Legislature(1999 - 2000)

04/29/1999 05:10 PM House O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
       HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                                                                   
                   April 29, 1999                                                                                               
                     5:10 p.m.                                                                                                  
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                                 
                                                                                                                                
Representative Jim Whitaker, Chairman                                                                                           
Representative Fred Dyson                                                                                                       
Representative Gail Phillips                                                                                                    
Representative Scott Ogan                                                                                                       
Representative John Harris                                                                                                      
Representative Allen Kemplen                                                                                                    
Representative Tom Brice                                                                                                        
Representative Harold Smalley                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                  
                                                                                                                                
Representative Brian Porter                                                                                                     
                                                                                                                                
COMMITTEE CALENDAR                                                                                                              
                                                                                                                                
*HOUSE BILL NO. 170                                                                                                             
"An Act establishing the Alaska Gas Corporation, a public                                                                       
corporation, and providing for its structure, management,                                                                       
responsibilities, and operation."                                                                                               
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
(* First public hearing)                                                                                                        
                                                                                                                                
PREVIOUS ACTION                                                                                                                 
                                                                                                                                
BILL: HB 170                                                                                                                    
SHORT TITLE: ALASKA GAS CORPORATION                                                                                             
SPONSOR(S): SPECIAL COMMITTEE ON OIL & GAS                                                                                      
                                                                                                                                
Jrn-Date    Jrn-Page           Action                                                                                           
 3/31/99       625     (H)  READ THE FIRST TIME - REFERRAL(S)                                                                   
 3/31/99       625     (H)  O&G, RES, FIN                                                                                       
 4/22/99               (H)  O&G AT  5:00 PM CAPITOL 17                                                                          
 4/22/99               (H)  <BILL POSTPONED TO 4/29>                                                                            
 4/29/99               (H)  O&G AT  5:00 PM CAPITOL 17                                                                          
                                                                                                                                
WITNESS REGISTER                                                                                                                
                                                                                                                                
HANK HOVE, Mayor                                                                                                                
Fairbanks North Star Borough                                                                                                    
PO Box 71267                                                                                                                    
Fairbanks, Alaska 99707                                                                                                         
Telephone:  (907) 459-1000                                                                                                      
POSITION STATEMENT:  Supported HB 170.                                                                                          
                                                                                                                                
BEN NAGEAK, Mayor                                                                                                               
North Slope Borough                                                                                                             
PO Box 69                                                                                                                       
Barrow, Alaska 99723                                                                                                            
Telephone:  (907) 852-0200                                                                                                      
POSITION STATEMENT:  Encouraged the legislature to view HB 170 in                                                               
                     a positive light.                                                                                          
                                                                                                                                
DAVE COBB, Mayor                                                                                                                
City of Valdez                                                                                                                  
PO Box 307                                                                                                                      
Valdez, Alaska 99686                                                                                                            
Telephone:  (907) 835-4313                                                                                                      
POSITION STATEMENT:  Supported HB 170.                                                                                          
                                                                                                                                
DAVE DENGEL, City Manager                                                                                                       
City of Valdez                                                                                                                  
PO Box 307                                                                                                                      
Valdez, Alaska 99686                                                                                                            
Telephone:  (907) 835-4313                                                                                                      
POSITION STATEMENT:  Discussed the amendment.                                                                                   
                                                                                                                                
BILL WALKER, Attorney                                                                                                           
City of Valdez                                                                                                                  
Walker Walker Wendlandt & Osowski                                                                                               
550 West 7th, Suite 1850                                                                                                        
Anchorage, Alaska 99501                                                                                                         
Telephone:  (907) 278-7000                                                                                                      
POSITION STATEMENT:  Offered information regarding the amendment.                                                               
                                                                                                                                
MANO FREY, Executive President                                                                                                  
Alaska AFL-CIO                                                                                                                  
2501 Commercial Drive                                                                                                           
Anchorage, Alaska 99501                                                                                                         
Telephone:  (907) 272-4571                                                                                                      
POSITION STATEMENT:  Encouraged the moving forward of HB 170.                                                                   
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                                
TAPE 99-15, SIDE A                                                                                                              
Number 0001                                                                                                                     
                                                                                                                                
CHAIRMAN JIM WHITAKER called the House Special Committee on Oil and                                                             
Gas meeting to order at 5:10 p.m.  Members present at the call to                                                               
order were Representatives Whitaker, Dyson, Phillips, Ogan, Harris,                                                             
Kemplen, Brice and Smalley.  Representative Porter was excused.                                                                 
                                                                                                                                
HB 170-ALASKA GAS CORPORATION                                                                                                   
                                                                                                                                
CHAIRMAN WHITAKER announced that the only order of business before                                                              
the committee would be HOUSE BILL NO. 170, "An Act establishing the                                                             
Alaska Gas Corporation, a public corporation, and providing for its                                                             
structure, management, responsibilities, and operation."                                                                        
                                                                                                                                
