Legislature(2007 - 2008)CAPITOL 106
03/19/2007 08:30 AM House OIL & GAS
| Audio | Topic |
|---|---|
| Start | |
| HB177 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 177 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 19, 2007
8:33 a.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Kurt Olson, Vice Chair
Representative Nancy Dahlstrom
Representative Jay Ramras
Representative Ralph Samuels
Representative Mike Doogan
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Bob Roses
Representative Berta Gardner
COMMITTEE CALENDAR
HOUSE BILL NO. 177
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline Inducement
Act coordinator; making conforming amendments; and providing for
an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 177
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (H) READ THE FIRST TIME - REFERRALS
03/05/07 (H) O&G, RES, FIN
03/06/07 (H) O&G AT 3:00 PM BARNES 124
03/06/07 (H) -- MEETING CANCELED --
03/08/07 (H) O&G AT 3:00 PM BARNES 124
03/08/07 (H) -- MEETING CANCELED --
03/13/07 (H) O&G AT 3:30 PM HOUSE FINANCE 519
03/13/07 (H) Heard & Held
03/13/07 (H) MINUTE(O&G)
03/15/07 (H) O&G AT 3:00 PM BARNES 124
03/15/07 (H) Heard & Held
03/15/07 (H) MINUTE(O&G)
03/19/07 (H) O&G AT 8:30 AM CAPITOL 106
WITNESS REGISTER
MARCIA DAVIS, Deputy Commissioner
Commissioner's Office
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Provided sectional analysis of HB 177.
PAT GALVIN, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Answered questions on HB 177.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 8:33:49 AM. Representatives Samuels,
Ramras, Doogan, Kawasaki, and Kohring were present at the call
to order. Representatives Dahlstrom and Olson arrived as the
meeting was in progress.
HB 177-NATURAL GAS PIPELINE PROJECT
8:34:25 AM
CHAIR KOHRING announced that the only order of business would be
HOUSE BILL NO. 177, "An Act relating to the Alaska Gasline
Inducement Act; establishing the Alaska Gasline Inducement Act
matching contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming amendments; and
providing for an effective date."
8:36:12 AM
MARCIA DAVIS, Deputy Commissioner, Commissioner's Office,
Department of Revenue (DOR), began her sectional analysis of the
Alaska Gasline Inducement Act (AGIA). This act amends AS 43 by
the addition of Chapter 90, which is known as AGIA. The Alaska
Gasline Inducement Act begins with Article 1, she said, entitled
"Inducement to Construction of a Natural Gas Pipeline in this
State." Section 43.90.010 states that the purpose of this act
is to encourage expedited construction of a natural gas pipeline
with the following goals: facilitate North Slope gas
commercialization, promote exploration on the North Slope,
maximize benefits for the people of the state, and encourage the
commitment of natural gas to the North Slope pipeline. Article
2, is entitled "Alaska Gasline Inducement Act License." Ms.
Davis informed the committee that Section 43.90.100 essentially
outlines that the commissioners of Department of Natural
Resources (DNR) and Department of Revenue (DOR) will award the
AGIA license and inducements.
8:38:15 AM
REPRESENTATIVE SAMUELS observed that an applicant applies for
[one] license, not multiple licenses.
MS. DAVIS confirmed that one license would be awarded to one
applicant. She continued to say that Section 43.90.110 lists
the inducements that are awarded to the licensee. Paragraph (1)
is the state matching contribution, which is not to exceed $500
million, paid out over a five year period, and the period
commences on the date of the issuance of the license. The terms
for matching the matching contribution are: subparagraph (A),
on or before the close of the first binding open season, the
match will be an equal match; subparagraph (B), after the close
of the open season the match is not specified, but left as an
item to be resolved in the bidding process with a limit on the
state's match of 80 percent; subparagraph (C), qualified
expenditures are costs that occur after the license is issued,
that are directly related to obtaining a Federal Energy
Regulatory Commission (FERC) or Alaska Regulatory Commission
(RCA) certificate, and are not overhead costs, litigation costs,
assets or work product predating the issuance of the license, or
civil or criminal penalties or fines. The second inducement
provided to the licensee is the benefit of the AGIA coordinator,
whose duties are more fully specified in AS 43.90.330. The
licensee also receives the benefit of a state program that
provides training for the employment workforce needed for the
construction of a pipeline.
8:40:40 AM
REPRESENTATIVE SAMUELS asked what amount of the state's money
will be spent prior to the open season and what amount will be
spent between the open season and certification.
MS. DAVIS said that total estimates are as low as $50 million
and as high as $200 million, and the state's portion would be
one-half.
REPRESENTATIVE DOOGAN asked for details about the state training
program described in Section 43.90.110(3).
