Legislature(2007 - 2008)CAPITOL 106
03/30/2007 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 30, 2007
8:30 a.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Kurt Olson, Vice Chair
Representative Nancy Dahlstrom
Representative Ralph Samuels
Representative Mike Doogan
Representative Scott Kawasaki
MEMBERS ABSENT
Representative Jay Ramras
OTHER LEGISLATORS PRESENT
Representative John Coghill
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
03/19/07 (H) Heard & Held
03/19/07 (H) MINUTE(O&G)
03/20/07 (H) O&G AT 3:00 PM BARNES 124
03/20/07 (H) Heard & Held
03/20/07 (H) MINUTE(O&G)
03/21/07 (H) O&G AT 5:30 PM SENATE FINANCE 532
03/21/07 (H) Heard & Held
03/21/07 (H) MINUTE(O&G)
03/22/07 (H) O&G AT 3:00 PM BARNES 124
03/22/07 (H) Heard & Held
03/22/07 (H) MINUTE(O&G)
03/23/07 (H) O&G AT 8:30 AM CAPITOL 106
03/23/07 (H) Heard & Held
03/23/07 (H) MINUTE(O&G)
03/24/07 (H) O&G AT 1:00 PM SENATE FINANCE 532
03/24/07 (H) -- Public Testimony --
03/26/07 (H) O&G AT 8:30 AM CAPITOL 106
03/26/07 (H) Heard & Held
03/26/07 (H) MINUTE(O&G)
03/27/07 (H) O&G AT 3:00 PM BARNES 124
03/28/07 (H) O&G AT 7:30 AM CAPITOL 106
03/28/07 (H) Heard & Held
03/28/07 (H) MINUTE(O&G)
03/28/07 (H) O&G AT 8:30 AM CAPITOL 106
03/28/07 (H) Heard & Held
03/28/07 (H) MINUTE(O&G)
03/29/07 (H) O&G AT 3:00 PM BARNES 124
03/29/07 (H) Heard & Held
03/29/07 (H) MINUTE(O&G)
03/30/07 (H) O&G AT 8:30 AM CAPITOL 106
WITNESS REGISTER
PATRICK GALVIN, Commissioner
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Reviewed proposed amendments to HB 177 and
responded to questions.
DON BULLOCK, Attorney
Legislative Legal Counsel
Legislative Legal and Research Services
Legislative Affairs Agency
Juneau, Alaska
POSITION STATEMENT: Spoke as the drafter of amendments to HB
177 and responded to questions.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 8:30:57 AM. Representatives Samuels,
Doogan, Kawasaki, and Kohring were present at the call to order.
Representatives Olson and Dahlstrom arrived as the meeting was
in progress.
HB 177-NATURAL GAS PIPELINE PROJECT
8:31:08 AM
CHAIR KOHRING announced that the sole 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."
CHAIR KOHRING recessed the House Special Committee on Oil and
Gas meeting to a call of the chair [for the purpose of waiting
for a committee substitute to be delivered to the committee].
8:44:40 AM
CHAIR KOHRING reconvened the House Special Committee on Oil and
Gas. Present at the reconvening were Representatives Dahlstrom,
Samuels, Doogan, Kawasaki, and Kohring. Representative Olson
arrived as the meeting was in progress.
8:46:13 AM
REPRESENTATIVE DAHLSTROM moved to adopt the committee substitute
(CS) for HB 177, Version 25-GH1060\E, Bullock, 3/30/07, Version
E as a work draft.
8:46:19 AM
CHAIR KOHRING objected.
REPRESENTATIVE DOOGAN objected and explained that he does not
know the content of Version E well enough to adopt it as a work
draft.
[There was discussion regarding the correct procedure and it was
determined that a vote did not have to be taken; instead the
motion with the two objections was left pending.]
8:48:07 AM
PATRICK GALVIN, Commissioner, Department of Revenue (DOR),
explained the changes made to HB 177 in Version E. He directed
the committee's attention to page 2, lines 22-24, which reads in
part:
... however, the state's contribution may
not exceed 50 percent of the qualified expenditures
incurred before the end of the first binding open
season ...
COMMISSIONER GALVIN said that the changes are to capture the
concept that the license applicant can suggest a state
contribution amount within the limits stated. On page 2, line
30 there is a language change to "is incurred" from the previous
language of "cost occurs." The section on abandonment is now
Section 240 of the bill, and the numbering has changed from the
original version. On page 3, lines 18 to 19, there is an added
clause allowing the commissioners to use "technical advisors" as
independent contractors to assist in application development and
evaluation.
8:52:39 AM
COMMISSIONER GALVIN continued to page 3, lines 22-24, and
explained that DOR had suggested inserting some restrictions on
appellate rights of the participants by incorporating
limitations already in the state's procurement code. However,
legal counsel explained that language in the state's procurement
codes does not exactly match that in HB 177. Therefore, the
provision provides the commissioners the authority to adopt
regulations regarding appeal rights substantially similar to
those in the procurement codes. He explained that changes on
page 4, lines 5-6, concern the requirement that an applicant
provide for the receipt and delivery point of gas before an open
season has occurred. He said the applicant is not expected to
provide information as to in-state delivery points in the
license application. In reference to page 4, lines 18 to 22, he
explained that in the original bill there was language detailing
what the applicants must provide in terms of the tariff rates
and transportation services. He said there was language in that
section concerning a liquefied natural gas (LNG) project that
was intended to apply to a project in Canada or an LNG project.