Number 0075                                                                                                                     
                                                                                                                                
CHAIRMAN WHITAKER explained that HB 170 would establish the Alaska                                                              
Gas Corporation which would be a publicly owned entity.  "The                                                                   
purpose of the Alaska Gas Corporation is to procure, transport, and                                                             
market natural gas from Alaska's North Slope to the world."  He                                                                 
acknowledged that many questions have arisen during the                                                                         
consideration of this and those questions will be addressed.                                                                    
Chairman Whitaker emphasized that this will not be a "closed door,                                                              
secretive deal," but rather "an open and honest review of an                                                                    
economic opportunity for all the people of Alaska."  He informed                                                                
the committee that the makers of the constitution demanded through                                                              
Article VIII, Section 2, "That the legislature provide for the                                                                  
utilization, development, and conservation of all natural resources                                                             
belonging to the state for the maximum benefit of its people."                                                                  
That is the basic premise of HB 170.  Chairman Whitaker informed                                                                
the committee that there will be a series of hearings on HB 170 and                                                             
the topics that surround it.  He announced that no public testimony                                                             
would be taken today, but noted there will be opportunity for that                                                              
later.                                                                                                                          
                                                                                                                                
REPRESENTATIVE HARRIS moved that the committee adopt the proposed                                                               
committee substitute (CS), Version LS0694\H, Chenoweth, 4/23/99, as                                                             
the working document before the committee.  There being no                                                                      
objection, it was so ordered.                                                                                                   
                                                                                                                                
Number 0410                                                                                                                     
                                                                                                                                
HANK HOVE, Mayor, Fairbanks North Star Borough, stated that he                                                                  
supported HB 170.  He read the following statement into the record:                                                             
                                                                                                                                
     I believe, along with Mayor Cobb of the City of Valdez                                                                     
     and Mayor Nageak of the North Slope Borough, that this                                                                     
     bill is potentially one of the most important pieces of                                                                    
     legislation to come before the body this year.  It is                                                                      
     creative, it is innovative, and it represents "out of the                                                                  
     box" thinking, and as Fairbanksan, I am extremely pleased                                                                  
     and proud of the fact that its originator was our very                                                                     
     own Representative Jim Whitaker.                                                                                           
                                                                                                                                
     This bill, for the first time, envisions a practical                                                                       
     means by which Alaska can develop it's vast natural gas                                                                    
     deposits on the North Slope.  It overcomes the obstacles,                                                                  
     real or imagined, that our oil producers have cited for                                                                    
     years as reasons why Alaska's gas must remain stranded.                                                                    
     It places the interest of Alaska first and, instead of                                                                     
     being placed well down the line in priority of                                                                             
     development as it competes with other petroleum                                                                            
     producers' fields throughout the world, it could quite                                                                     
     probably move Alaska natural gas to a position at or near                                                                  
     the top of the priority list.  The bill proposes to                                                                        
     eliminate the necessity of waiting for gas to liquids                                                                      
     technology to advance to the point where this method of                                                                    
     gas utilization might become economic which conceivably                                                                    
     may never happen.  It provides the opportunity and the                                                                     
     means by which Alaska can devise and control its own                                                                       
     destiny concerning this important natural resource which                                                                   
     has been, essentially, "locked up" by the oil producers                                                                    
     for far too long.                                                                                                          
                                                                                                                                
MAYOR HOVE read from the April 16, 1999 issue of the World Gas                                                                  
Intelligence which follows:                                                                                                     
                                                                                                                                
     In Alaska, takeover of Arco by BP will increase BP Amco's                                                                  
     stake in the Prudhoe Bay field, with this 26-trillion                                                                      
     cubic feet of reserves from 21 percent to 53 percent,                                                                      
     while reducing the likelihood of an eventual LNG contract                                                                  
     there.                                                                                                                     
                                                                                                                                
MAYOR HOVE continued with his prepared statement which follows:                                                                 
                                                                                                                                
     This bill would make available, for the first time,                                                                        
     sufficient quantities of natural gas to communities along                                                                  
     the length of the pipeline that have suffered                                                                              
     economically from a lack of access to an affordable                                                                        
     source of energy.  The bill envisions a maximization of                                                                    
     return to the residents of the State of Alaska from the                                                                    
     production and sale of this resource while retaining the                                                                   
     important private enterprise economies that would result                                                                   
     from competition in the construction and operational                                                                       
     phases of the project.                                                                                                     
                                                                                                                                
     In addition to the benefits of access, we envision the                                                                     
     distribution to every village and community in the state                                                                   
     significant sums derived from the revenue stream from the                                                                  
     sale of gas.  This could have the effect of ending the                                                                     
     necessity of communities throughout the state having to                                                                    
     appeal to the legislature each year for municipal                                                                          
     assistance and revenue sharing money.  With this                                                                           
     provision set in statute, there would no longer be the                                                                     
     need for the endless and frequently unproductive                                                                           
     discussions surrounding this issue.                                                                                        
                                                                                                                                
     And finally, and perhaps most importantly, the bill may                                                                    
     very well represent Alaska's financial salvation well                                                                      
     into the Twenty-first Century.  The financial difficul                                                                     
ties associated with declining crude production in the state are                                                                
well known to all of us.  The revenue resulting from this                                                                       
production and sale of the huge gas deposits is vitally important                                                               
to every resident of this state if we are to find our way out of                                                                
the financial briar patch in which we are currently located.  It                                                                
will ensure that our children and grandchildren have a bright                                                                   
future in Alaska and can look forward to the prospect of living,                                                                
working and playing in this great state.  I believe this bill                                                                   
deserves the serious consideration of every member of this                                                                      
committee as well as every member of the legislature.  I urge you                                                               
to give the bill all of the consideration that it deserves.                                                                     
                                                                                                                                
Number 0712                                                                                                                     
                                                                                                                                
REPRESENTATIVE PHILLIPS pointed out that there would only be one                                                                
source of revenue large enough to do this which is the permanent                                                                
fund.  In attempting to develop a long-term financial plan, the                                                                 
public has opposed going into the permanent fund.  Therefore, that                                                              
will be a consideration for this legislation.                                                                                   
                                                                                                                                