MS. DAVIS responded that this is the sole reference to the
program.
PAT GALVIN, Commissioner, Department of Revenue, informed the
committee that the training program is not established yet, and
that the intent is to work with Department of Education, the
University of Alaska, Department of Labor, and the licensee, to
develop a program geared toward jobs for pipeline development
and construction. The bill provides assurance to the licensee
that a training program will be developed with its project in
mind and it will be in place at the beginning of the project.
REPRESENTATIVE DOOGAN surmised that the Palin Administration
intends to develop a training program that will train Alaskans
to build the gas pipeline. He asked if there was a timeline for
this training.
COMMISSIONER GALVIN responded that the details and timeframe of
the training program will be available soon, and confirmed
Representative Doogan's statement of the intent of the program.
He noted that the schedule of the training program will be
dependent on the licensee.
REPRESENTATIVE DOOGAN asked if the training program would
require additional legislation.
8:44:58 AM
COMMISSIONER GALVIN said, at this point, the need for additional
legislation is not known.
REPRESENTATIVE DOOGAN asked if funding would be needed.
COMMISSIONER GALVIN answered yes.
REPRESENTATIVE SAMUELS asked if the open season is successful,
financing is obtained, and the state has already paid $25
million to $100 million, why would the state spend more money
after the open season?
COMMISSIONER GALVIN responded that the state anticipates
receiving proposals that denote spending a certain amount of
money to get to open season and that will also specify the cost
split with the state for either a successful or unsuccessful
open season. The proposals will be evaluated based on their
value to the state. He said that the applicants will want to
limit the state's cost.
REPRESENTATIVE SAMUELS noted that there is the possibility that
there will not be enough gas committed to obtain financing and
build the pipeline. If the proposal denotes that the state
gives to the licensee 80 percent [of $500 million] for design
and permitting, and the open season is unsuccessful, the state
may be in a better position to keep 100 percent of the
inducement and develop the project without the licensee.
COMMISSIONER GALVIN responded that the failure of an initial
open season is not necessarily the fault of the licensee. There
will be many hurdles that the state and the producers need to
identify and overcome. To proceed from the open season to
obtaining a FERC certificate requires a tremendous amount of
expertise and the licensee is needed to get the certificate.
8:48:18 AM
REPRESENTATIVE SAMUELS remarked, "You are spending 80 percent of
the money on the highest risk part, you don't have a customer.
You're designing it ...."
COMMISSIONER GALVIN noted that 80 percent is the maximum that
the state may be requested to spend at that point.
REPRESENTATIVE SAMUELS said:
But assuming that you allow them to get up to 80
percent, going to 100 percent, and just hiring
somebody, because then when you get to the end of the
day ... you have something of value ... that you can
sell it to the producers in exchange for the gas, you
could sell it back to Mid America, you could certainly
make your money back. ... You've now paid for
something and you 're not going to get your money
back.
COMMISSIONER GALVIN assured the committee that the state will
get its money back, the question is whether the state has the
opportunity to further maximize that return. He explained that
the state needs to encourage applicants. Commissioner Galvin
then said:
If [the applicants] look [at] this process and they
say if we get to an open season and it's unsuccessful,
then the state is going to kick us out the door and
bring in somebody else and drive the rest of the way
under some other scenario, then it's going to be less
likely that we're going to get somebody in initially.
We're locking in a relationship at the time the
proposal is made, that's going to carry us all the way
through to that FERC certificate. ... What we
recognized, in designing this, is sort of risk sharing
between the state and the companies, is we need to
provide them with the opportunity to see a successful
end product and if we cut them off at open season then
their attractiveness of engaging in this at the
initial phase becomes much lower.
REPRESENTATIVE SAMUELS observed that [the applicants] would be
enthused about a successful open season.
COMMISSIONER GALVIN responded yes, but they also would be taking
a risk that if they have an unsuccessful open season they would
lose their investment.
REPRESENTATIVE SAMUELS asked about the ramifications of a second
unsuccessful open season.
COMMISSIONER GALVIN noted that the state can not predict when
the commitments and financing for the project will happen, but
AGIA will begin a process with the best chance to succeed. If
there is a time when the FERC certificate is issued, but the
open season has not been successful, the state will look at
alternatives. Commissioner Galvin said that he believes AGIA is
the clearest path for success.
8:54:16 AM
REPRESENTATIVE RAMRAS said that his conception is that the
legislature must address the two valuable commodities of time
and money. The AGIA program spends money to obtain a set
outcome in a certain period of time. He said that AGIA sets a
finish line, but the uncertainty is, whether the producers will
cross the finish line and will transport the gas to market.
