Legislature(2013 - 2014)BARNES 124

02/19/2014 03:15 PM LABOR & COMMERCE


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03:34:13 PM Start
03:34:26 PM Alaska Lng Project - Memorandum of Understanding - Heads of Agreement, Department of Natural Resources, and Department of Revenue
05:01:50 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
--Delayed to 3:30 p.m. Today--
Presentation:
+ Alaska LNG Project - Memorandum of Understanding TELECONFERENCED
- Heads of Agreement
- Dept. of Natural Resources
- Dept. of Revenue
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
          HOUSE LABOR AND COMMERCE STANDING COMMITTEE                                                                         
                       February 19, 2014                                                                                        
                           3:34 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Kurt Olson, Chair                                                                                                
Representative Lora Reinbold, Vice Chair                                                                                        
Representative Mike Chenault                                                                                                    
Representative Bob Herron                                                                                                       
Representative Charisse Millett                                                                                                 
Representative Dan Saddler                                                                                                      
Representative Andy Josephson                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
ALASKA LNG PROJECT - MEMORANDUM OF UNDERSTANDING - HEADS OF                                                                     
AGREEMENT~ DEPARTMENT OF NATURAL RESOURCES~ AND DEPARTMENT OF                                                                   
REVENUE                                                                                                                         
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
JOE BALASH, Commissioner                                                                                                        
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified and answered questions during the                                                              
during the Alaska LNG Project presentation.                                                                                     
                                                                                                                                
ANGELA RODELL, Commissioner                                                                                                     
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Testified and answered questions during the                                                              
during the Alaska LNG Project presentation.                                                                                     
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:34:13 PM                                                                                                                    
                                                                                                                                
CHAIR KURT  OLSON called  the House  Labor and  Commerce Standing                                                             
Committee  meeting  to  order  at   3:34  p.m.    Representatives                                                               
Reinbold, Saddler, Josephson, and Olson  were present at the call                                                               
to order.  Representatives Herron,  Chenault, and Millett arrived                                                               
as the meeting was in progress.                                                                                                 
                                                                                                                                
^Alaska  LNG Project  - Memorandum  of Understanding  - Heads  of                                                               
Agreement,  Department of  Natural Resources,  and Department  of                                                               
Revenue                                                                                                                         
  Alaska LNG Project - Memorandum of Understanding - Heads of                                                               
 Agreement, Department of Natural Resources, and Department of                                                              
                            Revenue                                                                                         
                                                                                                                              
3:34:26 PM                                                                                                                    
                                                                                                                                
CHAIR OLSON announced that the only  order of business would be a                                                               
presentation:   Alaska LNG Project -  Memorandum of Understanding                                                               
Heads  of Agreement,  Department  of Natural  Resources, and  the                                                               
Department of Revenue.                                                                                                          
                                                                                                                                
3:35:08 PM                                                                                                                    
                                                                                                                                
JOE BALASH, COMMISSIONER, Department  of Natural Resources (DNR),                                                               
provided an  overview of  three main  guidance documents  for the                                                               
Alaska LNG Project: the Heads  of Agreement (HOA), the Memorandum                                                               
of Understanding (MOU),  and [HB 277] [slide 2].   He stated that                                                               
the  bill contains  three parts:    participation, percentage  of                                                               
participation,  and  the  process for  developing  contracts  for                                                               
legislative approval.  In order  to understand the authorities in                                                               
the bill,  the department  refers back  to the  HOA and  the MOU,                                                               
which inform  the legislature and  the public.  In  January, both                                                               
he  and Commissioner  Rodell signed  the  HOA -  a document  that                                                               
describes the  "road map"  project sponsors  will follow  and the                                                               
contracts  that  will govern  the  project  as  a whole.    These                                                               
documents describe key principles  and understandings between and                                                               
among the  parties.  The  MOU describes  the manner in  which the                                                               
state   will   partner   with   TransCanada   PipeLines   Limited                                                               
(TransCanada)  on  the  midstream  elements of  the  project  and                                                               
includes some key  commercial terms that are in  the state's best                                                               
interest.  All actions on whether  to advance the LNG project are                                                               
dependent upon passage of enabling legislation, he said.                                                                        
                                                                                                                                
3:38:33 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH  discussed the  heads of agreement  (HOA) for                                                               
the Alaska  LNG project [slide 3].   The agreement was  signed by                                                               
the state  Department of Natural  Resources (DNR)  and Department                                                               
of  Revenue (DOR),  the  Alaska  Gasline Development  Corporation                                                               
(AGDC),  TransCanada   Alaska  Development   Inc.  (TransCanada),                                                               
ExxonMobil Alaska Production,  Inc., ConocoPhillips Alaska, Inc.,                                                               
and BP Exploration (Alaska) Inc.   The definition of the HOA from                                                               
www.investopedia.com read, as follows:                                                                                          
                                                                                                                                
     A  non-binding  document   outlining  the  main  issues                                                                    
     relevant to  a tentative partnership agreement.   Heads                                                                    
     of agreement represents  the first step on  the path to                                                                    
     a  full  legally  binding agreement  or  contract,  and                                                                    
     serves   as    a   guideline   for   the    roles   and                                                                    
     responsibilities   of  the   parties   involved  in   a                                                                    
     potential partnership before  any binding documents are                                                                    
     drawn up.                                                                                                                  
                                                                                                                                
3:40:13 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH described the  organization of the HOA [slide                                                               
4].  The HOA  is broken into 16 sections and 13  articles.  A set                                                               
of   recitals  outline   the  history   behind  this   agreement.                                                               
Additionally, an  index provides a series  of correspondence from                                                               
the producers  and the governor over  the past few years  and the                                                               
appendix describes the pro-expansion principles for the project.                                                                
                                                                                                                                
COMMISSIONER BALASH  turned to key  recitals [slide 5].   The key                                                               
recitals  language  [pages 2-4  of  the  HOA] recognizes  changed                                                               
circumstances  in  the  Lower  48 natural  gas  market  that  led                                                               
Governor  Parnell to  change direction  from  the Alaska  Gasline                                                               
Inducement Act  (AGIA) framework  and direct  focus on  an Alaska                                                               
LNG project  targeting Pacific markets.   Second, another recital                                                               
recognizes that funding  from the state under  AGIA has supported                                                               
key  activities related  to the  Alaska  LNG project.   Both  the                                                               
state  and TransCanada  believe it  is appropriate  to back  away                                                               
from  the AGIA  license  and  focus on  the  Alaska LNG  project.                                                               
Third,  the state  recognizes that  AGDC is  pursuing the  Alaska                                                               
Stand Alone Pipeline  ("ASAP") project.  Further,  the Alaska LNG                                                               
project and ASAP  intend to cooperate with  one another; however,                                                               
for  now  the  ASAP  remains  unfettered,  unobstructed,  and  on                                                               
schedule.   Fourth, the Alaska  LNG parties  wish to ramp  up the                                                               
Pre-FEED phase of  the Alaska LNG project, which  is estimated to                                                               
cost over $400 million using a phased approach.                                                                                 
                                                                                                                                
