Legislature(2007 - 2008)BARNES 124
04/19/2007 01:00 PM House RESOURCES
| 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 | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 19, 2007
1:06 p.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Vic Kohring
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Max Gruenberg
Representative Anna Fairclough
Representative Mike Doogan
Senator Lyda Green
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
03/30/07 (H) Heard & Held
03/30/07 (H) MINUTE(O&G)
03/31/07 (H) O&G AT 1:00 PM BARNES 124
03/31/07 (H) -- MEETING CANCELED --
04/02/07 (H) O&G AT 8:30 AM CAPITOL 106
04/02/07 (H) Heard & Held
04/02/07 (H) MINUTE(O&G)
04/03/07 (H) O&G AT 3:00 PM BARNES 124
04/03/07 (H) Moved CSHB 177(O&G) Out of Committee
04/03/07 (H) MINUTE(O&G)
04/04/07 (H) O&G RPT CS(O&G) NT 3DP 2NR 2AM
04/04/07 (H) DP: RAMRAS, DOOGAN, OLSON
04/04/07 (H) NR: SAMUELS, KAWASAKI
04/04/07 (H) AM: DAHLSTROM, KOHRING
04/04/07 (H) O&G AT 8:30 AM CAPITOL 106
04/04/07 (H) -- MEETING CANCELED --
04/05/07 (H) O&G AT 3:00 PM BARNES 124
04/05/07 (H) -- MEETING CANCELED --
04/10/07 (H) RES AT 1:00 PM BARNES 124
04/10/07 (H) Heard & Held
04/10/07 (H) MINUTE(RES)
04/11/07 (H) RES AT 1:00 PM BARNES 124
04/11/07 (H) Heard & Held
04/11/07 (H) MINUTE(RES)
04/12/07 (H) RES AT 1:00 PM BARNES 124
04/12/07 (H) Heard & Held
04/12/07 (H) MINUTE(RES)
04/13/07 (H) RES AT 1:00 PM BARNES 124
04/13/07 (H) Heard & Held
04/13/07 (H) MINUTE(RES)
04/14/07 (H) RES AT 1:00 PM BARNES 124
04/14/07 (H) Heard & Held
04/14/07 (H) MINUTE(RES)
04/16/07 (H) RES AT 1:00 PM BARNES 124
04/16/07 (H) Heard & Held
04/16/07 (H) MINUTE(RES)
04/17/07 (H) RES AT 1:00 PM BARNES 124
04/17/07 (H) Heard & Held
04/17/07 (H) MINUTE(RES)
04/18/07 (H) RES AT 1:00 PM BARNES 124
04/18/07 (H) Heard & Held
04/18/07 (H) MINUTE(RES)
04/19/07 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
SENATOR HOLLIS FRENCH
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented information on the Alaska State
Senate's version of the Alaska Gasline Inducement Act and
answered questions.
SENATOR LESIL MCGUIRE
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented information on the Alaska State
Senate's version of the Alaska Gasline Inducement Act and
answered questions.
DON BULLOCK, Attorney
Legislative Legal Counsel
Legislative Legal and Research Services
Legislative Affairs Agency
Juneau, Alaska
POSITION STATEMENT: Answered questions and explained possible
legal issues relating to the Alaska Gasline Inducement Act.
SENATOR BILL WIELECHOWSKI
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Answered questions on the Alaska Senate's
version of the Alaska Gasline Inducement Act.
LARRY OSTROVSKY, Chief Assistant Attorney General
Statewide Section Supervisor
Oil, Gas & Mining Section
Department of Law (DOL)
Anchorage, Alaska
POSITION STATEMENT: Explained possible legal issues associated
with HB 177.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 1:06:17 PM. Representatives
Gatto, Johnson, Seaton, Roses, Edgmon, Kawasaki, Kohring, and
Wilson were present at the call to order. Representative
Guttenberg arrived as the meeting was in progress.
Representatives Gruenberg, Fairclough, and Doogan, and Senator
Green were also present.
HB 177-NATURAL GAS PIPELINE PROJECT
[Contains discussion of SB 104.]
1:06:31 PM
CO-CHAIR GATTO 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." [Before the committee was CSHB
177(O&G).]
1:07:18 PM
CO-CHAIR GATTO explained that the goal of today's meeting is to
compare and understand the differences between the House and
Senate versions of HB 177, the Alaska Gasline Inducement Act
(AGIA).
1:09:35 PM
SENATOR HOLLIS FRENCH, Alaska State Legislature, expressed
support for the decision to request members of the Alaska State
Senate to address the members of the Alaska State House
regarding this very important bill at this stage in the process.
He first addressed the provision in AGIA that allows for a 10-
year freeze on gas production taxes. He explained that the
basic structure is set forth on page 22, lines 9 through 16 of
committee substitute (CS) for SB 104 (JUD), 25-GS1060\0,
Bullock, 4/18/07, (Version O). The 10-year limitation to the
exemption is described on page 22, line 17. As proposed in
AGIA, the tax rate is set at the beginning of open season, and
applies for a 10 year period beginning at the time the pipeline
commences operations, he said.