Representative Ramras remarked:
It strikes me that the whole philosophical approach to
AGIA is that we swap the unknown of time for a finite
amount of time. We seed that with our money, a non-
specified amount, up to and not to exceed $500
million, dollar-for-dollar, and then we have to wait
and see whether the producers are good faith partners
or whether the state has a, a deeper problem. ... Is
that a pretty accurate read of what we are discussing
this morning?
COMMISSIONER GALVIN agreed. However, he added, within one year
the legislature will see the schedule for the expenditures and
will have an opportunity to reject the proposal.
REPRESENTATIVE DOOGAN asked at what point the legislature will
approve the expenditure of the $500 million.
COMMISSIONER GALVIN explained that the intent of AGIA is to re-
designate $300 million held by Alaska Housing Finance
Corporation (AHFC). These funds will be sufficient to proceed
through the initial process and through open season. Within one
year, there will be an expenditure timeline from the successful
applicant, and more funds may or may not be needed.
9:01:18 AM
REPRESENTATIVE DOOGAN clarified that $300 million is needed this
legislative session.
COMMISSIONER GALVIN said yes.
REPRESENTATIVE DOOGAN observed that potential bidders will ask
for funds within a range of zero to 80 percent of the $500
million.
COMMISSIONER GALVIN reiterated that the maximum the bidders will
ask for is $500 million; the determination of 80 percent
develops as the project progresses, and becomes 80 percent of
the expenditures.
REPRESENTATIVE DOOGAN noted that one of the evaluation criterion
listed in Section 43.90.170 requests the percentage of the
state's matching contribution. How important, he asked, is that
criterion compared to the other criteria?
COMMISSIONER GALVIN responded that the primary factors important
to the state are the value to the state, and the likelihood of
success. Net Present Value (NPV) to the state will be part of
the evaluation and how much money the state will have to spend
is a significant factor in determining NPV. If a lesser amount
is required of the state, and the applicant is proposing a
greater investment on its part, that will be a factor to be
evaluated. Commissioner Galvin said that a lesser amount
required from the state will also be considered to contribute to
the likelihood of success.
9:04:33 AM
REPRESENTATIVE DOOGAN pointed out that the bidder needs to know
how much each criterion is worth. Accordingly, if a legislator
is evaluating the award, he/she must also know how much a
criterion is worth in order to assess the award.
COMMISSIONER GALVIN agreed that DOR and DNR need to provide more
detail and information on the objectivity of the economic
evaluation. More information is also needed on how the
commissioners will judge how the money will be split and the
provisions related to the likelihood of success.
REPRESENTATIVE DAHLSTROM also requested clarification of the
evaluation criteria. She then recalled her conversations with
oil industry representatives who are encouraged to see a true
commitment of money from the state. The state's matching
contribution, she said, has garnered positive reactions from the
industry.
9:07:48 AM
REPRESENTATIVE OLSON asked about a contingency plan in the event
that the $300 million held by AHFC is not re-designated.
COMMISSIONER GALVIN advised the committee that AGIA, if enacted,
requires funds to be authorized by the legislature. The $300
million will not come from the current budget, but was
previously set aside for the development of the gas pipeline.
REPRESENTATIVE OLSON noted that the money was put in AHFC so it
could not be spent last year.
REPRESENTATIVE SAMUELS asked how the commissioners will answer
questions from the potential bidders on the $500 million, and if
the evaluation be open to the public.
COMMISSIONER GALVIN said that the commissioners will balance a
desire to provide a level of expectation, in terms of what type
of proposal is going to win favor versus another, but they will
not create weighted, specified, percentages to score the
applications.
9:11:03 AM
REPRESENTATIVE SAMUELS questioned how each of the applicants can
get exactly the same answer to questions posed over a period of
time and during different conversations.
COMMISSIONER GALVIN relayed that Representative Samuels' concern
is shared by the commissioners. At this time, discussions with
potential applicants are focused on the language in the bill.
After its passage, the interaction with the applicants and the
evaluation of the applications will be closely regulated. The
Request for Application (RFA) will have clarifying language
regarding the evaluation criteria and there will not be an
informal exchange of information between the commissioners and
the applicants.
REPRESENTATIVE SAMUELS recalled that the past administration
maintained that the gas is not stranded. He also suggested that
because the state is taking more than half the risk of
developing the gas pipeline, and the producers will not have to
pay the state's money back or provide equity in the project,
AGIA is very appealing to the producers. Representative Samuels
reminded the committee that an amendment to last year's gas
pipeline bill required each builder to deposit $300 million in
escrow until a successful open season occurred. There was also
the potential of a penalty for not meeting a certain deadline.
REPRESENTATIVE DAHLSTROM stressed that the successful applicant
may not request any state money.
9:15:23 AM
COMMISSIONER GALVIN emphasized that the state is granting up to
$500 million as an inducement to the applicants. The applicants
may forego requesting state funds to strengthen their proposals.