MAYOR HOVE explained that HB 170 contemplates the issuance by the                                                               
State of Alaska of revenue bonds sufficient to fund the                                                                         
construction of the pipeline and associated assets.  He pointed out                                                             
that method is beneficial because the bonds would be exempt from                                                                
taxation.  That exemption would probably result in several                                                                      
percentage points below the cost of capital that might have to be                                                               
paid under a private enterprise scheme such as contemplated under                                                               
last year's HB 393.  Under HB 393, capitalization under different                                                               
models was determined to be between 7.5 percent and 10.5 percent.                                                               
Tax exempt revenue bonds could be around five percent which changes                                                             
the entire complexion of such a project.  Last year, under a                                                                    
private financing scheme, at market rates that were not tax exempt,                                                             
the project probably could not have been considered even marginal                                                               
with regards to viability.  However, changing the cost of capital                                                               
as under HB 170, changes everything.  By early analysis, this                                                                   
project could result in gas priced on the world market at the                                                                   
middle and possible lower end.                                                                                                  
                                                                                                                                
REPRESENTATIVE PHILLIPS commented that she would like to have                                                                   
assurances and verification, as the process continues, that tax                                                                 
exempt bonds would be a factor.  She indicated that she was not                                                                 
sure of that at this time.                                                                                                      
                                                                                                                                
REPRESENTATIVE OGAN said that those bonds would have to be                                                                      
collateralized with something such as the assets of the permanent                                                               
fund.                                                                                                                           
                                                                                                                                
MAYOR HOVE stated that he believed the bonds would be                                                                           
collateralized by the revenue stream.                                                                                           
                                                                                                                                
CHAIRMAN WHITAKER agreed that the revenue bonds would be                                                                        
collateralized by the project.  He pointed out that GO bonds are                                                                
not contemplated to fund this program.                                                                                          
                                                                                                                                
Number 0980                                                                                                                     
                                                                                                                                
BEN NAGEAK, Mayor, North Slope Borough, testified via                                                                           
teleconference from Barrow.  He began by thanking Mayor Hove, Mayor                                                             
Cobb, and Representative Whitaker for working on this issue.  He                                                                
commented that in his travels over Prudhoe Bay, he has seen the gas                                                             
being burned.  Much money is leaving those wells which should be                                                                
generating revenue for the state.  This legislation helps the state                                                             
realize some benefits from the natural gas, although many hoops                                                                 
must be passed through before the Alaska Gas Corporation is                                                                     
established.  He commented that the bottom line is the economic                                                                 
feasibility of the project as well as the benefits brought to the                                                               
state.                                                                                                                          
                                                                                                                                
MAYOR NAGEAK acknowledged the recent legislative discussions                                                                    
regarding the declining revenues with which everyone will have to                                                               
deal.  This is an opportunity for the legislature to consider a                                                                 
plan that would benefit all municipalities in Alaska.  Mayor Nageak                                                             
encouraged the legislature to review HB 170 in a positive light and                                                             
to move forward with the feasibility study.  The feasibility study                                                              
would contain specific information related to this project.  Mayor                                                              
Nageak commented that this is a workable solution to Alaska's                                                                   
situation.                                                                                                                      
                                                                                                                                
REPRESENTATIVE PHILLIPS said she was encouraged by Mayor Nageak's                                                               
comments.  She cited the issue of land and possible contributions                                                               
as one that will certainly arise between Mayor Nageak and Mayor                                                                 
Cobb.  That issue may be a significant factor in whether this                                                                   
project is feasible.                                                                                                            
                                                                                                                                
Number 1353                                                                                                                     
                                                                                                                                
MAYOR NAGEAK reiterated the importance of everyone working                                                                      
together.  The issue of gas is not new.  He discussed a meeting of                                                              
mayors in Fairbanks in which there were discussions regarding the                                                               
cost of the pipeline by a private sector entity.  Mayors have met                                                               
on this and other issues numerous times and now this is up to the                                                               
legislature.                                                                                                                    
                                                                                                                                
CHAIRMAN WHITAKER asked Mayor Nageak to expand on his meeting in                                                                
New York with bonding fundants.  He asked if Mayor Nageak discussed                                                             
the possibility of revenue bonding for a project of this nature.                                                                
                                                                                                                                
MAYOR NAGEAK informed the committee that real interest was                                                                      
expressed at that meeting and there were questions regarding the                                                                
gas pipeline.  He believed that those at the meeting were looking                                                               
for leadership with regards to addressing declining revenues.  This                                                             
project is one such answer to the declining revenues.  Mayor Nageak                                                             
pointed to the importance of rating agencies which review the                                                                   
viability of the finances of any entity as well as how that entity                                                              
deals with such problems as revenue shortfalls.  Mayor Nageak said                                                              
that a good rating from a rating agency often results in revenue                                                                
and GO bonds being very attractive to bonding agencies.                                                                         
                                                                                                                                