3:43:19 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH highlighted  a few key definitions.   He said                                                               
"enabling  legislation"  will provide  the  DNR  and DOR  certain                                                               
authority to  advance the project  by negotiating  contracts with                                                               
the parties.   The "MOU"  refers to a separate  agreement between                                                               
TransCanada, Commissioner  Rodell, and  himself.   The pre-front-                                                               
end engineering  and design  or "Pre-FEED"  phase is  the current                                                               
phase,  consisting  of  work  that   will  inform  the  front-end                                                               
engineering  and design  or "FEED"  phase.   He anticipated  this                                                               
process will  take two to three  years to complete and  will cost                                                               
upwards  of $1.5  to $2  billion.   This process  should generate                                                               
sufficient  information to  make  a complete  application at  the                                                               
Federal Energy Regulatory Commission  (FERC), noting the FERC has                                                               
exclusive  jurisdiction  on  liquefaction terminals  and  plants.                                                               
The "RIK"  means royalty  in kind  and "TAG"  means "Tax  as Gas"                                                               
which will be  the DOR's share of revenues of  the gas production                                                               
that is a key part of this project.                                                                                             
                                                                                                                                
3:44:47 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH reviewed  additional  key provisions  [slide                                                               
7].    Some  key  principles   deserved  their  own  article  for                                                               
recognition, he said.   All of the parties  recognize and respect                                                               
the  authority  of this  branch  of  government and  if  enabling                                                               
legislation is  passed the parties  would negotiate  contracts to                                                               
proceed  in  the  fashion  contemplated.    Article  3  describes                                                               
broadly some  of the  key benefits of  developing the  Alaska LNG                                                               
project, including providing gas  to Alaskans, jobs for Alaskans,                                                               
revenue   to  the   state,  and   opportunities  for   additional                                                               
development.   The  substantial  infrastructure contemplated  has                                                               
the  potential  to  facilitate   an  expansion  of  unprecedented                                                               
exploration activities  on the North  Slope.  Currently,  and for                                                               
the last  40 years,  a discovery that  included methane  had been                                                               
considered  insignificant.   When considering  the success  of an                                                               
exploration   well,  companies   evaluate  the   likelihood  that                                                               
producers  will find  oil  and gas;  and for  the  last 40  years                                                               
finding gas was not part of  the success case.  If infrastructure                                                               
is in place,  companies will now have an  opportunity to monetize                                                               
gas so  the opportunity for  success will increase and  give more                                                               
positive  decisions to  put "holes  in the  ground" on  the North                                                               
Slope.   For  all  the benefits  of 3-D  seismic  and the  latest                                                               
innovations,  it still  all comes  down to  whether you  put that                                                               
"hole  in  the  ground"  and  can  test  what  the  seismic  data                                                               
indicates.    He  said  that additional  drilling  will  lead  to                                                               
production.                                                                                                                     
                                                                                                                                
3:47:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON, relative  to the  second key  recital,                                                               
asked about  the treble damages.   He said  he is not  a contract                                                               
lawyer;  however, it  seems TransCanada  said it  will waive  the                                                               
[AGIA] statute  and any  right and entitlement.   He  offered his                                                               
belief that  this is  called a novation,  which takes  a previous                                                               
agreement and  places a  new agreement  on top of  it.   He asked                                                               
whether any argument  exists that if the  enabling statute passes                                                               
that there is no legal repercussion.                                                                                            
                                                                                                                                
COMMISSIONER BALASH answered that  the department has worked hard                                                               
not  to expose  the  state  to any  further  liability or  treble                                                               
damages under AS  43.90.  He offered to have  the DOL explain the                                                               
rationale to the  committee; however, he understood  that part of                                                               
the  reason  that  the  state  is  not  in  jeopardy  is  due  to                                                               
TransCanada's involvement  in the  project as  contemplated here.                                                               
The key element of the project  assurances clause in AGIA is that                                                               
the state would  not grant benefits or inducement  to a competing                                                               
project.  He asked how a  project could be a competing project if                                                               
the  licensee   is  a  part   of  it.    He   acknowledged  other                                                               
considerations come  into play.  One  thing in the MOU  itself is                                                               
that there is  a very clear delineation between  the parties, and                                                               
that  [the state  and  TransCanada] are  stepping  away from  the                                                               
[AGIA] license and leaving it behind.                                                                                           
                                                                                                                                
3:50:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  MILLETT  asked  for clarification  on  the  state                                                               
"stepping  away from  the AGIA  agreement" but  the state  is not                                                               
terminating it.                                                                                                                 
                                                                                                                                
COMMISSIONER BALASH answered no; that  the state is utilizing the                                                               
abandonment  provisions  in  the Alaska  Gasline  Inducement  Act                                                               
statutes.  He  advised that at this point the  state doesn't have                                                               
the  authorities granted  in the  enabling legislation  to become                                                               
part of the  Alaska LNG project.  He stated  that the state needs                                                               
the enabling legislation to pass  and the agreements contemplated                                                               
in  the HOA  to be  formed.   At that  point TransCanada  and the                                                               
state will "step out of the AGIA license and leave it behind."                                                                  
                                                                                                                                
REPRESENTATIVE MILLETT  asked whether  the AGIA license  would be                                                               
terminated at that point.                                                                                                       
                                                                                                                                
COMMISSIONER  BALASH  agreed  that  is correct  if  the  enabling                                                               
legislation passes.   He  explained that  the state  is currently                                                               
operating  under  a "project  plan  amendment  (PPA)- 1  B"  that                                                               
allows some  of the pre-planning  activities to occur  during the                                                               
first and second quarter, but  it is expected to terminate rather                                                               
than finalize the  last of the accounting  for the reimbursements                                                               
and "buttoning things up."                                                                                                      
                                                                                                                                
3:52:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE MILLETT  asked if this project  doesn't go through                                                               
but ASAP does occur, whether  that is considered a termination of                                                               
the AGIA agreement.                                                                                                             
                                                                                                                                
COMMISSIONER  BALASH answered  that  the MOU  lays  out what  the                                                               
state will  do if the  enabling legislation passes, but  not what                                                               
will happen if  it does not.   He said he could  not predict what                                                               
will happen in May.                                                                                                             
                                                                                                                                
REPRESENTATIVE MILLETT  speculated that  treble damages  could be                                                               
assessed if the enabling legislation doesn't pass.                                                                              
                                                                                                                                