1:12:34 PM
SENATOR FRENCH referred to the Alaska State Constitution,
Article IX, section 1 which reads:
The power of taxation shall never be surrendered.
This power shall not be suspended or contracted away,
except as provided in this article.
SENATOR FRENCH told the committee this section was included in
the state's constitution because of a series of tax breaks that
had been granted by western state legislatures to banks and
railroads in the late 1880s as a way to attract development.
When those legislatures tried to remove the tax limitations,
they were prevented from doing so due to provisions in the
federal constitution disallowing impairment of contracts. As a
result, the tax breaks became permanent, he indicated. Based on
this, the constitutions of prior states were amended and the
constitutions of new states were drafted to prohibit the
legislature from surrendering taxation authority. He opined
that there is probably no state in the union where it is more
important to have this constitutional protection than Alaska
because there is no state in the union that is so dependent on
one industry.
1:14:29 PM
CO-CHAIR GATTO asked whether the term sovereign is essential to
a determination of this issue.
SENATOR FRENCH suggested that the drafters of the Alaska
Constitution also recognized the need to entice new industry to
the state. Therefore, they added the modifier "except as
provided in this article" to Article IX, section 1 of the Alaska
State Constitution. He explained that Article IX, section 4
provides the constitutional authority for commonly known tax
exemptions, such as the senior property tax exemption and
provisions which exempt religious property from taxation. He
referred to the "crucial third sentence" which reads:
Other exemptions of like or different kind may be
granted by general law.
SENATOR FRENCH characterized the aforementioned language as the
crux of the provision authorizing the 10-year production tax
exemption.
CO-CHAIR GATTO suggested that the words "like or different"
comprise 100 percent of everything.
1:16:13 PM
SENATOR FRENCH agreed that there is no getting around the fact
that "this is as different as you can imagine." He stated that
while the context of this section is clearly about property
taxes, "different means different and there's no point in
quibbling over it." He noted that any tax exemption must be
done by general law and offered his belief that "general law"
means statute. He noted that statutes are subject to change
anytime by the legislature. He set forth that one must first
consider if the tax freeze is necessary to build the gas
pipeline. The second consideration is whether the tax
limitation can be put into law, and he offered that it should be
done by statute, since statutory law is subject to change by the
legislature.
1:17:57 PM
SENATOR LESIL MCGUIRE, Alaska State Legislature, conveyed that
during the Alaska Constitutional Convention the delegates
discussed the Industrial Incentives Act, which she said was
"never challenged." Therefore, it may be hard to determine how
the current discussions "will play out" in general law and
whether "we can carve out these incentives," she opined. She
offered her belief that any tax exemption must be one of
"general applicability" and cannot be crafted for one group, or
a "group out of a group." Rather, it must apply to an industry
or a group of individuals, she opined.
1:19:39 PM
CO-CHAIR GATTO referred to a prior situation where the
legislature modified the law to allow a person to sit on a
former governor's cabinet. He offered that this had been a very
specific law directed towards "one post in the cabinet."
SENATOR MCGUIRE recalled that it may have been a change in law
to allow the governor to appoint special assistants and applied
to more than one person.
SENATOR MCGUIRE addressed the limitation of one legislature's
ability to bind a future legislature. She threw out for
committee consideration the issue of how past legislative
actions can affect a future legislature's ability to act in a
manner contrary to past legislative actions.
1:22:48 PM
SENATOR FRENCH opined that the current policy dispute over the
proposed production tax exemption is whether the 10-year tax
exemption should be contractual. The current Senate Judiciary
Committee version of AGIA does not have the tax exemption as a
contractual provision because legal counsel has advised that the
tax exemption is more likely to be constitutional if not
contractual, he explained. Other persons may present a
different perspective, he implied. He noted that prior legal
research on the constitutionality of a "general law tax freeze"
also indicated that a contractual tax freeze would likely be
unconstitutional unless the contract was subject to change.
1:24:50 PM
REPRESENTATIVE SEATON asked whether it was possible to change
the gas production tax from an annual tax to a 10-year tax with
annualized payments and thereby avoid constitutional issues. He
noted that the petroleum profits tax (PPT) is an annual tax,
with monthly estimated payments.
SENATOR FRENCH opined it may be possible to structure the tax as
suggested, but said the real issue is whether the tax is subject
to change.
SENATOR MCGUIRE opined that the tax, however structured, could
perhaps be crafted to apply to initial shippers as long as it
applied to all initial shippers. She offered that the type of
fiscal certainty desired by some parties may unduly restrict
future legislative actions. She reminded the committee that
there is a constitutional restriction against dedicated funds,
therefore the legislature can only recommend that funds be
directed towards a certain cause, but cannot mandate it.