Number 1567                                                                                                                     
                                                                                                                                
DAVE COBB, Mayor, City of Valdez, testified via teleconference from                                                             
Valdez.  Mayor Cobb believed that HB 170 provides Alaska with one                                                               
of its few remaining opportunities to control its own future.  The                                                              
North Slope gas is currently not being developed and the                                                                        
projections are that it will not be developed for the future which                                                              
impacts the local communities.  Mayor Cobb stated that the                                                                      
potential growth of communities along the pipeline corridor and                                                                 
those throughout Alaska would be phenomenal with the development of                                                             
gas.  He informed the committee that currently, there is a company                                                              
interested in coming into Valdez to establish an iron ore reduction                                                             
plant.  That company would need 20 billion cubic feet of natural                                                                
gas annually.  Such a situation would provide 30 to 50 jobs in                                                                  
Valdez which would not be available if Alaska waits for the oil                                                                 
industry to develop the gas pipeline.                                                                                           
                                                                                                                                
MAYOR COBB echoed prior comments regarding the fiscal state Alaska                                                              
is in and the need to look "outside the box" for manners in which                                                               
to solve Alaska's problems and develop the state's natural                                                                      
resources.  Mayor Cobb noted that the communities have developed an                                                             
amendment to HB 170 which would address the needs and concerns of                                                               
each community in Alaska.  Every Alaskan community should be a                                                                  
beneficiary of the revenues from this project.  He reiterated the                                                               
previous comments regarding the need to review all aspects of this                                                              
project in order to determine its feasibility, although he believed                                                             
it to be feasible for the state.  He noted concerns regarding the                                                               
proposed merger, specifically what would the merger mean to the                                                                 
development of gas on the North Slope.  Mayor Cobb emphasized his                                                               
support of HB 170 and encouraged review of the bill.                                                                            
                                                                                                                                
REPRESENTATIVE PHILLIPS informed Mayor Cobb that much interest was                                                              
sparked with regards to his comments of the possible iron ore                                                                   
reduction plant because there are some Kenai Peninsula legislators                                                              
on this committee who have been working to have that located on the                                                             
Kenai Peninsula.                                                                                                                
                                                                                                                                
MAYOR COBB stated that many communities are "hamstrung" regarding                                                               
new development in the state from industries besides the oil                                                                    
industry.  Unless there are available supplies of gas throughout                                                                
the state, development such as iron ore reduction or manufacturing                                                              
cannot be accomplished.                                                                                                         
                                                                                                                                
CHAIRMAN WHITAKER noted that there is an amendment, LS0694\H.2,                                                                 
Chenoweth, 4/29/99, which has been mentioned.  He said that the                                                                 
rules seem to indicate it appropriate to discuss the amendment in                                                               
conjunction with the CS without having to adopt the amendment.                                                                  
Chairman Whitaker invited Mayor Hove and Mayor Cobb to join the                                                                 
committee at the table to provide the committee with the reasoning                                                              
behind the amendment.                                                                                                           
                                                                                                                                
MAYOR HOVE noted that when HB 170 was described to himself, Mayor                                                               
Cobb and Mayor Nageak there was also discussion regarding a revenue                                                             
stream that would have the capacity to retire all the debt                                                                      
associated with the project as well as to provide a significant sum                                                             
to be distributed to Alaskan residents.  He informed the committee                                                              
that the three mayors were invited by Chairman Whitaker to develop                                                              
a plan with certain assumptions as provided by Chairman Whitaker.                                                               
The plan was achieved and can be defended.  Mayor Hove viewed this                                                              
project as a substitute for the eventual elimination of municipal                                                               
assistance and revenue sharing.                                                                                                 
                                                                                                                                
MAYOR HOVE explained that the model would take 25 percent of the                                                                
projected profit stream from the Alaska Gas Corporation and devote                                                              
that to distribution across the state.  Therefore, 75 percent of                                                                
the revenue stream was left for the State of Alaska to utilize as                                                               
it wished.  Mayor Hove noted that every community would receive a                                                               
$50,000 minimum payment annually irrespective of the community's                                                                
size.  The balance of the available funds would be distributed on                                                               
a pro rata share depending upon population.  The plan also provides                                                             
for a payment in lieu of taxes payment above the pro rata amount to                                                             
the North Slope Borough, the Fairbanks North Star Borough, and the                                                              
City of Valdez due to the effects of the pipeline in those                                                                      
communities.  The pipeline would attract additional residents and                                                               
therefore create an additional need for public infrastructure which                                                             
would be funded through that payment.  Mayor Hove commented that                                                                
this plan is fundamentally supportable.  He said that all three                                                                 
mayors agree that the plan has at its core an equitable and fair                                                                
distribution of the profit stream from the Alaska Gas Corporation.                                                              
                                                                                                                                
Number 2108                                                                                                                     
                                                                                                                                
DAVE DENGEL, City Manager, City of Valdez, commented that the plan                                                              
attempts to spread the wealth to all Alaskan communities.  He                                                                   
reiterated Mayor Hove's explanation that the plan would distribute                                                              
25 percent of the revenue to the municipalities and leave 75                                                                    
percent available to the state to be appropriated as the                                                                        
legislature sees fit.  Of the 25 percent, the payment in lieu of                                                                
taxes for the three affected communities would be taken off first.                                                              
He explained that the assets of the Alaska Gas Corporation are tax                                                              
exempt and therefore, real property would be located within the                                                                 
boundaries of the three specified municipalities, although those                                                                
municipalities would not be able to tax that property.  After that                                                              
amount was taken off the top, the remaining sum would be divided by                                                             
the state's population.  Mr. Dengel reiterated that all cities,                                                                 
regardless of population, would receive a minimum of $50,000.                                                                   
                                                                                                                                