COMMISSIONER BALASH  answered that  he can't  speak to  AGCD, but                                                               
the organization has  "gone out of their way to  ensure that they                                                               
haven't done anything to cross that  line and expose the state to                                                               
damage."  He did not see that happening.                                                                                        
                                                                                                                                
3:53:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SADDLER asked to put  on the record that this does                                                               
not represent a  mutual finding that AGIA  project is uneconomic,                                                               
but it  will represent  a mutual  abandonment conditioned  on the                                                               
legislature  passing  the enabling  legislation.    He asked  for                                                               
clarification on the process for the uneconomic finding.                                                                        
                                                                                                                                
COMMISSIONER  BALASH answered  that the  process laid  out in  AS                                                               
43.90.240 allows  either party  to deem  the proposed  Alaska LNG                                                               
project uneconomic,  followed by  the choice  to either  agree or                                                               
disagree,   which  would   take   the   matter  to   arbitration.                                                               
Essentially, the state  has agreed to the  mutual agreement path,                                                               
that  the  Alberta project  licensed  under  AGIA is  uneconomic.                                                               
Thus, the state and TransCanada have "agreed to agree."                                                                         
                                                                                                                                
REPRESENTATIVE  SADDLER  asked   whether  an  objective  standard                                                               
defines "uneconomic."                                                                                                           
                                                                                                                                
COMMISSIONER  BALASH   responded  that   the  statute   has  some                                                               
references to what would be  considered under arbitration, but it                                                               
is not specified  in detail; enough ambiguity  exists that either                                                               
party could argue over it.                                                                                                      
                                                                                                                                
3:55:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SADDLER reiterated  that the  term isn't  clearly                                                               
defined, but either party could make a claim.                                                                                   
                                                                                                                                
COMMISSIONER BALASH agreed that is  an option available under the                                                               
statute.                                                                                                                        
                                                                                                                                
CHAIR OLSON remarked  that the legislature tried  to clarify that                                                               
more specifically.                                                                                                              
                                                                                                                                
3:56:09 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH turned  to Article  4, to  the project  work                                                               
contemplated by  the parties  [slide 8].   He explained  that the                                                               
state  is  currently  entering   the  Pre-FEED  stage,  which  is                                                               
expected to last 18 to 24  months.  The information gathered will                                                               
include additional  environmental data, baseline  data, technical                                                               
information,  and  engineering  necessary   to  refine  the  cost                                                               
estimates to allow  all parties to evaluate  whether the proposed                                                               
Alaska LNG project is viable  or if sufficient possibility exists                                                               
to warrant  spending "the  really big dollars  in FEED."   During                                                               
this  phase, key  project services  agreements will  be developed                                                               
with TransCanada  and AGDC to  carry the state's interest  in the                                                               
liquefaction   plant  -   looking   downstream.     The   overall                                                               
contemplation is that  the state would have a portion  of the gas                                                               
and  a  proportionate part  of  the  infrastructure in  terms  of                                                               
production tax  and royalty  interests.  So,  as the  state looks                                                               
downstream to the GTP, pipeline,  liquefaction terminals, and the                                                               
project service  agreements with the  two entities, it  must also                                                               
look upstream to the producers.                                                                                                 
                                                                                                                                
COMMISSIONER BALASH  said the state will  seek offtake agreements                                                               
and   balancing  agreements   with   the   producers,  which   he                                                               
characterized as  being a big  part of  the overall package.   In                                                               
order  for  the  state  to   be  comfortable  in  taking  on  the                                                               
obligations  associated with  the  midstream service  agreements,                                                               
it's necessary  to know  that "we're  going to  have gas  and the                                                               
right amount  of gas."   That's where  the offtake  and balancing                                                               
agreements  come  in.    The  state will  need  to  look  to  the                                                               
companies that have the leases,  the working interest owners, and                                                               
producers to  obtain the  state's share  of the  gas.   Since the                                                               
state has  varying royalty  rates between  Prudhoe Bay  and Point                                                               
Thomson, it  doesn't know which field  will come on first  or the                                                               
amount, it  means that the state  could be a little  high or low.                                                               
In the  long run, the  state will  ultimately have a  75-25 split                                                               
between Prudhoe  Bay and  Point Thomson,  which is  determined by                                                               
the  commercial balancing  agreement.   Balancing agreements  are                                                               
routinely  used by  industry to  smooth  out some  of the  uneven                                                               
aspects of production that occur.                                                                                               
                                                                                                                                
3:59:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE MILLETT,  referring to the MOU,  said the language                                                               
seems to  indicate the state  becomes part of the  licensee, such                                                               
that the license  will be owned jointly by the  state, the users,                                                               
and TransCanada.                                                                                                                
                                                                                                                                
COMMISSIONER BALASH asked whether  she was referring to paragraph                                                               
8  in the  MOU, which  refers to  PPA-1 B  referenced previously,                                                               
which  is a  continuation until  the end  of first  quarter.   In                                                               
order for the licensee to operate  under the terms of the license                                                               
and be qualified  or entitled to reimbursement,  the parties must                                                               
have a work plan  and budget approved by the DNR  and DOR.  Thus,                                                               
PPA-1 B was  essentially a work plan and budget  that covers this                                                               
period of time.  In response  to a question, he answered that the                                                               
current licensees are TransCanada and Foothills Pipe Lines Ltd.                                                                 
                                                                                                                                
4:01:35 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH emphasized  key activity  4 is  significant.                                                               
The  state  and  each  of the  producer  parties  would  initiate                                                               
preliminary marketing  efforts for  LNG.   He stated  that during                                                               
Alaska's tortured  history when  considering North Slope  gas for                                                               
commercialization, a number of parties  sought to sell its LNG to                                                               
Pacific  markets; however,  the parties  didn't have  the gas  to                                                               
sell.   In  this case  all three  producers and  the state  would                                                               
initiate the marketing  efforts so critical to the  success of an                                                               
LNG project.   He characterized  the heart  of an LNG  project as                                                               
being the  sales and purchase  agreements (SPA), which  are long-                                                               
term agreements between  the producers and the  buyers, since the                                                               
financing  and  the  investment  rest on  it.    Those  long-term                                                               
contracts  signal that  this project  is "real"  and means  to do                                                               
business with the buyers of LNG in Asian markets.                                                                               
                                                                                                                                