SENATOR FRENCH opined that the most "legal way" to do this is to
amend the constitution, but he opined that a constitutional
amendment was politically impossible.
CO-CHAIR GATTO stated he agreed that "we are not going to change
the constitution because that is the way it is done all over the
country," and indeed all over the world - "with no certainty."
1:29:02 PM
SENATOR FRENCH said he agreed with the aforementioned comment.
He said there is also an issue related to the separation of
powers between the legislative and executive branch regarding
the approval or disapproval of the licensee by the legislature.
He explained that the Senate Judiciary Committee's current
approach to this issue is in AS 43.90.190 and provides that the
legislature shall propose a bill, rather than a resolution, to
approve the recommended licensee as a bill is more binding. He
explained that the Senate Judiciary's version of AGIA is drafted
"in the affirmative" to provide for approval of the proposed
license within a 60 day period. He said there is an issue as to
whether it would be an intrusion on the power of the executive
branch for the legislature to "step in and say we [the
legislature] have a role in this." He opined that it is
"probably not" an intrusion on the executive branch.
1:31:04 PM
SENATOR MCGUIRE opined that there is not only a constitutional
consideration here, but also practical and political
considerations. She said that "in our committee" there is no
question that the members believe "it is probably not
constitutional for certain elements of the contract." She also
opined that the executive branch is limited in its ability to
enter into contracts that are "fundamentally legislative in
nature, - that require the taxation authority of our body." She
offered her opinion that it is preferable to keep the
legislative approval section in AGIA so as to "do it right" and
so as to increase the legislature's public accountability.
CO-CHAIR GATTO opined that the idea of having the legislature
approve the contract is the preferable approach.
1:34:21 PM
SENATOR MCGUIRE told the committee that state legal counsel has
cautioned members to be ever mindful of the precedents that they
set in AGIA and to not lose sight of the legislature's equal or
co-equal role in the operation of government. Therefore, to not
require legislative approval of the proposed licensee may cast
future doubt on the legislature's rightful role in a contract
that incorporates fiscal terms, she opined. Furthermore, if the
legislature does provide a 10-year "lock in of rates" for the
gas pipeline, it is likely that the legislature will receive
requests for similar incentives from other industry groups, she
opined.
1:35:26 PM
REPRESENTATIVE GUTTENBERG asked whether parties will be entitled
to stop moving forward if there is litigation regarding the
constitutionality of the 10-year lock-in of production tax
rates.
SENATOR FRENCH replied that AGIA as submitted by the executive
branch has a severability clause so that if one part of the bill
is unconstitutional, the rest of AGIA still goes into effect.
He said the prior administration's proposed Stranded Gas
Development Act (SGDA) was drafted so that the entire process
stopped if one part of the bill was found unconstitutional.
CO-CHAIR GATTO asked if a shorter tax exemption provision would
be more likely to be legal.
SENATOR FRENCH replied no.
SENATOR MCGUIRE recalled that a point had been made by a prior
witness that "the closer you had to a nexus in your rationale,
the better you were on constitutional grounds." Under this
approach, if one started the tax exemption "at first gas" for
the initial risky 10 years of the pipeline, then the more likely
it would be that the court would uphold the constitutionality of
the tax incentive, she opined.
1:38:20 PM
CO-CHAIR JOHNSON asked who would have standing to challenge the
tax incentive provision of AGIA.
SENATOR FRENCH replied that any state citizen would have
standing to challenge the constitutionality of the tax incentive
provision. He went on to say that legislative approval of the
license may reduce the grounds for legal challenge except
perhaps for "questions of constitutionality." He said this is
important because under AGIA only one license will be issued,
and if the award is based solely on the decisions of the
commissioners [of the Department of Revenue and Department of
Natural Resources], disgruntled applicants would have the
ability to "do a full and thorough analysis" of the decision,
first before the administration, and then before the court.
However, he opined "that's not going to happen once we put our
stamp of approval on it" because it is "just like a bill." If a
bill is constitutional, the bill stays, he said. He said that
the 60-day period for approval will provide an opportunity for
disappointed licensee applicants to appear before the
legislature and argue against the approval of the license.
SENATOR MCGUIRE responded to a query by indicating that a change
in the CSSB 104 (JUD) had been made to section 5 to clarify that
it is the intent of the legislature that the commissioners issue
their first requests for license applications within 90 days
after the effective date of AGIA.
1:41:45 PM
Representative Gruenberg asked how the timing provisions in AGIA
for approval of the license would work in the event of a special
session, and whether the legislature would have adequate time
for review in the event of a special session.
SENATOR FRENCH replied that the issue has not yet been examined.
He opined that the administration and the commissioners would
likely carefully coordinate the issuance of the application with
the possibility of a special session. He agreed that there may
be 30 days between the call for a special session and the
commencement of that session.