MR. DENGEL pointed out that boroughs take on a greater                                                                          
responsibility area wide.  Therefore a methodology was developed in                                                             
order to provide funds to the city within a borough and provide the                                                             
borough with a large portion due to its area wide responsibilities.                                                             
He explained that the plan takes the general fund budget of each                                                                
community and compares that to the general fund budget of the                                                                   
borough which results in a ratio.  That ratio was multiplied by the                                                             
per capita dividend for the entire borough which is the city's                                                                  
share.  Then all of the city's dividends within that borough would                                                              
be added, that sum would be subtracted from the whole of the                                                                    
borough and the result would be distributed to the borough.                                                                     
                                                                                                                                
REPRESENTATIVE KEMPLEN referred to page 4, Article 4 of the                                                                     
amendment which reads, in part, "The corporation shall provide gas                                                              
to every community in the state that requests provision of it."  He                                                             
inquired as to how that would work, for instance, in Bethel.                                                                    
                                                                                                                                
MAYOR HOVE explained that the language was present in order that a                                                              
community that wished to construct a pipeline to a take-off point                                                               
on the main gas line would be free to do so.  If the community                                                                  
chose to do so, the community would also receive as much gas as                                                                 
required.  Clearly, in the case of Bethel that would be                                                                         
impractical.                                                                                                                    
                                                                                                                                
Number 2308                                                                                                                     
                                                                                                                                
REPRESENTATIVE BRICE commented that he could foresee a plant on the                                                             
Yukon River loading barges and taking the gas up and down the Yukon                                                             
as an alternative to heating oil.  Representative Brice said that                                                               
was a good provision which he appreciated.                                                                                      
                                                                                                                                
CHAIRMAN WHITAKER said that the concern was that the Alaska Gas                                                                 
Corporation would be responsible for bearing the cost of building                                                               
such spur lines.  With regard to Representative Brice's scenario,                                                               
Chairman Whitaker commented on how this project could create so                                                                 
many more opportunities for the state.                                                                                          
                                                                                                                                
REPRESENTATIVE OGAN concurred with Representative Brice's scenario.                                                             
However, this language should be clarified such that the language                                                               
translates that the corporation shall sell and provide the gas to                                                               
the community at the equivalent of the spigot of the well-head at                                                               
the pipeline.                                                                                                                   
                                                                                                                                
MR. DENGEL stated that the purpose of the language was that the                                                                 
community would request a valve at the pipeline and that community                                                              
would pay the well-head price plus the transportation cost to the                                                               
point.  The community would then be responsible to get the gas from                                                             
that valve to its destination.                                                                                                  
                                                                                                                                
MAYOR HOVE announced that he would provide the committee with                                                                   
information based on the methodology explained by Mr. Dengel.                                                                   
Mayor Hove referred to a spreadsheet entitled, "HB 170 Alaska Gas                                                               
Corporation Community Dividend Program," that was provided to the                                                               
committee.  He noted, "This is per billion dollars of profit.  So,                                                              
you get to choose how much profit you think...and apply the                                                                     
appropriate multipliers."  He informed the committee that the                                                                   
following communities would receive the specified community                                                                     
dividend:  Fairbanks North Star Borough - $12,735,369(annually);                                                                
City of Fairbanks - $1,805,615; Kenai Peninsula Borough -                                                                       
$6,367,886; Ketchikan Gateway Borough - $1,056,630.  He reiterated                                                              
that was per billion in profit.  He reviewed the corresponding                                                                  
community dividend amounts for other communities as listed on the                                                               
spreadsheet.                                                                                                                    
                                                                                                                                
TAPE 99-15, SIDE B                                                                                                              
                                                                                                                                
CHAIRMAN WHITAKER noted that the committee packet includes a memo                                                               
from Roger Marks, Department of Revenue.  Page 2 of that memo                                                                   
includes a matrix entitled, "Net Cash Flow to State - North Slope                                                               
Gas," which provides some preliminary numbers which Chairman                                                                    
Whitaker noted were very conservative figures.  The chart                                                                       
illustrates that a price of $2.50 per thousand cubic feet of gas                                                                
equates to $10 per barrel of oil which is very conservative.                                                                    
Chairman Whitaker said that a more realistic figure is provided at                                                              
a price of $3.50 per thousand cubic feet of gas which equates to                                                                
$17.00 per barrel of oil.  He pointed out that at the year 2020,                                                                
the numbers provided by Mayor Hove could be roughly doubled.  If                                                                
the state is very lucky and oil reaches $22 per barrel, the                                                                     
equivalent gas price is $4.50.  Chairman Whitaker emphasized that                                                               
the numbers are huge.                                                                                                           
                                                                                                                                
Number 2399                                                                                                                     
                                                                                                                                
REPRESENTATIVE KEMPLEN expressed his concern regarding Article 4 of                                                             
the amendment.  The language does not refer to the size of the                                                                  
natural gas pipeline and therefore no upper limit of size is                                                                    
specified.  He noted that the primary market for natural gas is                                                                 
export.  Therefore, he believed that there could be the possibility                                                             
of conflict between the amount of natural gas available for export                                                              
and the amount wanted by the local communities.  This could be more                                                             
problematic for those communities with a major project such as the                                                              
iron ore smelting project already mentioned.  Representative                                                                    
Kemplen recommended that the committee review inserting an upper                                                                
limit and ensure that the export aspect of this is economically                                                                 
viable.                                                                                                                         
                                                                                                                                
MR. DENGEL deferred to Bill Walker, the author of this amendment.                                                               
                                                                                                                                