4:03:33 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH  discussed the  state's participation  in the                                                               
proposed Alaska LNG project [slide 9].   He said, with respect to                                                               
the  state's  participation  in the  project,  the  findings  and                                                               
determinations  that he  and Commissioner  Rodell have  made show                                                               
the project  could yield  significant benefits.   The  state will                                                               
participate in  the infrastructure  as an  equity holder  of gas,                                                               
but will  enter into  partnerships with  TransCanada and  AGDC or                                                               
AGDC's  subsidiary   to  carry   the  state's  interest   in  the                                                               
infrastructure.  The DNR and  DOR aren't equipped to be corporate                                                               
players  or infrastructure  players in  the traditional  sense so                                                               
the state  must rely on an  agent such as AGDC  or TransCanada to                                                               
do so.   Finally, the state has agreed that  the state's interest                                                               
should be consistent with the state's  share of the gas, and when                                                               
combined with the state's royalty will  total 20 to 25 percent of                                                               
the gas.  He noted the  Governor's bill "pegs things" at a little                                                               
more than  22 percent.   In essence, so  long as the  figures are                                                               
not too low or too high the  state will be ready to move forward.                                                               
Certainly  the legislature  has a  number of  things it  needs to                                                               
consider,  including the  state's  debt capacity  and where  "the                                                               
number" puts the  state relative to the other parties.   In other                                                               
words, the party with the biggest  share in the gas will have the                                                               
biggest "say" in the project, he said.                                                                                          
                                                                                                                                
4:06:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON referring to  key provision 3 asked whether                                                               
going  to 22.5  or 22.7  percent would  be a  tipping point.   He                                                               
asked for further clarification.                                                                                                
                                                                                                                                
COMMISSIONER  BALASH responded  that as  the department  examined                                                               
the principles the fundamental goal  was an alignment of interest                                                               
between the state and the other  parties, as well as aligning the                                                               
state's  interest   in  the   gas  with   its  interest   in  the                                                               
infrastructure.     He  acknowledged  that  at   some  point  the                                                               
percentage is  too big or  is too small.   The department  has an                                                               
opportunity to  realize real revenues  for the state in  the long                                                               
run relative  to the risks  the state  might be undertaking  as a                                                               
participant  in the  project.   He suggested  that going  to less                                                               
than 20  percent is probably a  big problem.  He  said that going                                                               
over 25  percent could  also create a  problem for  other parties                                                               
and maybe  for the  state, too,  in terms of  what the  state can                                                               
afford.                                                                                                                         
                                                                                                                                
4:07:47 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH said  Article  6 relates  to the  regulatory                                                               
framework and  key access and  expansion principles.   He pointed                                                               
out  that one  thing  the state  wants to  ensure  is to  provide                                                               
multiple offtake  points to get  gas to  Alaskans, but also  as a                                                               
means to  get gas into the  project.  He recalled  the activities                                                               
underway by Doyon,  Limited in the Nenana Basin.   If Doyon finds                                                               
significant  gas it  will need  to get  that gas  to market.   He                                                               
characterized it  as being  almost as important  to get  gas into                                                               
the pipeline  as out  of the  pipeline.  The  work AGDC  has been                                                               
undertaking  in  the  open  season will  inform  the  project  by                                                               
identifying  demand points  and where  to locate  offtake points.                                                               
However, he  offered his belief  that the key is  the overarching                                                               
structure.   Each party who  has a share of  the gas is  going to                                                               
hold  its  capacity  in  the infrastructure  in  the  same  basic                                                               
percentage  and operate  its  share of  the  infrastructure on  a                                                               
proprietary basis.  One of the  reasons the state has had so many                                                               
disputes on  the Trans-Alaska  Pipeline System  (TAPS) has  to do                                                               
with the  manner in  which tariffs are  structured.   He recalled                                                               
that TAPS cost was approximately  $8 billion, but the question is                                                               
how was  the $8  billion financed  and how  does that  affect the                                                               
tariff ultimately.                                                                                                              
                                                                                                                                
4:09:58 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH said  that Governor Egan wanted  the state to                                                               
own its  share of TAPS  and he fell short  a vote in  the Senate.                                                               
Thus, the  state didn't  own its share  of TAPS  and subsequently                                                               
has fought  with the owners  over those tariffs since  the tariff                                                               
affects the state's  royalty and production tax value.   In order                                                               
to move past this, the key  provisions of the proposed Alaska LNG                                                               
are  structured so  each party  will  operate its  own share  and                                                               
finance its own share of  the infrastructure.  Therefore, it will                                                               
not impact the state if one party  decides on a high equity or to                                                               
have  a  high  return  on  that  equity.    In  the  conventional                                                               
structure, those  decisions would be material,  but this approach                                                               
would allow the state to seek  a "live and let live" arrangement.                                                               
The other  parties will set  up business  as the parties  see fit                                                               
and the  state will do  likewise.  He  moved to key  provision 4,                                                               
and  stated that  the portion  of  the project  that the  state's                                                               
agents  - AGDC  and TransCanada  -  share would  be committed  to                                                               
provide  access to  third  parties on  terms  developed with  the                                                               
state.    He concluded  that  these  are  the key  provisions  of                                                               
Article 6.                                                                                                                      
                                                                                                                                
4:12:00 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH  turned to Appendix  A [page 21 of  the HOA],                                                               
which lays out the principles for  expansions in the project.  He                                                               
emphasized that  A.1.1 outlines that  any party may  initiate the                                                               
process for  an expansion  of any  component, including  the GTP,                                                               
the  pipeline, or  the  marine terminal.    He acknowledged  that                                                               
there  is a  "carve out"  for the  liquefaction trains,  which is                                                               
important.  He  pointed out highlighted texts  and assuming there                                                               
are  no negative  impacts  on other  parties,  the expansion  can                                                               
proceed.  In  essence, it represents a sole risk  as the approach                                                               
to  expansions.    For  example,   the  state  is  interested  in                                                               
expansion in the  pipeline, and as long as it  doesn't impact the                                                               
other  parties,  the expansion  will  occur  and the  state  will                                                               
benefit from additional gas production.                                                                                         
                                                                                                                                
4:13:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SADDLER  referred to  Sections  A.2  and A.3,  of                                                               
Appendix A  and asked for  the principle for any  modification of                                                               
the LNG liquefaction plant.                                                                                                     
                                                                                                                                
COMMISSIONER  BALASH  explained  that  the  expansion  principles                                                               
differentiate  between  the  liquefaction trains  and  everything                                                               
else.  Basically,  the principle is that any part  of the project                                                               
except the liquefaction  trains can be expanded on  the sole risk                                                               
basis; however,  the trains  are the most  sensitive part  of the                                                               
infrastructure and  any modification to the  original trains must                                                               
be agreed to  by all parties.  Those agreements  are described in                                                               
A.2.  He said  that A.3 allows a party to build a  new train if a                                                               
modification of  the original train  is impossible or  not agreed                                                               
upon.  The project is being  designed around the concept of three                                                               
liquefaction trains, with  a certain capacity available.   In the                                                               
event sufficient additional gas is  discovered that can commit to                                                               
capacity  in  the  pipeline  or  the  GTP  and  can  fill  a  new                                                               
liquefaction  train, the  facility  can be  added  at the  marine                                                               
site.   Again,  this applies  the  same principles,  that if  one                                                               
party wants  to add a  liquefaction train, the other  parties can                                                               
participate but don't have to do so.                                                                                            
                                                                                                                                