1:43:48 PM
REPRESENTATIVE GRUENBERG observed that there may be some tension
between the eventual contractual language and the severability
clause in AGIA.
SENATOR MCGUIRE agreed that there is an issue regarding a
party's contractual position if based on a legislative incentive
that ends up being disallowed after the party has entered the
contract. She indicated that legal counsel would address this.
REPRESENTATIVE GRUENBERG agreed that the aforementioned point is
the issue, but that he also questioned whether section 7 on
severability makes it even more difficult for a party to "make
that argument."
SENATOR MCGUIRE replied that this administration's intent for
the severability clause is "exactly opposite of the former
administration's ... it is to say that you will be bound by the
terms." She noted that there is a process for abandonment of
the project should it become uneconomic. A licensee could argue
that the lack of fiscal certainty has made the project
uneconomic, she said. At that point, the state and the licensee
would invoke the provisions of AS 43.90.240 to determine if the
project is uneconomic, and thus subject to abandonment.
REPRESENTATIVE GRUENBERG offered that there is "one avenue" for
a licensee to escape the contract terms, and that is "the route
of abandonment." He stated that it should be clear that the
legal term abandonment is used in at least three other contexts:
property, railroad, and infant abandonment. He offered that the
definition in AGIA is unique and is the one that should apply.
1:48:35 PM
DON BULLOCK, Attorney, Legislative Legal Counsel, Legislative
Legal and Research Services, Legislative Affairs Agency,
reminded the committee that Article 2 of AGIA concerns the
relationship between the state and licensee. Article 3 covers
resource inducements and affects the resource producers, but is
really not an issue between the state and the licensee, he
opined. He characterized the inducements "as a carrot" to get
"people to commit their gas to the licensed project" during the
initial open season. He said that loss of the license incentive
does not necessarily have an effect on the licensed project, but
may have an effect on the viability of the project and how the
Federal Energy Regulatory Commission (FERC) would look at a
"commitment that goes away because they feel that they lost
their economic basis - for making that commitment." He
responded to a comment by reiterating that the abandonment
provision applies between the licensee and the state, not
between the producers and their commitment to ship gas during
that first binding open season, he said. Even if a producer is
the licensee, the producer's obligations as a recipient of the
inducements differ from its obligations as a licensee, he
explained. He reiterated that abandonment is contingent on the
project being found uneconomic and that there are enhanced
standards relating to the term "uneconomic" in the Senate's
version of the bill.
1:51:06 PM
SENATOR MCGUIRE opined that Representative Gruenberg is "exactly
right." The method by which a controversy between the licensee
and the state would be settled would be through the abandonment
and arbitration process to determine whether the project is
uneconomic, she said. She said the bill section on "fiscal
certainty" was included to clarify that one of the elements
necessary to make the project economic is the ability to get
firm transportation (FT) commitments. She offered that a non-
producer licensee could argue that the project has become
uneconomic if the provision on fiscal certainty is ruled
unconstitutional. She said that she believes the provisions in
the bill on abandonment provide a way to resolve this potential
issue in a fair way.
REPRESENTATIVE GRUENBERG asked whether a producer non-licensee
could seek to use the abandonment process were the tax
inducement provisions found unconstitutional.
SENATOR FRENCH replied no, that the commitment to ship gas is
likely not effected by a change in the tax structure.
1:53:30 PM
MR. BULLOCK said that several different relationships are
covered under AGIA, with a major portion of the bill covering
the relationship between the state and the licensee. The
licensee is to pursue a pipeline project, but the project itself
is not part of AGIA, he said. The licensee will seek FT
commitments from shippers. The potential shippers will consider
whether they can make money from the project, but those shippers
will have a relationship with the licensee, not the state, he
said. The incentives provided by the state are a factor in the
project's economics, he said.
1:55:20 PM
CO-CHAIR GATTO asked whether an owner could maintain a legal
action against a party who reneges on an FT commitment.
MR. BULLOCK noted that if there are not adequate FT commitments
to finance the pipeline, then the parties may consider whether
the project can be modified or whether there are grounds for
abandonment of the project.
1:56:28 PM
SENATOR FRENCH noted that the abandonment provisions are the
"circuit breaker" portions of the bill because in the
abandonment situation the process stops. He set forth that
under AGIA as currently structured, "any two arbitrators ...
could essentially stop the gas pipeline." He indicated that it
will be made clear "that there is a right of appeal from that
decision," through judicial review will be under the "abuse of
discretion" standard.
1:57:22 PM
REPRESENTATIVE SEATON referred to Version O, page 3, lines 16-
19, which state that the commissioners shall adopt
administrative procedures for any protest and appeal. He
contrasted this provision with the provision in Version O, page
9, lines 11-13, whereby applicants must commit to waive their
right to appeal the issuance of the license to another party and
asked whether this provision applies to administrative or
judicial appeals.
