                                                
Mr. Adams did  not believe the borough wanted  to pursue any                                                                    
more changes  in the way  it administered property  tax. The                                                                    
bill would  provide the borough with  the flexibility needed                                                                    
to ensure that municipality  operations were well taken care                                                                    
of.   He  remarked   that  the   community  had   sufficient                                                                    
infrastructure and  did not have  more need for  the selling                                                                    
of  general obligation  bonds. Maintenance  of the  existing                                                                    
facilities was what concerned the community.                                                                                    
                                                                                                                                
3:19:58 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze  wondered  if  members  had  questions  or                                                                    
concerns about  the proposed amendment from  the department.                                                                    
He  intended  to  bring  the  language  back  in  a  CS  the                                                                    
following day.                                                                                                                  
                                                                                                                                
Vice-Chair Neuman asked for a  more defined fiscal note from                                                                    
DOR.                                                                                                                            
                                                                                                                                
Co-Chair  Stoltze asked  the department  to work  with Vice-                                                                    
Chair  Neuman on  his  fiscal  note questions.  Commissioner                                                                    
Rodell replied in the affirmative.                                                                                              
                                                                                                                                
Co-Chair Stoltze CLOSED public testimony.                                                                                       
                                                                                                                                
HB  379  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Stoltze  discussed the  schedule for  the following                                                                    
day.                                                                                                                            
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
3:22:56 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:22 p.m.                                                                                          
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
13Taxable.pdf HFIN 4/8/2014 1:30:00 PM
HB 379
HB 379 Letter of Support.pdf HFIN 4/8/2014 1:30:00 PM
HB 379
HB 379 Sponsor Statement_.pdf HFIN 4/8/2014 1:30:00 PM
HB 379
Sectional Analysis.pdf HFIN 4/8/2014 1:30:00 PM
HB 379
AK LNG MOU.pdf HFIN 4/8/2014 1:30:00 PM
AKLNG
HB04 Legal Memo RE AGIA.pdf HFIN 4/8/2014 1:30:00 PM
HB 4
Summary of MOU.pdf HFIN 4/8/2014 1:30:00 PM
AKLMG
Authority To End AGIA.pdf HFIN 4/8/2014 1:30:00 PM
AKLNG
AGIA Timeline.pdf HFIN 4/8/2014 1:30:00 PM
AKLNG
MOU Review HFIN LegLegal.pdf HFIN 4/8/2014 1:30:00 PM
AKLNG
HB 379 DOR Suggested Language.pdf HFIN 4/8/2014 1:30:00 PM
HB 379
HB 379 WORKDRAFT CS FIN U version.pdf HFIN 4/8/2014 1:30:00 PM
HB 379