He offered that the language has been modified on page 5, line 1
to clarify some of the requests made of an LNG applicant. In
response to a question, he said that the changes take the
concept of proposed transportation services and expand on it to
provide additional clarity and application to both Canadian and
LNG projects.
8:56:43 AM
COMMISSIONER GALVIN went on to explain the changes on page 5,
lines 14 and 28. He said that the original bill had a 36 month
deadline in which to have an open season, the suggested
amendment shortens that time to 24 months. He noted a change on
4, lines 1-2, which references a statute that prohibits an "over
the top route" as described in AS 38.35.017(b).
8:58:42 AM
COMMISSIONER GALVIN said that there are changes made to page 6,
line 9, to clarify that section with respect to required
technical information. Page 6, line 16, incorporates a
stylistic change that recognizes the normal sequence of events
with regard to gas pipeline compression and pipe additions.
Moving on to page 7, line 18, he explained that the changes
require the applicant to describe how they propose to address a
North Slope gas treatment plant, and reminded the committee that
there is an inherent option for an applicant to propose a gas
treatment plant as part of their transportation system. If an
applicant is to include a gas treatment plant in its system, it
would have to use the same debt to equity ratio required by the
state. On page 7, line 26 a reference is added to require an
applicant to propose not only a percentage, but a "total dollar
amount" of the state's contribution under AS 43.90.110(1). This
allows the state to examine what the applicant intends to spend
to arrive at an open season. He responded to a question by
explaining that DOR desires the applicants to at a minimum
provide an estimate of costs to be spent in preparation for open
season so that the state can have some basis from which to gauge
the potential net present value of the project. He stated the
state would like to gauge whether the applicant would have a
"breaking off point" depending upon the success of the open
season, and how much the state may have to spend, he explained.
He responded to a further comment by indicating that DOR is
willing to discuss the need to place parameters on the
applicant's ability to exceed their stated spending limit for
that phase of the project.
9:03:59 AM
COMMISSIONER GALVIN explained that there is a possible error on
page 7, lines 27 and 28 which refers to AS 43.90.110(1) and (2)
and opined the reference should be to AS 43.90.110(1)(a) and
(b). He stated that the intent of this change was to reference
the 50 percent contribution up to open season and the post-open
season sections of the bill.
9:05:31 AM
COMMISSIONER GALVIN referred to three new subsections on page 8,
which read [original punctuation modified slightly for clarity]:
...(16) waive the right to appeal the award
to another applicant or the determination under
AS 43.90.180(b) that no application merits the
issuance of a license;
(17) commit to negotiate, prior to
construction, a project labor agreement, to assure
expedited construction and labor stability for the
project by qualified residents of the state;
(18) commit that the state contribution
received by the licensee may not be included in the
applicant's rate base and shall be used as a credit
against the licensee's cost of service; ...
COMMISSIONER GALVIN explained that the intent of section 16 is
to require an applicant to waive their right to appeal an
adverse decision. Section 17 was suggested by DOR and is
intended to require applicants to set forth that they will
commit to negotiate project labor agreements.
CHAIR KOHRING suggested that proposed section 17 might be a
point of contention by some members of the committee, but noted
its addition allows the committee to consider it.
9:07:31 AM
REPRESENTATIVE DOOGAN asked if the term "project labor
agreement" has a generally accepted meaning, or whether the
phrase can have a range of meanings.
COMMISSIONER GALVIN said he was unaware of whether there was a
specified meaning to the aforementioned term. He went on to
explain that section 18, line 23 is a technical change to
confirm that any state contribution to the project would be
deducted from the rate base.
COMMISSIONER GALVIN explained that Version E contains changes
suggested by DOR, by the chair and by legislative legal counsel.
He directed the committee's attention to page 9, section 150
which read [original punctuation provided]:
Sec. 43.90.150. Proprietary information and trade
secrets. (a) At the request of the applicant,
information submitted under this chapter that the
applicant identifies and demonstrates is proprietary
or is a trade secret is confidential and not subject
to public disclosure under AS 40.25 unless the
applicant is granted a license under this chapter;
after a license is awarded, all information submitted
by the licensee under this chapter shall be made
public.
(b) If the commissioners determine that the
information submitted by the applicant is not
proprietary or is a trade secret, the commissioners
shall notify the applicant and return the information
at the request of the applicant.
(c) An applicant that protests or appeals the
award of a license or the process by which the award
of a license is made shall be considered to have
consented to the disclosure of all of the information
submitted under this chapter by the applicant making
the protest or appeal, including information that is
confidential under (a) of this section.
(d) In this section, "proprietary" means that
the information is treated by the applicant as
confidential and the public disclosure of that
information would adversely affect the competitive
position of the applicant, or materially diminish the
commercial value of the information to the applicant.