SENATOR FRENCH explained that the waiver in Version O, page 9,
lines 11-13 is an attempt to forestall "legal wrangling" in the
event no license has been issued. He indicated there are legal
issues regarding the extent to which appeals can be restricted.
REPRESENTATIVE SEATON sought to clarify whether the intent is to
waive the right to appeal to a court, or to waive the right of a
party to appeal under whatever administrative process is
established by the commissioners as set forth in Version O, page
3. He offered that it appears that under Version O an appeal
process is established that cannot be used.
MR. BULLOCK said he was confused by the provisions regarding the
waiver of appeals and suggested this area could use some
clarification as to whether the waiver allows a judicial or
administrative appeal. He noted that there may be a
constitutional basis for appeal should there be an abuse of
discretion by the commissioners when making the decision
regarding license issuance.
SENATOR MCGUIRE said that the administrative procedures
suggested in Version O, page 3, cover the time period during
which the commissioners will be soliciting for applications.
However, the appeal waiver in page 9, subsection 16, covers the
period after an applicant has decided to apply for the license.
She reiterated that the appeal provisions cover an applicant's
rights at the beginning of the process and their rights after
the applicant has decided to submit an application.
2:03:08 PM
REPRESENTATIVE SEATON pointed out that the language on page 3 of
Version O covers not only the solicitation of the license, but
also the award of a license and he requested that the language
be clarified to state whether the waiver applies to
administrative and court appeals or just to court appeals.
SENATOR MCGUIRE stated that she is aware of the intent of the
provision, and indicated that the language would be clarified
"because they are different points in the process."
2:04:41 PM
SENATOR MCGUIRE said that modifications were being considered to
the sections on vouchers and arbitration. She noted that the
changes will require that Alaska law apply to any arbitration
proceedings, and explained that Alaska contract law
interpretation incorporates consideration of an implied covenant
of good faith and fair dealing. She said an "abuse of
discretion standard" will be added for the court to use for
review. There will be further clarification of the term
"uneconomic," she said. She explained that a licensee who
claimed the project was uneconomic must first try to modify the
contract. Failing that, the licensee could then proceed to
abandonment proceedings, she said. If the commissioners and the
licensee agree that the project is uneconomic, then the project
can be abandoned, she explained. If the parties do not agree
that the project is uneconomic, then the parties can proceed to
arbitration. The arbitrators must then use the criteria set
forth in AGIA to determine if the project is uneconomic, she
explained.
CO-CHAIR GATTO said he hoped to conform the House and Senate
versions of AGIA as much as possible.
SENATOR MCGUIRE referred to Version O, page 18, line 6, and
explained that the term "preponderance of evidence," was
included as potentially fairer than the higher standard of
"clear and convincing evidence." She also noted that there had
been some controversy regarding whether the appointment of an
AGIA coordinator should be subject to legislative confirmation,
and indicated that this issue was still being considered.
2:11:35 PM
MR. BULLOCK explained that under the Alaska Natural Gas Pipeline
Act of 2004, a pipeline coordinator was appointed by the
President of the United States, with the advice and consent of
the United States Senate. He said that provisions in the Alaska
Constitution limit the positions that are subject to legislative
confirmation and that these provisions have been "quite narrowly
construed." He explained that one provision concerns
commissioners and another refers to agencies such as the
Regulatory Commission of Alaska (RCA), which have quasi-
judiciary functions. He opined that the AGIA coordinator
position does not seem to fall within those constitutional
provisions, but based on his understanding of the duties of the
AGIA commissioner, he indicated that appointment "would not rise
to the level where the constitution would allow legislative
confirmation." He noted that there is no prohibition against
the governor voluntarily including the legislature in the
appointment process, but opined that a separation of powers
issue may arise if the legislature does not confirm the
governor's choice for the AGIA coordinator. He offered that
legal precedent supports the conclusion that there need not be
legislative approval of any position lower than that of a
commissioner.
2:13:46 PM
REPRESENTATIVE GUTTENBERG asked about commercial arbitration
rules and Alaska arbitration proceedings. He noted that the
House Special Committee on Oil and Gas version of AGIA refers to
commercial arbitration rules.
SENATOR MCGUIRE opined that the commercial arbitration rules and
the law of the state would likely work in concert.
REPRESENTATIVE GUTTENBERG said that CSHB 177(O&G) provides that
in the event of a disagreement regarding whether the project is
uneconomic, the "disagreement shall be settled by arbitration
administered by the American Arbitration Association under its
Commercial Arbitration Rules." Version O, page 17, line 23,
refers to arbitration administered by the American Arbitration
Association "under the laws of this state." He questioned
whether the state has an adequate body of law in this area and
what the standards are under commercial arbitration rules. He
said he recalled testimony from last year that indicated some
arbitration approaches provide advantages to certain parties.
SENATOR BILL WIELECHOWSKI, Alaska State Legislature, opined that
it would be preferable to use Alaska law to the extent possible.