In any event, AGIA's purpose is to encourage the producers to
submit proposals to build the pipeline, or to participate as
shippers. The state has a vested interest in seeing the Alaska
gas pipeline project proceed, unlike producers and pipeline
companies who can use their assets for other projects around the
world. Commissioner Galvin said that the bill is designed to
create a robust competition for construction of the pipeline and
increase the opportunities for the ultimate success of the
project. In addition, AGIA responds to the oil industry's wish
to see a financial commitment on the part of the state.
9:18:32 AM
MS. DAVIS added that the competitive process between the oil
companies for construction of the gas pipeline has already
begun. At the same time, the state wants to keep the process
open to all applicants, and not begin eliminating potential
applicants for any reason. After the Request for Proposal (RFP)
process and open season, the state will invite competition for
the most favorable terms for the state. Applicants, she said,
will be cognizant of the competition for post-open season state
funds.
REPRESENTATIVE SAMUELS reiterated that legislators do not know
how the criteria will be weighted so they will be unable to
determine the impact of the requested funds on the application.
He remarked:
If the 80 percent match is equally as important as
just having a headquarters here ... there is a huge
discrepancy but the bill doesn't say ... where the 80
percent match comes in. So if somebody comes in and
says "I don't want your money, I'll spend my own money
and I'll beat my competitors that way" and then they
don't beat their competitors....
9:21:15 AM
COMMISSIONER GALVIN confirmed that more information will be
provided on how the commissioners will apply the evaluation
criteria and how the impact of a successful, or unsuccessful,
open season will be weighted.
REPRESENTATIVE DOOGAN posed three situations to Commissioner
Galvin for his analysis: The legislature does not fund the $500
million grant; the legislature gives a lesser amount than
requested; or the legislature requires some return of ownership.
COMMISSIONER GALVIN answered that in not funding, or reducing
the amount of funding, the state would be limiting the number of
potential applicants. The state, he said, must demonstrate its
commitment to the ultimate success of the project. Commissioner
Galvin explained that $500 million is about one-half of the cost
of acquiring a FERC certificate and an amount that recognizes
the potential risk of this project. The application process
also provides the licensee an opportunity to propose how to put
this money toward the process. Regarding state ownership of the
pipeline, he said that a guaranteed return on the state's
investment will eliminate the state's risk. In order to
demonstrate the state's interest in the project, and to
encourage participation in the application process, the state
needs to accept some risk in the initial phase. The state, he
noted, receives significant value back for its investment
through more participation, lower tariffs, expansion, and other
provisions.
9:26:08 AM
REPRESENTATIVE DOOGAN acknowledged that each of these situations
will result in less participation.
COMMISSIONER GALVIN said yes.
REPRESENTATIVE DOOGAN said:
If the most important element of getting a gas ...
pipeline built is to get the producers to commit gas
at the open season, so that the project can be
financed, why aren't we paying the producers $500
million to make that commitment? Wouldn't that be a
better investment of that money?
COMMISSIONER GALVIN said:
It would, if that would be enough. But, ... one
aspect of the previous contract that I think is
illustrative to that point is that they put tremendous
value, much more that $500 million, onto that contract
and we didn't get a commitment to do much of anything
... What we're trying to do is use that $500 million
to get us something that may get them to commit...
REPRESENTATIVE DAHLSTROM asked if Commissioner Galvin is willing
to work with legislators on amending the evaluation criteria.
COMMISSIONER GALVIN said yes.
9:28:50 AM
REPRESENTATIVE RAMRAS remarked:
The fact is that the two commodities that are on the
table are time and money. That's what I hear
throughout this committee. ... One of the greatest
failings, apart from fiscal certainty on oil and gas,
on the Governor Murkowski's proposal, the other one
was the uncertainty of the benefit of time spent and
so what I appreciate about this proposal is that,
although I have my own reservations about spending so
much money, if it narrows down and makes the scope
more finite for the time component, that to me is the
most helpful element. .... I like that fact that this
thing is time triggered. And that we are ...
accelerating or expediting this process because the
loss to the state for each year of delay are so
significant. We certainly studied this. ... The cost
component in there, that's the trade-off for the
certainty of time, is the expenditure, and I think
that that's something that those of us in the private
sector are very accustomed to.
REPRESENTATIVE SAMUELS said:
Failed open season, we actually design a pipeline, get
a FERC certificate. Second failed open season, now I
have a five year contract with my partner to get
financing. Now I'm at 11 years right now, if you add
a second failed open season ... Second failed open
season ... Time is of the essence. ... I understand
this process, you're right, it gets to an open season
36 months, somebody's going to win the license, you're
going to get to an open season, but, at the end of
day, if you have a failed open season the first time
and now ... the worst case scenario, we've spent 80
percent of the money, we're halfway in so we have a
partner to the open season and we had 80 percent of
the money to the certificate, and now we have a failed
open season. Now we are $500 million into it and we
now have a partner that we're tied to for another five
years, we have no gas. ... What the plan is ... other
than suing to take Prudhoe Bay away....