4:16:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SADDLER  understood the  GTP plant is  either "all                                                               
on or  all off."   He related  his understanding that  if someone                                                               
finds  gas  and wants  to  send  gas that  requires  liquefaction                                                               
services, the  party can  do so  at cost  or several  parties can                                                               
collectively do  so.  He also  understood one party could  pay to                                                               
build an  additional liquefaction  train.   He asked  whether the                                                               
parties can sell liquefaction capacity to others.                                                                               
                                                                                                                                
COMMISSIONER BALASH answered  in essence; yes.  He  said, "He who                                                               
owns  the infrastructure  owns the  capacity."   He  acknowledged                                                               
that the  state would need to  be sensitive to the  other parties                                                               
in terms  of the operating  agreements and ensure  the agreements                                                               
do not cause harm  or problems.  If the party  wanted to take the                                                               
risk  of  building an  entire  liquefaction  train, even  without                                                               
enough gas for  the train, and was willing to  speculate and sell                                                               
the capacity later  on to someone else, it  represents a business                                                               
proposition.                                                                                                                    
                                                                                                                                
REPRESENTATIVE SADDLER  assumed that  it could happen  in several                                                               
ways.                                                                                                                           
                                                                                                                                
4:18:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  related a  scenario in which  the state                                                               
owned  25  percent   for  royalty  and  production   tax  of  the                                                               
molecules.   He  surmised  the  state could  market  it to  third                                                               
parties who were not parties of the initial agreement.                                                                          
                                                                                                                                
COMMISSIONER BALASH answered that is correct.                                                                                   
                                                                                                                                
REPRESENTATIVE  JOSEPHSON  wondered  if the  state's  25  percent                                                               
expands to 30 percent making  105 percent, or alternatively, does                                                               
the state surrender 5 percent of its capacity to an independent.                                                                
                                                                                                                                
COMMISSIONER  BALASH  acknowledged  his  questioning  is  a  very                                                               
interesting line  of questions.   It  has to do  with is  how the                                                               
capital cost  and operating costs  will be reallocated  among the                                                               
parties.  He stressed this is  something that is going to require                                                               
very careful  crafting of  the operating  agreements in  the next                                                               
phase of development, which is the  type of detail that will need                                                               
to be worked out.   He agreed that the project  does not become a                                                               
105  percent project,  but would  necessitate  a reallocation  or                                                               
recalculation of the equity interest.                                                                                           
                                                                                                                                
4:20:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  said when  he thinks of  compression he                                                               
thinks of it  as putting more molecules in the  same space in the                                                               
pipeline.                                                                                                                       
                                                                                                                                
COMMISSIONER BALASH answered that is correct.                                                                                   
                                                                                                                                
4:20:33 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH  continued with  Article 7, which  is related                                                               
to enabling  legislation and  the timeline [slide  12].   He said                                                               
this  describes the  enabling legislation,  which requires  other                                                               
parties to  take a "leap of  faith."  While the  language appears                                                               
in the  HOA itself,  the other  parties did  not review  the bill                                                               
until  it  was introduced.    However,  the actual  drafting  and                                                               
language fell  on the DOR,  the DNR,  and the Department  of Law.                                                               
He hoped the  legislature would pass the  enabling legislation by                                                               
April   2014  and   that   over  the   next   12-18  months   the                                                               
administration  and  other  parties  would  develop  all  of  the                                                               
contracts  necessary to  advance the  Alaska LNG  project to  the                                                               
[front-end-engineering  design] FEED  phase.   He  also said  the                                                               
department will keep the legislature  informed as these contracts                                                               
are  developed.     In  terms  of  the  timeline,   in  2015  the                                                               
legislature will  consider the project enabling  contracts and if                                                               
approved, all  parties will be ready  to move to FEED  phase late                                                               
in 2015 or early in 2016.                                                                                                       
                                                                                                                                
4:22:48 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH  discussed royalties and production  taxes in                                                               
Article  8 [slide  13].   He  indicated that  the combination  of                                                               
those  two interests  represents  the "state's  gas  share."   He                                                               
noted that the royalty share for  Prudhoe Bay is generally set at                                                               
12.5 percent  while a few  leases have sliding scale  royalty and                                                               
net profits share royalty provisions.   Point Thomson royalty has                                                               
generally  been a  little higher.   Thus,  by blending  the rates                                                               
together the  state royalty interest  is slightly higher  than 13                                                               
percent  overall.   Under the  Alaska LNG  project, the  state is                                                               
asking for a  gross determination for production  taxes, which in                                                               
combination  would total  somewhere  between 20-25  percent.   In                                                               
order to  facilitate this,  the state must  manage the  gas, take                                                               
responsibility  for  the  gas, and  ultimately  market  the  gas.                                                               
Under state  leases, the state can  take its gas royalty  in kind                                                               
(RIK) or in value (RIV).  He  said he was surprised to learn that                                                               
the statutes direct the state to  take its royalty in kind unless                                                               
the state  determines it is  in the  best interests of  the state                                                               
to.  Thus, the starting point will be to use RIK.                                                                               
                                                                                                                                
4:24:49 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH pointed  out that  in 2013,  Black &  Veatch                                                               
identified  potential risks  and  opportunities  related to  RIK.                                                               
Many of  the state's risks  would be ameliorated or  mitigated if                                                               
it has an interest in  the infrastructure, but B&V identified the                                                               
state marketing  its gas as the  biggest risk due to  the state's                                                               
inexperience  in  marketing liquefied  natural  gas  (LNG).   The                                                               
state would need to establish  an organization to market its gas,                                                               
but would  likely suffer a  discount in  doing so.   The producer                                                               
parties have committed per the  HOA [8.3.3], which read, in part,                                                               
as  follows: "...  negotiate separately  with the  State in  good                                                               
faith to  enter into  an agreement with  the state  regarding the                                                               
purchase or other  disposition of a portion of the  LNG ...."  He                                                               
offered  his  belief  that a  significant  number  of  anti-trust                                                               
lawyers  crafted  the  language  since  this area  of  law  as  a                                                               
delicate area of law in the U.S.  and in Asia.  He cautioned that                                                               
the state must be very careful  not to collude or "trip over" the                                                               
complex  laws.   This  means that  the state  should  be able  to                                                               
leverage the marketing expertise and  the specific terms that the                                                               
producer  parties  use  to  sell  Alaska's  LNG.    He  said  the                                                               
department  believes  this approach  will  protect  the state  in                                                               
terms  of the  RIK investment  identified by  the 2013  Black and                                                               
Veatch study.                                                                                                                   
                                                                                                                                
4:27:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  asked whether  the "the  delicate balance"                                                               
means the  state is saying  it won't  be short changed,  that the                                                               
rate will be nearly identical to the partners' rates.                                                                           
                                                                                                                                