COMMISSIONER GALVIN explained that this section covers the
treatment of an applicant's confidential information. The
section is designed to capture the concept that once a license
has been issued, all information is public.
REPRESENTATIVE SAMUELS asked if whether the legislature would be
aware that there was information that it did not have access to
when reviewing the commissioners' license issuance
recommendation.
COMMISSIONER GALVIN answered yes, and noted that the applicant
must provide a public summary of the information it desires be
considered confidential. He explained in response to a question
that the sort of information that may be confidential could
include the potential methods that pipeline companies may
propose with others to share risks between themselves and the
shippers.
REPRESENTATIVE DOOGAN expressed concern that keeping some
information confidential will make it difficult for the public
at large to evaluate the adequacy of the selection process.
COMMISSIONER GALVIN stated that there would likely not be much
confidential information relevant to the actual value of the gas
pipeline project to the state. He opined that most of the
information likely to be in the confidential arena is
information that weighs more on the likelihood of project
success.
REPRESENTATIVE DOOGAN said that throughout these hearings people
have been using "risk" as a code word for how much money they
are going to have to pay. He asked whether the amount a shipper
would have to pay would be part of evaluation process.
COMMISSIONER GALVIN opined that the issue of risk is a
combination of how much an applicant is going to have to pay,
and the level of uncertainty the applicant must bear. He
suggested that the level of information that will be available
to the public will provide a "clear band" around the range of
criteria. He set forth that DOR is attempting to craft a
procedure that is as transparent as possible and has very few
confidential aspects. He relayed that the confidential
information would not be the driving factor in the license award
decision.
9:22:04 AM
REPRESENTATIVE SAMUELS asked about the situation where
confidential information sets forth a proposal that the
applicant eventually does not enact and questioned whether that
information would ever become public knowledge.
COMMISSIONER GALVIN responded that under the current proposal,
any information that was confidential would be made public as
soon as the legislature approved of the license issuance.
REPRESENTATIVE DOOGAN expressed his concern that under the
current proposal, only the successful applicant's information is
made public while the information in the unsuccessful
applications remains confidential.
COMMISSIONER GALVIN replied that the intent is not to draw
distinctions between public and non-public information. He
offered that the bid parameters of an unsuccessful applicant are
not normally made public. He stated that the bill attempts to
be sensitive to normal business dynamics, and noted that a
challenger to the license award would also have its information
made public.
COMMISSIONER GALVIN explained that the intent behind the
application evaluation and ranking criteria, AS 43.90.170, is to
provide more structure to the determination of which application
provides the most net present value to the state and the
greatest likelihood of success.
9:30:43 AM
REPRESENTATIVE SAMUELS asked about the meaning of the section on
page 11, line 16 which reads [original punctuation provided]:
(d) In this section, "net present value" means the
discounted value of a future stream of cash flow ...
COMMISSIONER GALVIN suggested this section be addressed by the
DOR's economists.
9:32:53 AM
COMMISSIONER GALVIN reviewed proposed AS 43.90.180 which read
[original punctuation provided]:
Sec. 43.90.180. Notice to the legislature of intent to
issue license; denial of license. (a) If, after evaluation
of complete applications under AS 43.90.170 and
consideration of public comments received under
AS 43.90.160, the commissioners and the coordinator
determine that an application proposes a project that will
sufficiently maximize the benefits to the people of this
state and merits issuance of a license, the commissioners
shall
(1) issue a determination, with written findings
addressing the basis for the determination; the
determination becomes a final agency action in accordance
with AS 43.90.190;
(2) publish a notice of intent to issue a
license that includes findings addressing the basis for the
determination; and
(3) submit the determination along with the
findings, supporting documentation, and a copy of the
notice published under (2) of this subsection to the chairs
of the legislative standing committees having jurisdiction
over natural resources for action as provided in
AS 43.90.190.
(b) If the commissioners determine that no
application proposes a project that sufficiently maximizes
the benefits to the people of this state and merits
issuance of a license, the commissioners shall issue a
written notice of that determination and the findings on
which the determination is based.
(c) The commissioners' determination under this (b)
of this section is a final agency action for purposes of
appeal to the superior court.
(d) Within 90 days after a determination under (b) of
this section, the commissioners may issue a new request for
applications for a license under AS 43.90.120.
COMMISSIONER GALVIN noted there is a reference within the
evaluation criteria which references the section on public
comment. He went on to say that the next area with a
substantive change is on page 12, line 11 which reads [original
punctuation provided]:
Sec. 43.90.190. Legislative approval; issuance of
license. (a) After receiving a determination from the
commissioners under AS 43.90.180, the House standing
committee and the Senate standing committee having
jurisdiction over natural resources shall introduce a
bill in their respective chambers that provides for
the approval of the license proposed to be issued by
the commissioners.
(b) If a bill approving the issuance of the
license becomes law, the commissioners shall issue the
license as soon as practicable after the effective
date of the Act approving the issuance of the license.
The issuance of the license approved by the
legislature is a final administrative action on the
date the license is issued for purposes of appeal to
the superior court.