COMMISSIONER GALVIN relayed that different factors will come
into play after the passage of time. He pointed out that AGIA
provides the opportunity for a mutual, or unilateral, decision
to abandon the project. If sometime during the process it is
recognized that a licensee or project is not going to succeed,
the state will have the authority to terminate the contract.
9:36:26 AM
CHAIR KOHRING announced the formation of a subcommittee chaired
by Representative Dahlstrom, and consisting of Representatives
Ramras, Doogan, and Samuels.
MS. DAVIS continued her analysis by noting that Section
43.90.120 is titled "Abandonment of project." Subsection(a)
relates that if the commissioners and licensee agree that the
project is uneconomic, then the inducements end, and there are
no further obligations except on the part of the licensee to
complete an audit. If the commissioners and licensee do not
agree that the project is uneconomic, then an impartial third
party will make the final determination.
REPRESENTATIVE SAMUELS stated that the terms of abandonment only
address the "uneconomics" of the project. If the licensee has
decided to abandon the project, and the arbitrator rules in
favor of the state, can the licensee be forced to continue the
project, he asked.
MS. DAVIS responded that in this instance, the licensee will be
in violation of the license. Section 43.90.240 gives the state
authority to revoke the license, recoup state money, and release
the licensee.
COMMISSIONER GALVIN added that AGIA also allows the
commissioners to seek remedies and damages allowable by law and
that may be due after the breach of the terms of the license.
9:41:51 AM
MS. DAVIS continued to say that the abandonment provision
establishes that if the state makes a payment in violation of
the licensed project assurances, this would also result in
abandonment of the project.
REPRESENTATIVE DOOGAN requested the definition of "uneconomic"
as used in AGIA.
MS. DAVIS said that she believes that commercial parties will
have their own definitions to use during negotiations. An
impartial third party would bring to bear commercial or industry
standards.
REPRESENTATIVE DOOGAN observed that the lack of a definition may
cause problems in the future.
MS. DAVIS cautioned that uneconomic needs to be defined from the
state's perspective.
REPRESENTATIVE DOOGAN urged Ms Davis to prepare a definition of
uneconomic for the committee's review.
REPRESENTATIVE RAMRAS remarked:
A 12 percent or 14 percent return on a pipe is
terribly uneconomic for Conoco, BP, or Exxon. But
it's remarkably economic for Mid America or Trans-
Canada. ... It means different things to different
companies that have different capital structures and
require different returns on investment. ...
Presumably, every potential licensee ... is going to
be a publicly traded company, and that's, I think, a
critical piece of this to bear in mind....
9:46:44 AM
COMMISSIONER GALVIN agreed that clarification on this issue is
needed. He advised that the question of whether the bill sets
up the economic standards, or whether the companies should
establish economic standards in their proposals, has not been
answered.
REPRESENTATIVE SAMUELS warned that defining uneconomic will be
difficult. He added that, after an unsuccessful second open
season, the project will be uneconomic for everyone. He then
asked:
What are you going to do when Trans-Canada comes up
and says it's uneconomic because I think we're not
going to get the gas? And you're going to go, well
you can get out, but I'm going to sue you for all of
the monies. Or you can get out and I'm going to sue
you for damages, or you must continue with me on this
partnership. ... Your partner wants out ....
9:48:54 AM
MS. DAVIS assured the committee that a definition of uneconomic
can be stated from the perspective of the state, and a company
will then base its policy decisions on the definition included
in the bill. She added that, an open season can be unsuccessful
for legitimate commercial reasons, or perhaps, not. The state's
perspective is what will provide the greatest certainty and
security for investment in the project, from the applicant's
point of view.
COMMISSIONER GALVIN explained that the proposals for the project
will include contingency plans for certain events like an
unsuccessful open season. The state will expect a commitment
for action dependent upon anticipated variables and the
companies are expected to have made plans as a part of the
application. However, the state will need to decide what its
reaction will be if a FERC certificate is issued and there is an
unsuccessful open season.
9:53:14 AM
REPRESENTATIVE DOOGAN agreed that drawing a definition of
uneconomic is difficult, but during the project it is possible
for the licensee to require a change in the previously arranged
terms. He recommended further discussion to decide whether the
bill is better with or without the definition.
REPRESENTATIVE DAHLSTROM suggested that some questions may need
to be discussed in executive session.