2:16:25 PM
REPRESENTATIVE GRUENBERG said that the American Arbitration
Association has a set of commercial arbitration rules that
parties can agree to abide by through contracts. He referred to
AS 09.43.010-595, which is the Uniform Arbitration Act, and
opined is the state law referred to. He expressed concern
regarding use of the term "abuse of discretion," and noted that
there are very narrow grounds which allow a court to vacate or
modify an arbitration award. He indicated that AS 09.43.500(a)
sets forth that arbitration awards can only be vacated if
procured by corruption, fraud or other undue means, or if there
was evidence of partiality, misconduct, corruption, or other
factors affecting the integrity of the decision. He offered his
belief that there is nothing in the Alaska arbitration statutes
"approaching abuse of discretion" and that using this standard
would be a major change in state law. He said that the term
"abuse of discretion" does not reflect a uniform standard, but
is interpreted differently depending on the area of law. He
offered that in the event of an appeal, the meaning of the term
"abuse of discretion" would likely be a main point on appeal.
MR. BULLOCK opined that the "abuse of discretion" standard is
generally applicable in administrative appeals.
REPRESENTATIVE GRUENBERG offered his opinion that it is not that
simple, and opined that courts give different degrees of
deference to administrative agencies depending on the nature of
the administrative decision. He characterized the determination
of "abuse of discretion" as a very complex issue of appellate
law.
2:20:49 PM
SENATOR WIELECHOWSKI said he argued against use of the term
"abuse of discretion" because the term has varying meanings. He
opined that the default provision should be the Alaska Uniform
Arbitration Act, which sets a fairly high standard. He argued
in favor of the term "under the laws of this state" in Version
O, page 17, line 23. He said that typically arbitrators will
"apply any laws that they want," and opined that it is
appropriate to indicate that Alaska law should apply.
CO-CHAIR GATTO observed that the pipeline may go through another
country and asked whether the limitation to Alaska law could
cause disputes.
MR. BULLOCK noted that the abandonment issue concerns only the
state and the licensee, not other parties.
SENATOR MCGUIRE suggested that one approach may be to reference
the Alaska statute governing the Uniform Arbitration Act.
REPRESENTATIVE ROSES recounted his experience with an
arbitration proceeding in which the arbitrator used precedent
from another jurisdiction rather than Alaska law. He recalled
that neither side was satisfied with the decision.
REPRESENTATIVE GUTTENBERG asked what laws will apply to pipeline
issues for the portions of the project outside of the United
States.
2:25:16 PM
SENATOR WIELECHOWSKI replied that his understanding of AGIA is
that the licensee will agree to abide by the terms of AGIA for
the entire project. If there is a dispute regarding a portion
of the project in Canada and it is addressed in AGIA, then it
will be determined under the provisions of AGIA. If those
provisions call "for Alaska law," then that is the law that
applies, he said.
SENATOR MCGUIRE opined that if AGIA is a contract, then some
parties might argue that federal laws apply. If AGIA is a
general law, then Alaska law applies.
MR. BULLOCK reiterated that the abandonment provisions only
concern the relationship between the state and the licensee. He
indicated that a determination that the project is uneconomic
does not necessarily result in abandonment of the pipeline, but
only the abandonment of the relationship between the state and
the licensee. He opined that AGIA is to "get a project
started," it is not to define what the project is.
SENATOR WIELECHOWSKI responded to a question by explaining that
the bill had been amended to state that Alaska law applies
throughout the entire AGIA process.
2:28:43 PM
CO-CHAIR GATTO asked for clarification as to whether Alaska law
applies to AGIA, or whether AGIA determines that Alaska law
applies to the contract.
SENATOR WIELECHOWSKI stated his understanding is that Alaska law
applies to AGIA, and any disputes related to the contract or the
bill will "be disposed of by a court of competent jurisdiction
here in Alaska." He opined that issues related to Canadian
regulatory laws will be "prosecuted in the Canadian courts."
2:29:27 PM
SENATOR MCGUIRE said this issue was still being considered by
the Senate. She noted that Version O, Section 6 concerns
expedited consideration of court cases and sets forth that the
legislative intent is for expedited consideration of cases
concerning pipeline issues as allowed by the Alaska Rules of
Court.
CO-CHAIR GATTO asked what authority would authorize a party to a
contract to invoke expedited judicial review.
2:31:03 PM
SENATOR MCGUIRE stated it is a statement of intent, and
indicated that there is a separation of powers issue which
restricts the ability of the legislature to direct other
branches of government.
REPRESENTATIVE GRUENBERG suggested that the language of Version
O, Section 6, be broadened to include challenges and
interpretations of AGIA as matters that the legislature would
like reviewed expeditiously.
SENATOR WIELECHOWSKI agreed that the aforementioned point is
well taken. He stated that although Section 6 is not binding on
the judicial branch, the courts generally attempt to expedite
issues like this because "they understand the importance."