(c) If the legislature fails to approve the
issuance of the license, the commissioners may request
new applications for a license under AS 43.90.120.
9:35:10 AM
COMMISSIONER GALVIN explained that this provision was at the
request of the committee chair and requires approval of the
issuance of the licenses in the form of a bill. .
CHAIR KOHRING set forth that nothing in the aforementioned
section is "rock solid," but just something for consideration.
9:36:36 AM
COMMISSIONER GALVIN referred to page 11, line 21, which proposes
that the Alaska Gasline Inducement Act (AGIA) coordinator be
added to the review process. In response to a question, he
noted that the timing of the hiring of the AGIA coordinator
still needs to be evaluated.
CHAIR KOHRING set forth there needs to be a procedure if the two
commissioners cannot agree.
COMMISSIONER GALVIN expressed confidence that the governor will
make decision should the commissioners be unable to come to a
unified decision.
9:38:21 AM
COMMISSIONER GALVIN noted that language on page 12, lines 25-26,
is intended to clarify that the obligation to take certification
either from Federal Energy Regulatory Commission (FERC) or the
Regulatory Commission of Alaska (RCA) does not become an
obligation until after all the administrative appeal rights have
been exhausted by the applicant.
COMMISSIONER GALVIN explained that changes on page 13, lines 19-
20 clarify when the time starts to run for purposes of appeal.
Changes on page 13, lines 27-28 set forth that [original
punctuation provided]:
... An amendment or modification approved under
this section must be consistent with the requirements
in AS 43.90.130 and may not diminish the value to the
state of the project or the like likelihood of success
for the project.
COMMISSIONER GALVIN summarized that the aforementioned section
is to ensure that the project value or likelihood of success is
not diminished if the project terms are modified.
9:41:29 AM
REPRESENTATIVE SAMUELS asked about the situation where a
modification decreases the value to the state, but increases the
likelihood of project success.
COMMISSIONER GALVIN opined that such a modification should not
be allowed.
REPRESENTATIVE SAMUELS asked about the criteria which determine
when the value to the state is diminished.
COMMISSIONER GALVIN responded that decisions on modifications
are intended to be referenced back to the initial evaluation
criteria, therefore would use the same criteria as in the
initial evaluation process.
9:42:54 AM
COMMISSIONER GALVIN said that technical changes made to AS
43.90.210 are designed to clarify that the scope of the
commissioners' ability to require the production of information
is related only to the license procedures of AGIA. He explained
that modifications on page 15, line 23, concern remedies
available to the commissioners if a licensee has violated the
license terms. One remedy is to allow the state to acquire the
work product from the licensee. In other similar sections of
the bill, language has been clarified to make clear that only
the work product developed during the license period is
available to the state. He explained that AS 43.90.240 covers
the procedure for abandonment of the project and contains some
modifications suggested by DOR regarding the process of
arbitration. He said the DOR is continuing to craft language
defining the term "uneconomic." If the project is determined to
be uneconomic, the state could acquire the work product at the
applicant's net cost, he explained.
9:48:06 AM
COMMISSIONER GALVIN said that AS 43.90.250 covers the position
of AGIA coordinator and has been modified at the request of the
chair to place the position in the governor's office, to clarify
the appointment process, and to further delineate the
responsibilities of the position. The AGIA coordinator is
subject to legislative confirmation and to reconfirmation after
a gubernatorial election.
9:50:29 AM
COMMISSIONER GALVIN set forth that AS 43.90.260 has been moved
from Article 3, but has not been changed. He said that all the
upstream inducements in Article 3 of HB 177 have been modified
to make it clear that they are all contractual in nature. The
language on page 18, lines 12 and 13 which states the "
inducement[s] in AS 43.90.310 and 43.90.320 are contractual"
provides a clear statement of that intent, he indicated. AS
43.90.310 covers the royalty inducement provisions of AGIA. He
said that 43.90.310(c) consists mostly of new language that is
intended to create a contractual relationship. He offered that
the intent of this section is to have a regulatory method to
establish valuation for purposes of upstream determinations.
The applicant will have the option to have that alternate
methodology put into their contract, he explained. Although the
regulations may change to update the method used, each time the
lessee will have the option as to whether to change its lease
terms.
9:54:18 AM
COMMISSIONER GALVIN explained that language was added on page
20, line 27 authorizing the commissioner of DOR to sign a
certificate regarding the proposed production tax exemption. He
disclosed that legislative legal counsel does not support this
approach because of concerns regarding its constitutionality.
The committee took an at-ease from 9:55:57 AM to 9:56:01 AM.
CHAIR KOHRING recessed the House Special Committee on Oil and
Gas meeting at a call of the chair at 9:56:49 AM.
[The motion to adopt Version E as a work draft was left pending
with objections by Chair Kohring and Representative Doogan.]
12:36:07 PM
CHAIR KOHRING reconvened the House Special Committee on Oil and
Gas meeting. Present at the reconvening were Representatives
Samuels, Doogan, Kawasaki, Olson, and Kohring. Representative
Dahlstrom arrived as the meeting was in progress.
Representative Coghill was also in attendance.