MS. DAVIS continued her analysis of Section 43.90.130, titled
"Request for applications for the license." Subsection (a)
requires the commissioners of DNR and DOR to issue the request
for application within three months of the effective date of
this chapter. Subsection (c) declares that the requests for
application are exempt from the state's procurement code in
order to accelerate the application process. Section 43.90.140
relates to the application requirements, which details the
request for application (RFA) process. Information that the
commissioners, the legislature, and the public will need from
the applicant includes filing deadlines, a detailed description
of the gas pipeline route, the design of the receiving and
delivery points, analysis of the economic and technical
viability of the project, an economic and technical work plan,
and the timeline and budget for developing the project. In
addition, if the proposed route passes through Canada,
information must be included regarding international rights-of-
way and licensing. Ms. Davis noted that if the proposed project
includes the transportation, storage, and liquefaction of
natural gas (LNG), details of the additional components
necessary for a LNG plant are required. The application must
also include a schedule for holding the initial open season that
confirms to FERC regulations.
9:58:39 AM
REPRESENTATIVE RAMRAS asked: "Why wouldn't the producers come
to an open season?"
MS. DAVIS responded that uncertainty over the proposed shipping
tariffs is one factor that may contribute to a failed open
season. Shippers must negotiate for the conditions attached to
their commitments to buy shipping capacities. Favorable
shipping rates will enable a shipper to allocate the risk of
cost overruns between itself and the pipeline companies. If a
shipper does not want to ship gas, it may be because it has not
been able to negotiate favorable tariff rates. Ms. Davis noted
that the second factor may be the shippers' concern about the
future market price for the sale of the gas.
REPRESENTATIVE RAMRAS suggested that the subcommittee look at
tariffs in addition to the evaluation criteria.
MS. DAVIS expressed her belief that private enterprise can often
solve its own problems. In addition, in AGIA, there is the
opportunity for a shipper to realize benefits from participating
in the initial open season. Therefore, the pipeline company
will benefit from timing the open season to the advantage of
both entities. A level of coordination and cooperation between
the producers and the selected pipeline company is expected, she
said.
10:02:27 AM
REPRESENTATIVE SAMUELS remarked:
I don't think the state, on a project this size, is,
Trans-Canada or Enbridge or Mid America big enough to
essentially backstop the tariff? ... Are they big
enough, as a corporate entity, to backstop large
tariff increases? And when the original legislation
was going through Congress, there was talk by various
players, you know, and industry disagrees on what they
need or don't need, but the only one actually big
enough would be the United States government. ... So
instead of having the tariff subsidy they put in the
loan guarantees. ... Are some of these relatively
small companies, which are huge corporations, big
enough to take on that additional risk?
COMMISSIONER GALVIN informed the committee that the $35 million
to $45 million estimate described earlier in the presentation
represents value to the state, not the cost to a pipeline
company. The ultimate question is whether the risk-sharing is a
legitimate expectation, or whether the costs will be borne by
the producers. He suggested that more information on this
subject will be coming from testimony on AGIA by the industry.
Commissioner Galvin also noted that the potential problems
associated with a failed open season, after the FERC certificate
is issued, may lead to intervention by Congress.
10:07:20 AM
MS. DAVIS continued her analysis of Section 43.90.140
subparagraph (B), regarding the FERC certification process. The
applicants are required to use FERC pre-filing procedures and
apply for the certificate of public convenience and necessity.
If the project requires certification from the Regulatory
Commission of Alaska (RCA), the time commitments remain the
same. The applicant is required, after the first binding open
season, to commit to soliciting applications to expand the
pipeline every two years. Expanding the project will be based
on reasonable engineering increments and by commercially
reasonable terms. Expansion will also occur with the commitment
of rolled-in rates that are not to exceed 15 percent of the
initial tariff rates.
REPRESENTATIVE DOOGAN asked: "How did we get to the 15 percent
figure?"
MS. DAVIS replied that the 15 percent was derived from analyst's
determination of the typical costs of expansion. According to
the scope of the expansion on the North Slope, this rate
delivers the majority of the value.
MS. DAVIS returned to the application requirements of AGIA, and
said that the applicant is prohibited from entering into
negotiated rate agreements that by-pass the rolled-in rate
requirements. In addition, the applicant, if its proposal
includes using an existing gas treatment plant, must also agree
to include the value of the gas treatment plant in the
calculation of the tariff at the net book value. The applicant
must specify the percentage of the state's matching contribution
after the open season, must ensure financing does not exceed 70
percent debt, and demonstrate how to handle cost overruns. This
section of AGIA also requires that the applicant commit to
designate five delivery points with distance sensitive rates to
delivery points within the state, establish a local headquarters
for the project in the state, and hire qualified local residents
to work on the project.