COMMISSIONER BALASH answered that he  is correct that this is the                                                               
intent  going   forward.    He   said  the  state   held  initial                                                               
conversations with each  of the parties to investigate  this.  As                                                               
part  of  the  Pre-FEED  process, the  state  will  develop  more                                                               
specific agreements the legislature will review in 2015.                                                                        
                                                                                                                                
4:28:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON  asked  whether the  state  can  negotiate                                                               
separately  with  the three  individual  parties  so it  has  the                                                               
unique position of having access to specific knowledge.                                                                         
                                                                                                                                
COMMISSIONER  BALASH answered  that he  will spend  a significant                                                               
amount  of  time  with  anti-trust counsel  to  ensure  that  the                                                               
department doesn't expose  the state to anti-trust  jeopardy.  He                                                               
agreed  that the  state will  be able  to identify  opportunities                                                               
with each of  the three companies.  Additionally,  the state will                                                               
also  have   opportunities  to  independently  market   its  LNG.                                                               
Certainly,  the  state  may find  good  reason  to  independently                                                               
market some volume of its LNG product, he said.                                                                                 
                                                                                                                                
4:29:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON asked whether  the opportunity is unique to                                                               
the  state   or  if  it   can  negotiate  with   another  partner                                                               
independent of the state.                                                                                                       
                                                                                                                                
COMMISSIONER  BALASH   responded  that  the  state   needed  this                                                               
specific provision  in terms of the  RIK approach.  He  said that                                                               
how parties market  respective volumes of LNG is left  to each of                                                               
them.  He  related he is familiar with joint  marketing, which is                                                               
where  all  project  sponsors  come   together  and  form  a  new                                                               
marketing   company  to   market   the  total   output.     Those                                                               
organizations  have  to be  "hived  off"  or separated  from  the                                                               
parent entity.   That type  of approach is not  universally used,                                                               
but it has been used by these companies in other projects.                                                                      
                                                                                                                                
4:30:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SADDLER   asked   for   clarification   of   the                                                               
disposition of a portion of the LNG under Article 8.3.3.                                                                        
                                                                                                                                
COMMISSIONER BALASH explained an  outright purchase would consist                                                               
of purchase at the outlet of  the LNG plant.  Another disposition                                                               
would be "anything  else."  For example, the state  might sign on                                                               
as a  co-party in an  individual sale  agreement with one  of the                                                               
entities.  In essence, the state  would be marketing side by side                                                               
with the other parties.   He related that from conversations with                                                               
each  of the  three companies,  that the  department heard  three                                                               
different approaches  to solve  the marketing  issue.   He stated                                                               
that   directionally,  the   solutions  were   similar  but   the                                                               
differences were in the details.   He offered his belief that the                                                               
legislature  has  much  to  look forward  to  in  learning  about                                                               
portfolios of  contracts, the management  of portfolios,  and the                                                               
differences each company takes on marketing.                                                                                    
                                                                                                                                
4:32:30 PM                                                                                                                    
                                                                                                                                
CHAIR OLSON  asked whether  the state  will market  gas on  a BTU                                                               
basis or a volume basis.                                                                                                        
                                                                                                                                
COMMISSIONER BALASH  answered that  every SPA  is a  unique deal.                                                               
Thus the  broad metric for  the sale of  LNG is measured  in tons                                                               
per annum.                                                                                                                      
                                                                                                                                
CHAIR  OLSON interjected  a  question  on how  the  LNG would  be                                                               
taxed.                                                                                                                          
                                                                                                                                
COMMISSIONER  BALASH  answered  that  the  contract  itself  will                                                               
likely  contain heat  contract requirements  so the  gas that  is                                                               
produced at North  Slope and converted to LNG will  have range of                                                               
heat that will help market the LNG.   The state will take a gross                                                               
volume approach  for tax purposes so  the state will get  a gross                                                               
volume  rather  than  something  that  will  vary  volumetrically                                                               
depending on the heat.                                                                                                          
                                                                                                                                
CHAIR OLSON  asked whether it will  be similar to the  way it has                                                               
been handled out of Nikiski to Japan for the past 42 years.                                                                     
                                                                                                                                
COMMISSIONER  BALASH  answered  that  he  is  not  familiar  with                                                               
production taxing aspects, although he  is more familiar with the                                                               
royalty aspects.   He  said the  state uses  a simple  method and                                                               
takes  a  percentage  of  the  calculation  on  the  Japan  Crude                                                               
Cocktail price (JCC).                                                                                                           
                                                                                                                                
4:34:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SADDLER understood the tax  will be based on gross                                                               
volume  and the  contracts will  be based  on heat  value or  BTU                                                               
value.   He asked whether  the balancing agreement would  be used                                                               
in instances in which the tax  is based on certain BTU value, but                                                               
over time the BTU varies from the contract.                                                                                     
                                                                                                                                
COMMISSIONER BALASH  answered that  this could potentially  be an                                                               
aspect  of a  balancing agreement;  however, the  state seeks  to                                                               
ultimately  solve   the  volume   issue  through   the  balancing                                                               
agreements  by using  a series  of debits  and credits  to ensure                                                               
that "everyone  gets their due."   Thus, no one over  produces or                                                               
under  produces  from  their  respective  share,  he  said.    He                                                               
acknowledged that the balancing agreements  can have a variety of                                                               
mechanisms, features,  and commercial  solutions to deal  with an                                                               
imbalance.   He offered his  belief that  the state will  want to                                                               
pay close attention to the  offtake agreement specifying the heat                                                               
content of the gas.                                                                                                             
                                                                                                                                
4:36:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  said he thinks  of RIK as being  a tank                                                               
of natural  gas in the sky,  in terms of the  state's accounting.                                                               
He  related  "scuttlebutt"  exists regarding  the  constitutional                                                               
prohibition provision that does  not allow legislatures to impact                                                               
future legislatures from changing  the gross production tax rate.                                                               
He  understood the  constitutional provision  would not  apply if                                                               
the state take uses RIK, but it  would apply if the state were to                                                               
take its royalty  as cash.  He asked why  RIK would be different.                                                               
He expressed concern that if  this legislature [passed HB 277] it                                                               
might inadvertently "tie the hands" of subsequent legislatures.                                                                 
                                                                                                                                