12:36:34 PM
COMMISSIONER GALVIN reviewed Article 4, page 21, lines 16 to 18
which reads [original punctuation provided]:
... Money appropriated to the fund may be spent for
the purposes of the fund without further
appropriation. Appropriations to the fund do not lapse
under AS 37.25.010, but remain in the fund for future
disbursements. Nothing in this subsection creates a
dedicated fund ...
and explained the modifications were suggested by legislative
legal counsel. Furthermore, changes were made to proposed AS
43.90.410 because the existing administrative code is not
designed to allow two commissioners to jointly adopt
regulations. The proposal allows the commissioner of revenue to
adopt the regulations for decisions made jointly by the
commissioners of Department of Natural Resources (DNR) and DOR,
he explained. The clause "before the commencement of commercial
operations" clarifies the cut-off for when the assurance that
the state will not provide benefits to a competing project
expires, and is added on page 22, line 16. The intent is to add
a "stay faithful" clause to the deal which ends once the gas
pipeline begins operations, he explained. A definition of
competing project is added on page 22, line 30, and states
[original punctuation provided]:
(b) In this section, "competing natural gas
project" means a project designed to accommodate
throughput of more than 500,000,000 cubic feet of
North Slope gas a day.
COMMISSIONER GALVIN explained that this provision is to allow
for in-state gas volumes to proceed without violating the nature
of the "faithful" clause. He went on to explain that on page
23, line 7, the phrase "diminish the likelihood of success" was
added as a factor to consider when determining whether a
licensee can assign its license. There is also a change on page
23, line 21 to make clear that any job training program need not
be limited to jobs on the gas pipeline project, but can include
related vocational training. A definition of "North Slope" was
added on page 24, line 30 and 31. Further changes in
definitions include the addition of the word "financial" before
commitments on page 25, lines 13 and 14. A conforming amendment
was made on page 25, line 3. Further language on page 27, line
22, concerns language added by counsel regarding confidentiality
and reads [original punctuation provided]:
(12) records that are
(A) proprietary or a trade secret in
accordance with AS 43.90.150;
(B) applications that are received under
AS 43.90.120 - 43.90.140 until notice is published
under AS 43.90.160.
12:44:53 PM
COMMISSIONER GALVIN further noted that Section 5, page 27 sets
forth the legislative intent that the first request for license
applications be issued within 90 days after the effective date
of AGIA, a requirement that was previously set forth as a
mandatory requirement. He explained that a severability clause
regarding the upstream tax inducement provisions was inserted to
insure that even if the production tax exemption was found to be
unconstitutional, the remainder of AGIA would still be valid.
The committee took at ease from 12:48 to 12:52.
12:53:21 PM
DON BULLOCK, Attorney, Legislative Legal Counsel, Legislative
Legal and Research Services, Legislative Affairs Agency, said
the structure of AGIA remains basically the same.
REPRESENTATIVE SAMUELS asked about the change regarding the
amount of money the state would match up to open season, noting
it went from 80 percent to 50 percent. [Version E, page 2,
lines 22 to 24.]
MR. BULLOCK explained that prior language provided that the
state would match contributions made by the licensee equally up
until the end of the first binding open season, but it was not
clear whether there would be any funds left at the end of open
season. Under the revision, the applicant will put forth the
amount of matching funds they propose to receive in the first
period, with the limitation it not exceed 50 percent of the
qualified expenditures incurred before the end of the first
binding open season.
12:55:59 PM
MR. BULLOCK explained that in AGIA, "North Slope" is defined as
North of 68 degrees North latitude, whereas federal law relating
to the natural gas act uses a marker of North of 64 degrees
North latitude. He noted that there are constitutional issues
regarding the separation of executive and legislative powers
relating to contract approval and regarding the confirmation of
the AGIA coordinator. He relayed that the courts have narrowly
construed provisions regarding the ability of the legislature to
appoint commissioners. He noted that the AGIA coordinator
position "does not fit easily" into the constitutional
provisions that provide for legislative confirmations. He
reminded the committee of his earlier testimony that the 10 year
tax exemption was likely to be constitutional because it was a
matter of general law, subject to future legislative change.
12:58:37 PM
REPRESENTATIVE DOOGAN asked if the problem with the
constitutionality of the confirmation of the AGIA coordinator
would be lessened if confirmation was only for the initial
appointment.
MR. BULLOCK replied that was not the issue, rather the issue is
whether the confirmation is required at all. The AGIA
coordinator position is to be in the governor's office.
12:59:42 PM
REPRESENTATIVE DOOGAN asked if the constitutional issue changes
if the tax exemption is based on the volume of gas rather than
period of time.
MR. BULLOCK replied that it could be. He noted that the Alaska
State Constitution, Article IX, Section 1, and Article IX,
Section 4 appear to allow the legislature to enact some tax
exemptions by general law.
1:01:46 PM
REPRESENTATIVE DOOGAN reiterated his question as to whether an
exemption based on volume is more likely to withstand
constitutional scrutiny than one based on time.
MR. BULLOCK replied that a period of time would deal with how
long the legislature wanted to allow the exemption. He offered
that an exemption if different than credit because an exemption
states the taxpayer is not subject to tax, while a credit states
that a calculated tax will be reduced.