MS. DAVIS said that Section 43.90.150 relates to the process of
the application review. The commissioners will receive the
applications and reject any incomplete applications. They may
request additional information, if desired.
10:12:41 AM
REPRESENTATIVE DOOGAN asked if all applicants will be requested
to supply the same information.
MS. DAVIS confirmed that, even though the projects may differ
and the types of information may be irrelevant, the state's
intent is that all applicants will be treated equally.
REPRESENTATIVE DOOGAN stated that two comparable applications
would be required to provide identical information.
COMMISSIONER GALVIN said that the intent is that the
commissioners can request details about a specific proposal when
necessary. He added that earlier in the process, the timeframe
will allow for full competition with no competitive advantage.
Later, the questions and additional information will be made
public at the same time as the original application.
MS. DAVIS added that additional pieces of information can be
requested from all of the applicants during the review process.
MS. DAVIS relayed that Section 43.90.160 is titled "Proprietary
information and trade secrets." An applicant is required to
identify and demonstrate that information on the application is
proprietary or a trade secret, and not subject to public
disclosure.
10:16:24 AM
REPRESENTATIVE DOOGAN asked how an applicant can demonstrate
that information is proprietary.
MS. DAVIS explained that the company would need to demonstrate
that the information is non-public, unavailable, protected by
other laws, or will, if disclosed, put the company at a material
disadvantage.
MS. DAVIS informed the committee that Section 43.90.170
identifies the application evaluation criteria. The evaluation
criteria includes: timing, the management of cost overruns,
transportation rates, the initial design capacity, the
percentage of the state's matching contribution, the
reasonableness, specificity and feasibility of the work plan,
the timeline and budget, and the applicant's financial records.
Section 43.990.180, she said, relates to the application notice,
review, and comments. After the applications are complete, they
will be open for public comment for a 60-day period.
REPRESENTATIVE DOOGAN returned the committee's attention to the
application criteria paragraph (7) and asked how an unpaid
federal judgment would affect an applicant's record of
performance.
COMMISSIONER GALVIN indicated that this provision is a standard
clause to ensure that the commissioners are able to use
information to approve or reject an application.
REPRESENTATIVE DOOGAN said: "So this is a term of art
someplace. And there's either a definition or history to tell
us the specifics of how we would be defining, say, business
ethics in this?"
MS. DAVIS said that is correct.
REPRESENTATIVE DAHLSTROM recommended that application criteria
paragraph (7) also be discussed by the subcommittee.
10:21:10 AM
MS. DAVIS continued her analysis of Section 43.90.190, "Notice
to the legislature of intent to issue license; denial of
license." She said that, once the commissioners decide that an
application meets AGIA's criteria and requirements, they will
issue a determination of findings and publish a notice of intent
to issue a license with the written findings. This notice will
be forwarded to the legislature for action. The commissioners
also have the right to issue a written finding that none of the
applications meet the criteria of the bill. Section 43.90.200
relates to legislative action regarding the issuance of the
license. Ms. Davis noted that within 30 days of the receipt of
the commissioners finding, the legislature can disapprove of the
issuance of the license by a joint resolution.
CHAIR KOHRING asked if the disapproval is by resolution of the
legislature.
MS. DAVIS answered that the notice of intent to disapprove would
be a joint resolution of the legislature.
CHAIR KOHRING asked whether the joint resolution would prevail
if the administration did not accept the decision of the
legislature.
COMMISSIONER GALVIN said that the intent is that the resolution
by the legislature can not be overturned by the governor.
However, he recommended that this question be referred to the
Department of Law.
REPRESENTATIVE OLSON asked: "What happens if we receive it in
the middle of the first or second special session?"
10:23:36 AM
MS. DAVIS assured the committee that the 30 day time limit could
be accommodated within a special session.
CHAIR KOHRING asked what would happen if the receipt of the
finding occurs at the end of a regular session.
MS. DAVIS indicated that that situation will require a special
session.
COMMISSIONER GALVIN added that the resolution is not required,
and would only be necessary if the legislature decides to act
and overrule the decision of the commissioners.
MS. DAVIS noted that Section 43.90.210 relates to certification
by regulatory authority and project sanction. A licensee is
required to accept the FERC or RCA certificate if awarded, and
to proceed with the project within one year, if financing is
approved, or obtain financing with five years. If the licensee
does not sanction the project at this time, it must abandon the
project and transfer the certificates, project data, etc., to
the state, at no cost to the state.
10:25:54 AM
REPRESENTATIVE DOOGAN asked: "Can you explain to me why the
bill imagines that the license might be awarded to somebody who
doesn't have the financing?"
MS. DAVIS answered that FERC has the authority to issue the
license notwithstanding the credit worthiness of the applicant.