Number 2326                                                                                                                     
                                                                                                                                
BILL WALKER, Attorney, City of Valdez and the firm of Walker Walker                                                             
Wendlandt & Osowski, testifying via teleconference from Anchorage,                                                              
acknowledged that there would be challenges, but viewed the                                                                     
amendment as a start.  With regard to the size of the line, Mr.                                                                 
Walker said that would have to be further developed in the                                                                      
legislation.  Mr. Walker pointed out that the economics of the gas                                                              
line under HB 393 is certainly different than under HB 170.  Under                                                              
HB 393, the authority had to be available for export under                                                                      
long-term contract in order to make it feasible financially.  He                                                                
commented that under HB 170 it appears that the local communities                                                               
would have a higher priority.                                                                                                   
                                                                                                                                
REPRESENTATIVE PHILLIPS commented that the amendment is an                                                                      
interesting concept.  With regard to profit-sharing with                                                                        
municipalities, Representative Phillips stressed the need to ensure                                                             
that at no time will the state be required to pay out this money to                                                             
municipalities, if a point is reached in any given year where there                                                             
is no profit on this line.  Therefore, that language would need to                                                              
be worked out.  Also the language regarding the issues of the                                                                   
boroughs and the cities needs to be clarified, particularly for                                                                 
those areas that are not encompassed within a borough.                                                                          
                                                                                                                                
CHAIRMAN WHITAKER interjected that the issue of boroughs and cities                                                             
could be commented on by Mayor Hove.                                                                                            
                                                                                                                                
REPRESENTATIVE PHILLIPS said that she did not see the answer in the                                                             
language and therefore, was uncomfortable with the language.                                                                    
                                                                                                                                
CHAIRMAN WHITAKER announced that he was not planning on taking any                                                              
action on this legislation; this is the first of many hearings.                                                                 
                                                                                                                                
MAYOR HOVE stated that no distinction was made between organized                                                                
and unorganized governments, but every village is represented on                                                                
the spreadsheet and shares on the pro rata basis.                                                                               
                                                                                                                                
REPRESENTATIVE PHILLIPS agreed, but pointed out, "... if you are                                                                
encompassed a borough, the borough also gets money which is more                                                                
money into that area.  So, that's the language I want to verify and                                                             
clarify."                                                                                                                       
                                                                                                                                
Number 2162                                                                                                                     
                                                                                                                                
MAYOR HOVE used Fairbanks as an example.  Fairbanks is not                                                                      
consolidated and includes two organized cities and one borough.  In                                                             
Fairbanks' case, the ratio of its funded budgets for a given year                                                               
is the determinant of how much money each receives.  If Fairbanks                                                               
was consolidated, the borough would receive every dollar available                                                              
on the pro rata basis.  As it is, the portions for the City of                                                                  
North Pole and the City of Fairbanks is subtracted from the borough                                                             
government's entitlement.  Clearly, a unified government such as                                                                
Juneau would receive everything.                                                                                                
                                                                                                                                
MR. DENGEL explained, "What we did with boroughs and cities is we                                                               
would just take the total population of the borough and that was                                                                
the pot that we worked off from when we divided back up to the                                                                  
cities and then borough....  There's not additional money going                                                                 
into a borough, ..., there's 10,000 people in the borough, they'd                                                               
get whatever 10,000 times the per capita ...."  He recognized that                                                              
the language may need clarification.                                                                                            
                                                                                                                                
REPRESENTATIVE HARRIS referred to the definitions section.  He                                                                  
noted that the definition for "project" is fairly site specific.                                                                
However, the majority of gas consumers would not live in those                                                                  
specified areas.  Is there any language in the legislation                                                                      
mandating that the Alaska Gas Corporation construct a spur to the                                                               
area with the most demand?                                                                                                      
                                                                                                                                
MAYOR HOVE informed the committee that it was agreed upon that this                                                             
natural resource be first put to use by Alaskans at beneficial                                                                  
rates to Alaskans.  For example, there would not be petroleum                                                                   
refiners adjacent to our oil pipeline and producing products that                                                               
are not that competitive.  The language fashioned would allow any                                                               
community to construct a pipeline to the point of transmission and                                                              
take as much gas as the community could use.  The prices would                                                                  
compensate the public corporation for its cost of capital and                                                                   
operations to that point on the pipeline.                                                                                       
                                                                                                                                
Number 1978                                                                                                                     
                                                                                                                                
MAYOR HOVE used Anchorage as an example, as it will probably face                                                               
a gas shortage from the Cook Inlet field in a few years.  He noted                                                              
the possibility that Anchorage could construct a properly-sized                                                                 
pipeline from Anchorage to Glennallen to receive access to gas in                                                               
the pipeline itself.  The language in the legislation would make it                                                             
possible then for Anchorage to receive an unending supply of                                                                    
take-offs in the quantities desired.  With regard to take-offs,                                                                 
Mayor Hove pointed out that gas is compressible which means that                                                                
gas taken off can be made up through "artful operation of                                                                       
compression stations."  For example, if gas is taken off in                                                                     
Fairbanks, the pressure can likely be increased north of Fairbanks                                                              
to make up for the gas lost in order to ensure that the pipeline is                                                             
fully utilized to the tidewater.                                                                                                
                                                                                                                                