1:02:40 PM
REPRESENTATIVE SAMUELS asked about drafting the contracts to
provide flexible royalty rates which would increase or decrease
in conjunction with other tax issues.
MR. BULLOCK noted that a royalty is not a tax, but a share of
ownership and that share is negotiated at the time of the lease.
He noted that while there may be some changes to the royalty
provisions in the state leases, which the lessee may seek to add
to the lease. Change would be considered a revision of the
lease and be a new contract, he explained.
1:05:17 PM
REPRESENTATIVE SAMUELS asked about the ability to incorporate a
flexible royalty rate to balance a possible rise in taxes and
the possibility that such an approach would be less likely to be
unconstitutional.
MR. BULLOCK replied that royalty terms are contractual terms
that are negotiated between the parties. He indicated the lease
could have a reference to any measure that would adjust for the
lease amounts. He noted that the royalty provisions tax the
activity of producing oil and gas, measured by the value. He
reminded the committee that the state only gets a portion of
royalties from federal land as it is not an owner on those
lands.
1:07:40 PM
REPRESENTATIVE DOOGAN asked whether there is a benefit to
including inducements as contractual royalty terms within the
lease instead of structuring inducements as a production tax
exemption that may face a constitutional challenge.
1:08:38 PM
MR. BULLOCK agreed with the aforementioned point. He went on to
say that since the state is constitutionally required to be a
good steward of its natural resources, there is a perception
that royalty incentives could be inconsistent with the
stewardship responsibilities. He opined that "royalties would
definitely be safer." He reminded the committee that there are
constitutional provisions which restrict the impairment of
contractual terms.
1:09:08 PM
REPRESENTATIVE DOOGAN asked if lowering the state's royalty
share in current contracts would be considered an impairment of
contractual terms.
MR. BULLOCK stated he was not sure, noting that in the
aforementioned example, the state's interests would be impaired.
MR. BULLOCK explained that the lease abandonment provisions have
been moved to be within a more appropriate place within the
structure of the bill. He referred to AS 43.90.110 on
inducements as "where that 50 percent cap comes in." He went
noted that in Version E the state takes the position as
coordinator of vocational training, noting that there is also a
new section regarding the development of a training program. He
explained that a change in AS 43.90.110 requires the
commissioner of DOR to consult with the commissioner of DNR to
adopt regulations to enhance the definition of qualified
expenditures for purposes of the state's matching contribution.
Other changes include some re-numbering because the abandonment
provisions of the bill were moved to another section of the
bill. He opined that there were legal problems with the prior
requirement that the commissioners issue a request for
application for the license within 90 days of the effective date
of the act. To remedy this, this section was changed to
indicate that the commissioners must do it "as soon as
practical." He said there is an un-codified section at the end
of the bill setting forth that legislative intent is that the
commissioners act within 90 days of the effective date of the
act.
1:12:27 PM
MR. BULLOCK explained that there was some desire to use the
existing state procurement code provisions to award the license
and govern appeals. However, he explained that there are a
number of terms in the procurement codes that would be difficult
to apply to the gas pipeline project. Therefore, he suggested
that the commissioners are required to adopt regulations
substantially similar to those in the existing state procurement
codes. AS 43.90.130 has been modified to be more affirmative in
that the applicant is making the commitments listed in the
application, he explained. The "over the top route" through the
Beaufort Sea and down through the McKenzie, has specifically
been excluded, he said. He said this exclusion still leaves
room for highway routes and an in-state route to tidewater. He
explained that the time period for arriving at the end of open
season is shortened from 36 months to 24 months. He indicated
this a target date, which requires the licensee to move a bit
faster.
CHAIR KOHRING noted that he had suggested this change with the
intent to move things up a bit.
MR. BULLOCK stated that there is flexibility to change the law
if it becomes apparent that the suggested time periods are
problematic. He noted that changes had been made to recognize
that expansion would likely first involve compression, and then
pipeline looping later.
1:16:37 PM
REPRESENTATIVE SAMUELS asked if the time period would be in the
contract, which the legislature could not change.
MR. BULLOCK opined that the applicant has the option to complete
the work under the time period set as well as the flexibility to
request more time.
1:17:45 PM
REPRESENTATIVE DOOGAN asked if the statute and the contract
would have to be changed if the licensee needs a longer time
period than 24 months.
MR. BULLOCK agreed that the terms of the law would have to be
changed to grant the licensee additional time. He put forth
that there is a requirement that the applicant commit not to
protest the award of the license to another applicant, or a
determination by the commissioners not to issue a license to any
applicant.
1:19:50 PM
REPRESENTATIVE DOOGAN asked if the term "project labor
agreement" in AS 43.90.130(17) has legally defined meaning.