COMMISSIONER GALVIN urged the committee to recognize that the
only entities that can initially guarantee financing are the
large producers. Through AGIA, at some point the state must
look to the licensee for proof of specific credit support. The
state is not obligated to wait for the entire five years. This
provision, he said, will alert the applicant to the time limit
for obtaining the financing and commitments of gas from the
producers.
CHAIR KOHRING recalled that the Alaska Railroad Corporation has
tax exempt, low interest bonds available to companies.
COMMISSIONER GALVIN said he was unfamiliar with the Alaska
Railroad Corporation bonds, but that there are opportunities for
state, federal, consumer groups, utilities, and others, to
participate in financing the project.
10:30:50 AM
MS. DAVIS informed the committee that Section 43.90.220 relates
to the amendment or modification of project plans. Changes to
the plan can be approved through the commissioners if they are
the result of circumstances outside the licensee's control and
were not reasonably foreseeable. However, these changes can not
diminish the value to the state of the project. Section
43.90.230 is relevant to records, reports, conditions, and audit
provisions. Subsection (a) requires the licensee to maintain
records for audit purposes. In addition, the commissioners will
have a representative present at all meetings of the licensee's
governing body and equity holders that relate to the project.
In addition the representative will have access to all
information given to equity holders. Section 43.90.240 defines
license violations and damages. Ms. Davis said that a licensee
is in violation of its license if it uses state money for other
purposes, departs from the approved plan, or violates any terms
of AGIA, or violates the terms of the license. Commissioners
will give written notice of the violation and allow 90 days to
resolve the violation. If the violation is confirmed the state
has rights to recover.
10:33:30 AM
REPRESENTATIVE DOOGAN asked whether the state will take over all
the work that had been done on the existing project, in addition
to the license.
MS. DAVIS answered yes.
REPRESENTATIVE DOOGAN further asked whether the license and
project could then be transferred to another licensee.
MS. DAVIS answered yes. She then continued her analysis of
Article 3, that focuses on shippers and the inducement portion
of AGIA. Section 43.90.300 outlines the qualifications for
receiving resource inducements. Ms. Davis noted that
inducements are acquired by obtaining a firm transportation
capacity at the first binding open season. Royalty inducements
will be based on regulations written by the commissioner of DNR
and will establish the fair market value for the state's royalty
gas and to exercise the state's right to switch between royalty
gas in-value and in-kind. As a condition to receiving the
royalty inducements the shipper must agree not to contest
rolled-in rates. The commissioner of DNR will review the
regulations every two years. A shipper has the right to opt
into these benefits if desired. Section 43.90.320 outlines the
gas production tax exemption. The intent of this exemption is
that by contract, a shipper can exempt the amount that is equal
to the difference between its gas production tax obligation and
the tax that was in effect at the first binding open season.
This benefit continues for the first ten years of the commercial
operation of the pipeline.
10:36:21 AM
REPRESENTATIVE DOOGAN asked what the value of this tax exemption
will be to the producers.
MS. DAVIS explained that if there is no change in the tax
structure, the value is zero. However, if the tax rate is
increased in the future, the value will increase also.
REPRESENTATIVE DOOGAN questioned whether the value to the
producers can be calculated at different tax rates.
COMMISSIONER GALVIN offered to provide the committee estimates
of tax rate changes. He said that the models will give a
perception of risk on the part of the producers by limiting the
uncertainty of the state's future tax rate. The intent is to be
responsive to requests from the producers. Commissioner Galvin
opined that Alaska is a stable tax regime, and reminded the
committee that the tax freeze will need to survive a
constitutional challenge.
REPRESENTATIVE DOOGAN asked:
If the tax rate right now, is, I think it's 22.5
percent on gas, if, how much, making the assumptions
that you have already made in your presentation on
AGIA, for the kind of pipeline you're building and the
... rate at which gas can be passed through it and all
the rest of that, how much would one percent ...
increase or decrease, in that tax be worth?
COMMISSIONER GALVIN indicated that that information would be
provided to the committee.
MS. DAVIS advised the committee that Section 43.90.330 creates
the position of the AGIA coordinator, which is an inducement for
both the pipeline construction company and the shippers. This
position will coordinate the activities of the state agencies,
assist with the compliance of the requirements of AGIA, and
coordinate with the federal coordinator. The coordinator will
focus on actions taken by state agencies relating to the
project.
10:41:41 AM
CHAIR KOHRING asked whether the coordinator will be authorized
to hire additional individuals to support this position.
MS. DAVIS, responding to questions, stated that the AGIA
coordinator will be a single position, serving until one year
after the operation of the pipeline begins, and at the
discretion of the governor.
[HB 177 was held in committee]
10:45:00 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 10:45
p.m.
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