2:33:22 PM
REPRESENTATIVE GRUENBERG asked about the possibility of
requiring that challenges to AGIA be filed within a certain time
period and directly to the Alaska Supreme Court. He indicated
that a similar approach was used during construction of the
Trans-Alaska Pipeline System (TAPS).
2:34:20 PM
SENATOR WIELECHOWSKI replied that there is a section in Version
O, section 420, page 24, which requires that constitutional
challenges to AGIA be brought within 90 days after issuance of a
license. He said there had been "quite a bit" of discussion
about the possibility of granting original jurisdiction to the
Alaska Supreme Court. He offered that if the goal is to
expedite resolution of issues under AGIA, an appeal directly to
the Alaska Supreme Court may not speed up the process as that
Court may have to appoint a special master to hold a hearing on
certain issues.
REPRESENTATIVE GRUENBERG suggested that a special master could
be allowed to proceed under a different set of rules than the
normal appellate rules so as to expedite proceedings on a
challenge to AGIA.
SENATOR WIELECHOWSKI explained that a special master is someone
selected by the Alaska Supreme Court to gather facts as directed
by the court. He said special masters are often retired judges
appointed to particular cases to help the Supreme Court, which
is not bound by the special master's findings.
2:37:16 PM
REPRESENTATIVE SEATON opined that this committee may want to
consider the voucher issue in its discussions of AGIA as a way
to address approaches to avoid or address a failed open season.
2:37:57 PM
MR. BULLOCK explained that vouchers would allow a utility or
other party interested in buying gas to commit to firm
transportation (FT) capacity during the first binding open
season. After they acquire capacity, they can apply to the
commissioners for a voucher that describes the capacity that
party has committed to. The holder of the voucher can then
negotiate with the producers to enter a binding purchase
agreement for gas produced on the North Slope. As part of the
agreement, the voucher would be transferred to the producers so
that the voucher-holder can claim the royalty and tax
inducements, he explained. The goal is to broaden the potential
parties at the first binding open season, he opined.
REPRESENTATIVE SEATON asked whether the voucher allows the
purchaser of gas on the other end to control the inducements
that the state would be offering to a shipper.
MR. BULLOCK stated he believes there is a requirement that the
sale happen on the North Slope, before input into the pipeline.
Otherwise, the gas producer that "doesn't commit" would not get
the benefit of the inducements. The voucher provision allows
another party to commit to capacity on the pipeline without
having its own source of gas, he explained. That party then has
to purchase gas to fulfill their commitment, and the voucher can
be offered to the producer as part of the negotiation, he said.
2:40:05 PM
REPRESENTATIVE SEATON offered his belief that previously the
upstream inducements were available only to a party with FT
commitments. He asked whether a party that wants to sell gas
but does not want to take on FT commitments can still receive
inducements through the voucher system.
MR. BULLOCK explained that the voucher gives the resource
inducement to a producer that did not bind themselves to
capacity during the first open season.
2:40:57 PM
LARRY OSTROVSKY, Chief Assistant Attorney General, Statewide
Section Supervisor, Oil, Gas & Mining Section, Department of Law
(DOL) acknowledged that the producers have claimed that they
need fiscal certainty to be able to enter FT commitments for a
gas pipeline. He said that when considering AGIA, there was an
attempt to accommodate those concerns within the bounds of
constitutionality. He indicated that the provisions on fiscal
certainty were crafted so as to be similar to the timing and
language of the prior Industrial Incentive Act. He said that
the provision was intended to be limited to gas production taxes
and not to apply to a broad ranges of taxes as was done in the
SGDA. He opined that "there is a pretty good likelihood" that
the "provisions we put in would pass constitutional muster," and
in any event there is a severability clause in AGIA so that the
process could continue despite some uncertainty regarding the
constitutionality of the fiscal certainty provisions.
2:44:54 PM
REPRESENTATIVE SEATON asked whether the administration's
position is that a 10-year freeze on production taxes provides
adequate fiscal certainty despite producer testimony that they
require fiscal certainty as to all applicable taxes.
MR. OSTROVSKY said it is not surprising in a situation like this
that any commercial party would desire the maximum degree of
certainty possible. He indicated that the state understands the
concern of the producers that even if one tax rate is frozen,
another tax could still be raised. He offered that an effort
was made to accommodate the need for fiscal certainty, but noted
that it could only be "accommodated to a certain extent,"
without going beyond the bounds of the constitution. He opined
that although "this might not be everything" the producers
requested, it represents a determination of what the drafters of
AGIA thought the state could provide within the bounds of the
state constitution.
2:47:29 PM
REPRESENTATIVE SEATON asked if there is still any constitutional
uncertainty if the 10-year provisions do not, in the opinion of
the producers, provide fiscal certainty.
MR. OSTROVSKY answered that he cannot answer for the North Slope
companies, although he did note that the producers have
expressed a desire that tax rates be set on a greater number of
taxes for a greater period.