COMMISSIONER BALASH replied  that he is touching on  a point that                                                               
is critical  to the  success of  this project,  which is  how any                                                               
parties -  including DOR and the  DNR in their fiduciary  roles -                                                               
can enter  into the  types of contracts  necessary for  an Alaska                                                               
LNG project  to go forward.   However, the  state has as  much an                                                               
interest in  the durability  in the terms  as the  other parties,                                                               
since  the state  will take  out  long-term financing,  long-term                                                               
capacity,  and long-term  sales of  LNG.   It will  also want  to                                                               
count  on  things  occurring  as expected.    He  emphasized  the                                                               
importance of being able to  survive the constitutional questions                                                               
in a democratic form of government.   He acknowledged that RIK is                                                               
not the magic key, but  the crossover between multiple agreements                                                               
will provide an avenue of  opportunities for the parties to solve                                                               
the durability  problem and challenge.   He referred to  the tank                                                               
described earlier,  and visualized it being  filled and delivered                                                               
5 times a day  for 25 years.  It's important  that happens so the                                                               
state can meet  its obligations to the buyers.   He surmised that                                                               
if a future legislature were  to change taxes the agreements will                                                               
need  to  contemplate  this  in   advance,  to  predict  how  the                                                               
agreements  would change.    In  order to  get  to  "yes" on  the                                                               
initial  agreements, everyone  will need  to be  comfortable with                                                               
how the specific mechanisms will work.                                                                                          
                                                                                                                                
4:40:44 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH  related a  scenario  in  which the  state's                                                               
[royalty and  production] is  20 percent, but  15 years  from now                                                               
the rates  change from 20 to  30 percent.  In  that scenario, the                                                               
state   would  have   50  percent   more  volume   on  hand   and                                                               
consequently, the state would need  to find capacity for its gas.                                                               
However,  the  parties whose  taxes  are  being raised  have  the                                                               
capacity so it  is likely the parties would charge  the state the                                                               
same  as the  increase.   He  concluded that  how  this all  fits                                                               
together will be explored over the next two years.                                                                              
                                                                                                                                
4:41:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SADDLER  asked whether  he was  saying there  is a                                                               
constitutional  obligation  to  preserve   the  right  of  future                                                               
legislatures  to change  taxes.   He understood  the commissioner                                                               
envisioned  a network  of agreements  that would  dampen out  the                                                               
effect  of any  future changes  to  end up  "not nullifying"  but                                                               
minimizing it to  the point that all the  parties will ultimately                                                               
still be in agreement.                                                                                                          
                                                                                                                                
COMMISSIONER  BALASH responded  that rather  than describe  it as                                                               
"nullifying" he would describe  it as understanding consequences.                                                               
He said the  state incurs consequences when it  changes its taxes                                                               
and in  this instance the  consequences will be specific  and may                                                               
affect other agreements  the state may care about.   He indicated                                                               
that exactly  how many places  "we'll have  to work with"  in the                                                               
overall complex network of contracts  is something the state will                                                               
be exploring.                                                                                                                   
                                                                                                                                
4:43:01 PM                                                                                                                    
                                                                                                                                
ANGELA  RODELL,   Commissioner,  Department  of   Revenue  (DOR),                                                               
explained the  contracts will be specific  and targeted contracts                                                               
that are in  place.  These provisions don't apply  to all the oil                                                               
and  gas  production  across  the  entire  state  and  there  are                                                               
opportunities  for  the state  and  future  legislatures to  take                                                               
various  actions,  just  as  the legislature  does  now,  and  to                                                               
recognize  any distinction  between  the oil  and gas  production                                                               
occurring  in different  areas.    For example,  this  is how  it                                                               
happens  with  respect   to  Cook  Inlet  and   the  North  Slope                                                               
production.   She  reminded members  that  while these  contracts                                                               
have consequences, the  legislature can examine a  variety of tax                                                               
plans in the future as they see fit.                                                                                            
                                                                                                                                
4:43:56 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH  referred to  Articles 9  and 10  [slide 14].                                                               
He  indicated some  other  project enabling  terms  are found  in                                                               
Articles 9  and 10.   The department  believes that a  payment in                                                               
lieu   of  tax   (PILT)   system  will   serve   the  state   and                                                               
municipalities very well.   The department has  committed to work                                                               
in consultation  with local  governments to  develop a  system of                                                               
PILT  that will  go into  effect  on operation  of the  pipeline.                                                               
Preceding that,  there will  be impact  payments provided  to the                                                               
affected communities  as well.   He said  that is  an undertaking                                                               
that  will  begin  if  this enabling  legislation  passes.    The                                                               
department did not  envision the need to  engage with communities                                                               
until the project is viable.                                                                                                    
                                                                                                                                
4:45:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SADDLER  understood  the statewide  municipal  or                                                               
local  property   taxes  are  paid   in  cash.    He   asked  for                                                               
clarification on PILT.                                                                                                          
                                                                                                                                
COMMISSIONER RODELL answered that rather  than having a mill rate                                                               
that resets every  year based on valuation  changes and potential                                                               
debates on  valuations, the  parties would  have an  agreement on                                                               
the payment  of property tax not  based on a mil  rate calculated                                                               
against a  valuation, but as  a flat  payment.  The  parties will                                                               
come to  an agreement as  to how  the payment will  be calculated                                                               
and what is  taken into account.  It would  identify what type of                                                               
impact payments  would occur prior  to improvements  to valuation                                                               
and property,  but there is  tremendous impact  on infrastructure                                                               
and  communities due  to  the work  that has  happened.   It's  a                                                               
negotiation, she said.                                                                                                          
                                                                                                                                
4:47:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SADDLER asked  whether  the department  currently                                                               
has  this  power  or  if  it will  be  granted  by  the  enabling                                                               
legislation.                                                                                                                    
                                                                                                                                
COMMISSIONER  RODELL answered  neither.   The department  doesn't                                                               
currently  have   the  power  to   negotiate  that   and  doesn't                                                               
contemplate  it  in  the  enabling   legislation.    Rather,  the                                                               
department  would  like to  work  with  municipalities and  other                                                               
local  governments and  come back  with a  comprehensive property                                                               
tax proposal in 2015.                                                                                                           
                                                                                                                                
4:47:47 PM                                                                                                                    
                                                                                                                                
CHAIR OLSON asked  whether the initial structure will  be set for                                                               
the life of the project.                                                                                                        
                                                                                                                                
COMMISSIONER  RODELL  answered  that  she was  unsure  since  the                                                               
department will want  to take into account the  various stages of                                                               
the project,  including but not  limited to what the  impacts are                                                               
when  revenues  begin  flowing, when  the  valuations  will  take                                                               
effect, and when people can  expect to receive property taxes off                                                               
that project.   The  project will generate  revenue and  become a                                                               
source of  payment for  the property  taxes.   At this  point the                                                               
department doesn't  know the answers,  but it wants to  develop a                                                               
framework.    She envisioned  the  administration  coming to  the                                                               
legislature  every single  year  until gas  flows, adjusting  and                                                               
amending the contract structure.                                                                                                
                                                                                                                                