MR. BULLOCK said that the term is not defined in Alaska
statutes, but that there is a case where a project labor
agreement was upheld. He recalled that in a footnote, the court
set forth a definition for the term. He stated it is a
contractual provision whereby laborers are identified and agree
not to strike in return for the benefits of the contract. He
said that project labor agreements raise some "right to work"
constitutional issues, but that an Alaska Supreme Court case
affirmed the use of a project labor agreement in a case from
Fairbanks. In response to a question, he explained that the
Fairbanks case has some differences as it involved public monies
for a public contract. The gas pipeline situation involves
public money going to develop a project, and he has not
researched the possible effect of these differences on the
court's holding as applied to the project labor agreement
section of AGIA.
1:21:32 PM
MR. BULLOCK reviewed section 43.90.140 regarding the appointment
of an AGIA coordinator and stated the intent was to add a third
person to the decision making process.
REPRESENTATIVE DOOGAN set forth that his expectation is that the
governor will be the ultimate decision maker, and asked whether
it is possible to structure AGIA so the commissioners make a
recommendation, but the governor makes the actual decision of
who to award the license to.
1:22:52 PM
MR. BULLOCK indicated there is no legal reason not to proceed as
stated in the aforementioned method, but noted that there is
some separation of powers issues, although the commissioners do
work for the governor.
REPRESENTATIVE DOOGAN opined that since the governor is elected
and will likely be the one actually making the final
determination, it may be preferable to state explicitly that the
governor makes the final decision.
MR. BULLOCK stated Version E makes sets forth that the
commissioners are entitled to seek additional information from
applicants related only to the application itself. AS 43.90.150
concerns information the applicant wishes to keep confidential
and includes a definition of "proprietary." The commissioners
make the determination and can require a summary of the
information. Upon appeal, an applicant's information is no
longer confidential, he explained. AS 43.90.160 covers notice,
review, and comment by the public and relates to all the
applications the commissioners have reviewed and found
acceptable. He stated the work of Representative Dahlstrom's
committee is reflected in AS 43.90.170 so as to make the
criteria for review more directed as to what the state can
expect from the project. He opined that this approach brings
back the focus that the greatest benefit will be at the well-
head value. He opined that the criteria have been crafted to
determine how capable the applicant is and how likely it is the
applicant will be able to build the pipeline. He offered his
belief that this section is one of the most important pieces of
the bill as it gives the commissioners the basis on which to
review applications to make a recommendation.
1:28:12 PM
REPRESENTATIVE SAMUELS asked about the definition of "net
present value" as the "discounted value of a future stream of
cash flow" on page 11, line 16-17. He opined that his
inclination is to set specific numbers as the current definition
may be somewhat subjective.
MR. BULLOCK replied that he thinks it is reasonable, noting
there are presumptions made to the net present value calculation
and perhaps this is the appropriate place to do it. He
suggested that the commissioners could approach this through
regulation, which can be more responsive to change than
parameters set in statute.
1:30:10 PM
MR. BULLOCK reviewed AS 43.90.180 which sets forth the procedure
for legislative approval of the commissioners' recommendation.
The process for legislative approval set forth in AS 43.90.190
is that the chairs of the committees that received the bills
will introduce a bill to approve the issuance of the license.
This is a change from the original bill which was set up so that
if the legislature did nothing, the license would be issued.
Version E requires the legislature to consider and a pass a bill
for the license to be issued. He suggested this resolves some
of the timing issues in the original bill, because as a bill, it
would carry over into the next legislative session.
1:33:12 PM
REPRESENTATIVE DOOGAN asked about the procedure if the bill did
not pass in regular session, but there was a special session.
He queried whether the bill would be taken up from the last
committee of referral, or whether it would have to "go back to
square one."
MR. BULLOCK replied that new bills are introduced in special
session. He opined that there is flexibility in the rules, but
in general new bills are introduced in special session.
1:34:11 PM
REPRESENTATIVE SAMUELS asked why the request for a bill
approving the license would not just be given to the House and
Senate standing rules committees, referring to page 12, line 13.
MR. BULLOCK answered that it could be set up that way, noting
that other committees can request bills introduced to the rules
committees.
REPRESENTATIVE SAMUELS asked if it was possible to increase the
time limits, or set forth a calendar day limit to accommodate
possible scenarios.
MR. BULLOCK replied that a calendar day approach was possible,
but opined that there is flexibility in the legislative
organization now to manage the bill. He opined that the "day
requirement" raises problems as to when the legislature receives
the bill relative to the end of the session.
1:36:39 PM
REPRESENTATIVE SAMUELS expressed concern that the political
dynamic could slow down approval of the bill. He indicated
there should be some sort of deadline for a vote.
REPRESENTATIVE DOOGAN set forth that his understanding that once
the bill for approval is introduced, it would not be until after
the next election and a new legislative session that one could
definitively say the legislature failed to adopt the bill.
MR. BULLOCK agreed with the aforementioned statement, noting
that the bill "would be dead" if not passed by the end of the
second legislative session after introduction. The bill could
also not pass by being voted down, he noted. He indicated that
this provision contemplates that the legislature reviews the
commissioners' determination that the recommended project is the
one that maximizes benefit to the state. AS 43.90.200 covers
certification by regulatory agencies and requires the licensee
accept the certificate issued by the regulatory agency only
after all rights relating to appeal are expired.