MAYOR HOVE stressed that the mayors wanted to ensure access at                                                                  
affordable prices.  Furthermore, they wanted to establish the                                                                   
Alaska Gas Corporation as a common carrier through competitive                                                                  
contracts with private industry and only hold the corporation                                                                   
responsible for the transmission of gas from the North Slope to                                                                 
tidewater.  Everyone else wanting to hook up would have to do so at                                                             
their own expense.                                                                                                              
                                                                                                                                
REPRESENTATIVE OGAN referred to page 1, line 8 of the amendment                                                                 
which he interpreted as dedicating 25 percent of the profit to a                                                                
special purpose.  That is prohibited Article 9, Section 7 of the                                                                
constitution.  He wondered if the language "Subject to                                                                          
appropriation for the purpose," was utilized to meet the                                                                        
constitutional question.                                                                                                        
                                                                                                                                
CHAIRMAN WHITAKER said, "That would not be my intent.  And if we                                                                
need to amend the constitution in order to ensure that this is a                                                                
constant revenue stream to the municipalities, then I would suggest                                                             
that we do that."                                                                                                               
                                                                                                                                
MAYOR HOVE viewed this as a form of enterprise in which the state                                                               
government will be involved.  The profits from that enterprise will                                                             
go to the state's general fund and the legislature will                                                                         
periodically make the appropriate appropriations to the                                                                         
municipalities.  In that way, Representative Ogan's constitutional                                                              
concern is avoided.                                                                                                             
                                                                                                                                
CHAIRMAN WHITAKER concurred with Mayor Hove, however he expressed                                                               
concern that it is easy to not appropriate.                                                                                     
                                                                                                                                
REPRESENTATIVE KEMPLEN referred to page 3, line 17 of the amendment                                                             
which utilizes the same language, "Subject to the appropriation for                                                             
the purpose."  Since these impact grants would be appropriated                                                                  
during construction, these grants would not be able to come from                                                                
the profits of the line.  Therefore, Representative Kemplen                                                                     
inquired as to where the funding for these impact grants would                                                                  
come.  Is it anticipated that the funds would come from the                                                                     
proceeds of the revenue bonds or from the general fund itself?                                                                  
                                                                                                                                
MAYOR HOVE said that it is the intention that the revenue derived                                                               
from the sale of revenue bonds, one percent, would fund the impact                                                              
grants.                                                                                                                         
                                                                                                                                
REPRESENTATIVE KEMPLEN asked if that was allowable for distribution                                                             
as bond monies.  He was unsure that the proceeds from revenue bonds                                                             
could be used.                                                                                                                  
                                                                                                                                
MR. WALKER stated that would be a cost of the project and would                                                                 
qualify for financing in that method, just as an additional cost of                                                             
constructing the project.  Mr. Walker agreed that he based that                                                                 
upon his past experience with bonding procedures.                                                                               
                                                                                                                                
Number 1670                                                                                                                     
                                                                                                                                
REPRESENTATIVE PHILLIPS commented that in order to make a profit                                                                
from the pipeline, an export of the gas will have to occur.  At                                                                 
what point is there a balance between the amount of gas dedicated                                                               
for export in order to provide gas to the local entities at the                                                                 
well-head price.  She asked how will it be balanced, if the state's                                                             
demand exceeds the amount exported which allows local entities to                                                               
utilize the gas at the well-head price.                                                                                         
                                                                                                                                
MAYOR HOVE said that Alaska would not be able to put a dent in the                                                              
quantity of gas in the pipeline, unless Alaska grew by a order of                                                               
magnitude.  He indicated that Anchorage's needs could be met                                                                    
without negative impacts.  In any event, the state would derive the                                                             
revenue in the same amount from its residents as it would from                                                                  
sales in Korea, for example.  The language reflects that "we" will                                                              
pay the cost of transportation to the point of take-off.  No                                                                    
communities would be requesting any type subsidy for the purpose of                                                             
access.  Mayor Hove pointed out that although Alaska is the                                                                     
provider of energy to a large portion of the United States, if not                                                              
the world, Alaskans pay more for their energy than most.  That was                                                              
puzzling to Mayor Hove, who felt that energy policy should be                                                                   
changed.                                                                                                                        
                                                                                                                                
REPRESENTATIVE PHILLIPS commented then that the first step would be                                                             
to ensure that there are contracts to sell this gas before moving                                                               
forward.                                                                                                                        
                                                                                                                                
CHAIRMAN WHITAKER agreed, but noted that the cost must be                                                                       
determined first which is at the heart of this feasibility study.                                                               
                                                                                                                                
REPRESENTATIVE OGAN read Article VIII, Section 5 of the Alaska                                                                  
Constitution which reads as follows:  "FACILITIES AND IMPROVEMENTS.                                                             
The legislature may provide for facilities, improvements, and                                                                   
services to assure greater utilization, development, reclamation,                                                               
and settlement of lands, and to assure fuller utilization and                                                                   
development of the fisheries, wildlife, and waters."  He assumed                                                                
that "lands" also referred to resources which would upon an initial                                                             
reading provide the constitutional authority.  Representative Ogan                                                              
requested that Legal Research and Services be contacted for an                                                                  
opinion on the constitutional authority in this case.                                                                           
                                                                                                                                