4:48:58 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH,  in response  to a  question on  whether the                                                               
Trans-Alaska Pipeline System  is balanced every five  to 10 years                                                               
by  the  Federal  Energy Regulatory  Commission  (FERC)  and  the                                                               
Regulatory Commission  of Alaska (RCA), suggested  it might refer                                                               
to the tariff setting.                                                                                                          
                                                                                                                                
CHAIR OLSON offered his belief that  it is based the agreement on                                                               
the valuation of the pipeline  and the recalculation of the state                                                               
taxes.                                                                                                                          
                                                                                                                                
COMMISSIONER  BALASH  answered  that   some  of  those  valuation                                                               
determinations  factor  into the  full  and  fair value  that  is                                                               
assessed but he was unsure how those interrelate.                                                                               
                                                                                                                                
COMMISSIONER RODELL said she was unsure but will look into it.                                                                  
                                                                                                                                
COMMISSIONER  BALASH, in  response  to a  question, recalled  the                                                               
rate-making trial  that the Federal Energy  Regulatory Commission                                                               
and Regulatory  Commission of Alaska  (RCA) jointly  conducted as                                                               
lasting several months.                                                                                                         
                                                                                                                                
4:50:51 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH,  in response  to  a  comment, agreed  since                                                               
significant money is  involved disputes arise.   He remarked that                                                               
the state ships  its oil on the producer's pipeline.   He offered                                                               
his belief  that one benefit  of the  Alaska LNG project  is that                                                               
the  state  will  be  shipping  gas  on  its  own  share  of  the                                                               
infrastructure.   Previous types of disputes,  protracted trials,                                                               
and adjudications will hopefully be a thing of the past.                                                                        
                                                                                                                                
CHAIR  OLSON  remarked that  he'd  be  really impressed  if  that                                                               
happens.   He said,  "In fact, quite  frankly I'm  impressed that                                                               
we've gone as far as we have on this one...."                                                                                   
                                                                                                                                
REPRESENTATIVE HERRON  remarked that literally this  means "real"                                                               
money  for local  projects and  the product  that the  state will                                                               
sell.                                                                                                                           
                                                                                                                                
4:52:05 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH  discussed the  key provisions in  Articles 9                                                               
and 10 [slide  14].  He touched  on the need for  PILTS, that the                                                               
need for the project enabling  contracts which will allow each of                                                               
the parties to  take the kinds of investments  necessary for this                                                               
to  come together  and move  forward.   An expression  of general                                                               
support from the state will be  needed in this agreement in order                                                               
to develop  the necessary infrastructure and  permitting, as well                                                               
as the  need for a  healthy long-term  oil business in  Alaska to                                                               
support the  proposed Alaska  LNG project.   With respect  to the                                                               
overall economics,  the economics of  gas relies on oil  to carry                                                               
the costs of  operating Prudhoe Bay and Point Thomson  so the oil                                                               
business must be healthy or the  gas revenue will need to support                                                               
the costs and the state could "start to get into trouble."                                                                      
                                                                                                                                
4:53:59 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH  turned to  the  topic  of Alaska  hire  and                                                               
content [slide  15.]  He  said the administration  has identified                                                               
some important things  for the men and women who  will be working                                                               
on this project.   He said that  Article 11 [page 16  of the HOA]                                                               
provides guidance on the hiring  of Alaska residents, contracting                                                               
with Alaska  businesses, and participation  of the  Department of                                                               
Labor  &   Workforce  Development   in  providing   training  for                                                               
occupations needed  to support the  project, and a  commitment by                                                               
the project  sponsors to  negotiate in  good faith  project labor                                                               
agreements  for  the  project.     He  pointed  out  key  points,                                                               
including  the estimated  total project  cost at  $45-65 billion.                                                               
He stated that  at peak construction the state  will enjoy 15,000                                                               
jobs in Alaska.  Once the  project is in operation it will result                                                               
in 1,000  long term  jobs, noting that  the Kenai  community will                                                               
benefit from many jobs due to  the operation of the LNG plant and                                                               
associated marine terminal and vessels.                                                                                         
                                                                                                                                
4:55:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON  commented  on  the  bullet  commit  to                                                               
negotiate  good  faith  project   agreements.    He  related  his                                                               
understanding  that the  language  "commit to  negotiate in  good                                                               
faith" is not strong enough.   He recalled that an amendment made                                                               
it into  AGIA, signed by  members of  both parties in  the House.                                                               
He offered his  belief that this language  is not in HB  277.  He                                                               
asked whether this  is correct, and if so, if  there is something                                                               
that can be done to enhance the language.                                                                                       
                                                                                                                                
COMMISSIONER BALASH thought  he might have a couple  of pieces of                                                               
the history wrong and offered to  meet to discuss this more fully                                                               
at a later time.                                                                                                                
                                                                                                                                
COMMISSIONER BALASH  said that  the effort  in the  original AGIA                                                               
statute and HOA  is to try to recognize  project labor agreements                                                               
could be helpful tools to avoid  work stoppages.  However, if the                                                               
state  obligated  the  project  sponsors to  sign  a  PLA,  there                                                               
wouldn't be much  room to negotiate.  In other  words, they would                                                               
have  to agree  to  whatever  terms were  laid  out.   Thus,  the                                                               
concept  of  negotiating  in  good  faith is  to  make  sure  the                                                               
opportunity  happens  and  is  fully  explored  by  the  relevant                                                               
parties.   He cautioned not to  "put our thumbs on  the scale" to                                                               
determine  the outcome  of the  negotiations.   He said  that the                                                               
state is  trying to keep things  on an even fashion.   He offered                                                               
his belief  that when  the legislature  discusses the  bill, many                                                               
provision  are  not contained  in  the  bill since  the  enabling                                                               
legislation creates  a general law.   Therefore, the  state hopes                                                               
to avoid  putting significant detail in  the underlying statutes.                                                               
The  HOA is  a  guidance  document the  parties  can  rely on  to                                                               
negotiate,  which is  available to  the legislature  to use  as a                                                               
measuring stick.                                                                                                                
                                                                                                                                
5:00:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON commented.   He said, "In  order to make                                                               
the biggest tent  you can make, there are going  to be colleagues                                                               
who even  at this early stage  are going to be  looking for that.                                                               
Thanks."                                                                                                                        
                                                                                                                                
CHAIR  OLSON  remarked  that  he  recalled  the  amendment  being                                                               
discussed  but  he  did  not   recall  "21  signatures"  on  that                                                               
particular amendment.                                                                                                           
                                                                                                                                
5:01:50 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no  further business before the  committee, the House                                                               
Labor and  Commerce Standing Committee  meeting was  adjourned at                                                               
5:01 p.m.                                                                                                                       

Document Name Date/Time Subjects
TC MOU and AKLNG HOA in Context 2-19-2014.pdf HL&C 2/19/2014 3:15:00 PM
LNG Project - MOU and HOA Presentation 02-19-2014 to HL&C