1:40:19 PM
MR. BULLOCK went on to say that a financial commitment is
required, opining that the intent is to make sure the licensee
is making a firm commitment to go forward with the project. AS
43.90.210 concerns amendments or modifications to the project
plan and adds that any changes may not "diminish the value to
the state of the project of the likelihood of success for the
project."
1:41:27 PM
REPRESENTATIVE SAMUELS referred to a past failed refinery
project in 1980 which resulted in a state debt of around $70 to
$80 million. He expressed concern that the modification terms
as set forth in the statute are subjective terms which will
require negotiation and indicated his desire for assurances that
a modification will not result in project failure.
MR. BULLOCK indicated he could not offer that assurance through
a specific provision, but said that the section of the bill on
ranking and criteria offers a system to really test the projects
viability. Furthermore, the commissioners have the ability to
request further information. He noted that if something
occurred to put the project's economic viability in jeopardy,
there are provisions in the modification section of the bill to
allow the state to consider ways to salvage the project.
1:43:41 PM
REPRESENTATIVE SAMUELS noted modification would occur after the
license was issued, and without legislative review.
MR. BULLOCK suggested that a provision could be added to require
legislative review of substantial modifications to the contract
terms.
REPRESENTATIVE DOOGAN opined that language in AS 43.90.210
regarding likelihood of success does not necessarily mean a "net
present value" calculation as contemplated under AS 43.90.170.
He opined that as written, Section 210 would include
consideration of non-monetary value. He suggested that
modifying this provision to mean "net present value" may tighten
it up somewhat.
MR. BULLOCK agreed that a "best interest" concept can include
many factors, noting the legislature may structure such
provisions to emphasize factors it considers most important.
1:46:57 PM
REPRESENTATIVE DOOGAN suggested that the criteria to determine
whether a modification should be allowed be the same criteria
used to make the initial license award.
MR. BULLOCK suggested the modification section could refer to
the initial criteria section. He explained that AS 43.90.220
provides the state the ability to account for funds spent. The
language recognizes that parties besides the licensee may be
making the expenditures. He said that it is still unclear as to
how the state's contribution of $500 million is to be paid as a
matching contribution, or as reimbursement to the licensee for
funds spent. AS 43.90.230 provides that the commissioners
determine, through administrative hearing, whether there has
been a license violation and a cure thereof. Project
abandonment is covered by AS 43.90.240 and is based on a finding
that the project is uneconomic. Version E incorporates use of
an arbitrator from the American Arbitration Association to
determine whether the project is indeed uneconomic. That
determination is then filed in the court, he explained.
1:51:29 PM
CHAIR KOHRING asked whether "uneconomic" is defined in the bill.
MR. BULLOCK replied that this determination comes back to the
value and expected rate of return for the project. He noted
that the tariff will have a rate of return built in to it, but
opined it will not mean much if there is an insufficient volume
of gas.
REPRESENTATIVE SAMUELS noted that economic evaluations may
differ between companies based on differing business focuses.
REPRESENTATIVE DOOGAN asked if this determination was limited to
the economics of project itself.
MR. BULLOCK replied that the project itself and its benefits to
the state intertwine because of policy decisions made in the
determination of the license award. He said there is nothing in
HB 177 that precludes development of another project should the
first licensee abandon its project.
1:58:44 PM
MR. BULLOCK reviewed the inducement sections of the bill, noting
that they are intended to be contractual. He explained that DNR
will determine how the royalty provisions will work.
1:59:15 PM
REPRESENTATIVE DOOGAN asked about the possible constitutional
problems with AS 43.90.320, the gas production tax exemption
section.
MR. BULLOCK opined that the tax exemption approach in Section
320 definitely raises a constitutional issue under Section IX of
the Alaska State Constitution. He offered that putting a
taxation provision in the contract could bring up the
constitutional provision against impairment of contracts. He
said it is a matter of opinion as to how a court will rule, but
opined that the court would not look favorably upon contracting
away the power to tax. He noted that the Alaska Constitution is
crafted to allow the legislature to have considerable financial
flexibility. He noted that there is a desire to give fiscal
certainty to business interests, and that the ultimate decision-
maker may be the courts.
2:05:24 PM
MR. BULLOCK explained that Article 4 of AGIA concerns
miscellaneous provisions. He explained that under AS 43.90.400,
once the matching contribution amounts are appropriated, they
will not lapse, but will be available to the commissioners in a
non-dedicated fund. Under Article 4, the state assures the
licensee it will not extend favorable treatment to another
party. License transfers are allowed in certain conditions as
set forth in AS 43.90.450. He emphasized that a transfer of the
production tax exemption must also include whatever committed
capacity that transferor has in the pipeline, referring to page
17, lines 13-17. He explained that Section 5 on page 27
expresses the statutory intent that the commissioners issue a
request for applications within 90 days after passage of AGIA.
He said that a severability clause is included, although courts
recognize the concept of severability even without a specific
provision in the statute.
CHAIR KOHRING said that HB 177 would be held in committee.
[Representative Dahlstrom's motion to adopt Version E as a work
draft was carried over for consideration at the next meeting.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 2:15
p.m.
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