Number 1440                                                                                                                     
                                                                                                                                
MANO FREY, Executive President, Alaska American Federation of Labor                                                             
and Congress of Industrial Organizations (AFL-CIO), testified via                                                               
teleconference from Fairbanks.  He supported this legislation                                                                   
moving forward.  Mr. Frey commented that the AFL-CIO has strong                                                                 
relationships with Yukon Pacific, Alyeska, and Alaska's oil                                                                     
industry.  He looked forward to working on this legislation as it                                                               
moves through the legislature.  This is visionary and an                                                                        
opportunity for the state to be involved in the entire scope of a                                                               
resource that belongs to all of Alaska.  Furthermore, this would                                                                
ensure that Alaskans are trained for all aspects of this.  Mr. Frey                                                             
encouraged this legislation being moved forward.                                                                                
                                                                                                                                
CHAIRMAN WHITAKER asked if there were any questions of Mr. Frey.                                                                
There bing none, the discussion amongst the committee continued.                                                                
                                                                                                                                
REPRESENTATIVE OGAN pointed out that thus far, the committee has                                                                
heard from those that have something to benefit from this                                                                       
legislation.  This is a major departure in policy for the state to                                                              
become involved in the pipeline.                                                                                                
                                                                                                                                
Number 1147                                                                                                                     
                                                                                                                                
MAYOR HOVE noted that he is an average businessman and that is how                                                              
he tends to approach things.  He said, "Because of my work on HB
393 last year, and because of my recognition and, I think the                                                                   
recognition of everyone who was working with that bill, we were                                                                 
really on the bubble as far as creating margins was concerned.                                                                  
There wasn't much, if any, margin to create there under that                                                                    
circumstance where we had to rely on private financing either                                                                   
through equity or through straight flat out debt or bonds.  The                                                                 
fact that, the internal ... capitalization rate that oil companies                                                              
use that we were told, at least for the purpose of evaluation of                                                                
taps is in the area of 10 percent.  And when you can then think in                                                              
terms of selling bonds that cost you half of that, 5 percent, that                                                              
changes everything."  Therefore, it should be a public corporation                                                              
because only public corporations can sell revenue bonds of that                                                                 
nature.  In response to how such can be justified, Mayor Hove said                                                              
it is the only way the project will be achieved.  Mayor Hove                                                                    
pointed out that this legislation limits the function of the public                                                             
corporation owned by Alaskans to the "negotiation and execution of                                                              
contracts with private enterprise firms engaged in design,                                                                      
construction, and ultimately operation."  Mayor Hove understood                                                                 
that to be all the corporation would do and he was comforted with                                                               
that knowledge.  Mayor Hove stressed that if something as                                                                       
encompassed in HB 170 is not attempted, Alaska's natural gas                                                                    
resource would still be stranded.                                                                                               
                                                                                                                                
REPRESENTATIVE KEMPLEN referred to the legal opinion regarding the                                                              
exemption of the incomeable earnings.  If the Alaska Gas                                                                        
Corporation is just a shell for a private sector operation, he was                                                              
unsure that the corporation would qualify for the tax benefits.  He                                                             
suggested clarification regarding the shape and form of this                                                                    
corporation and its relationship with the state.                                                                                
                                                                                                                                
Number 0836                                                                                                                     
                                                                                                                                
CHAIRMAN WHITAKER stated that Representative Kemplen was correct                                                                
and noted the need for further study.  Even if the project is                                                                   
determined by the IRS not to be properly designed to receive                                                                    
tax-exempt status, Congress can provide a specific exemption for                                                                
the project.  The Alaska Railroad Corporation operates under such                                                               
a situation.                                                                                                                    
                                                                                                                                
REPRESENTATIVE HARRIS reminded the committee that the legislature's                                                             
work on gas last year resulted in a sponsor group which he wanted                                                               
to continue.  He indicated that there has been an effort put                                                                    
together by Arco and four other companies to attempt a project.  He                                                             
hoped the work on this legislation did not slow their investment in                                                             
a solution.                                                                                                                     
                                                                                                                                
CHAIRMAN WHITAKER concurred with Representative Harris regarding                                                                
the sponsor group continuing its work.  He announced his intent to                                                              
provide other interested parties with the opportunity to come                                                                   
forward.                                                                                                                        
                                                                                                                                
MAYOR HOVE informed the committee that he went to San Francisco                                                                 
last March to sell the last portion of a general obligation bond                                                                
issue for school construction in the amount of $27 million.  He                                                                 
explained that such a process requires discussions with                                                                         
underwriters and rating agencies about the desirability of the                                                                  
community.  During one of the breaks, Mayor Hove mentioned that he                                                              
was going to be involved in a project in Alaska which would require                                                             
a large amount of capital which he estimated to be in the $7 or $8                                                              
billion range.  He inquired as to how such a revenue bond issue be                                                              
structured.  Mayor Hove said that the group was so focused on this                                                              
possibility that the group could not be brought back to task on the                                                             
$27 million general obligation bond.                                                                                            
                                                                                                                                
REPRESENTATIVE PHILLIPS commented that it is encouraging to know                                                                
that Alaska's economic stability and passage of trust and financial                                                             
legislation have helped those corporations in Alaska that would be                                                              
eligible for such a project.                                                                                                    
                                                                                                                                
Number 0501                                                                                                                     
                                                                                                                                
MAYOR HOVE pointed out to the committee that the Fairbanks' Borough                                                             
Assembly passed a resolution in support of this legislation.                                                                    
                                                                                                                                
CHAIRMAN WHITAKER pointed out that this is an accomplishable task.                                                              
                                                                                                                                
ADJOURNMENT                                                                                                                     
                                                                                                                                
There being no further business before the committee, the House                                                                 
Special Committee on Oil & Gas meeting was adjourned at 6:34 p.m.                                                               
                                                                                                                                
                                                                                                                                

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