2:48:57 PM
MR. BULLOCK addressed the issue of legislative approval of AGIA
and the applicable time period. He said that the time period
for approval may depend on the extent of the legislature's
review. He noted that review could be as simple as the
commissioners presenting only their recommended licensee, or a
more complex consideration of the other acceptable, but
ultimately rejected proposals. The scope of the review may
dictate the time required for approval, he explained.
CO-CHAIR GATTO asked if it is likely that legislative review
will consist of an up or down vote.
2:50:11 PM
MR. BULLOCK replied that ultimately it is an up or down vote
because the legislature will be presented with only one
recommended licensee. If the licensee is rejected, the
commissioners have the discretion to start the process over and
request new applications, he said. He noted that in that
situation, the commissioners would have knowledge of the
legislature's grounds for rejection of the prior proposed
licensee.
2:50:44 PM
CO-CHAIR GATTO asked if the commissioners could accept their
recommended licensee if time runs out before the legislature has
time to finish the task of reviewing the commissioners'
recommendation.
2:50:56 PM
MR. BULLOCK stated that if a licensee is not approved, there is
no licensee available. He went on to say that if the governor
and the commissioners believe the licensee has presented a
proposal that is in the best interests of the state, they may go
ahead and issue the license. In that instance, it may be up to
the court to determine if the license issuance under AGIA is an
executive decision that does not require legislative approval.
He opined that another party with an interest in the pipeline
could also raise the issue and request that the license be
issued even if not approved by the legislature.
2:51:55 PM
CO-CHAIR GATTO asked if the legislature was restricted to
approving only a single licensee.
MR. BULLOCK explained that the commissioners review the
applications and present to the legislature the licensee whose
proposal they have determined to be in the best interest of the
state.
CO-CHAIR GATTO asked how a potential liquefied natural gas (LNG)
project would be considered in the event the legislature later
wants to have an LNG project.
2:52:18 PM
MR. BULLOCK replied that would involve the provisions of AGIA
whereby the licensee is assured that the state will not give the
same benefits in AGIA to another party. He said that the Senate
version includes language that defines a competing pipeline as
one that transports North Slope gas of 500 million cubic feet
(Mcf).
2:53:13 PM
CO-CHAIR JOHNSON asked whether the state may be subject to
damages under AGIA should the state reduce taxes or royalties
after the pipeline contract has been awarded to a third-party
licensee.
MR. BULLOCK opined that the state is not subject to damages as
long as it is not giving money to the other pipeline or
providing incentives. He opined that "tax laws will change" and
that is alright.
2:54:01 PM
CO-CHAIR JOHNSON sought further clarification as to whether the
tax provisions of AGIA are an incentive.
MR. BULLOCK replied that it is ambiguous and that discussions
surrounding both the House and Senate versions of AGIA have
considered the issue of whether changes to laws or regulations
could be deemed to be a benefit or inducement to a competing
pipeline company. He noted that any change in tax laws would
also affect other parties that may be committing to the licensed
project. He went on to say it is critical to have the public
convenience and necessity issue, and if the state's project is
going forward it is possible that a finding could be made that a
second line is needed.
2:54:54 PM
REPRESENTATIVE GUTTENBERG asked whether the state will have the
ability to evaluate a second project should one be proposed
prior to the commencement of operations of the first pipeline.
MR. BULLOCK answered that the competition aspect would have to
be evaluated a little bit further. He opined that competition
takes place at both the intake and output ends of the pipeline.
He said it is not clear without further consideration whether
delivery of gas to Valdez for shipment to San Francisco would
necessarily be in competition with a gas pipeline that goes
overland to the Midwestern United States.
2:56:15 PM
SENATOR WIELECHOWSKI stated that a definition of what
constitutes a competing project has been added to Version O,
page 25, lines 2-4 which defines a competing natural gas
pipeline project as "a project designed to accommodate
throughput of more than 500,000,000 cubic feet a day of North
Slope gas to market." Therefore, an LNG project with less than
500 Mcf per day would not meet the definition of "competing
natural gas pipeline project," he explained. He stated the
intent of the provision was not to discourage development of a
spur line or a bullet line to provide natural gas to Alaska
residents and businesses. He offered that 500 Mcf is a good
number to provide natural gas for in-state use.
2:57:40 PM
SENATOR WIELECHOWSKI addressed a previous point as to whether
lowered taxes could be considered a preferential treatment
extended to a competing project by noting that AS 43.90.440
describes preferential treatment as actions done with the intent
to provide preferential royalty or tax treatment for the purpose
of facilitating or constructing a competing natural gas
pipeline. He indicated that actions that do not constitute
preferential royalty or tax treatment are set forth in Version
O, page 25, lines 5-12. He opined that if taxes were lowered
for everyone, that would not be considered inducing or
facilitating the construction of a natural gas pipeline project.
CO-CHAIR JOHNSON expressed concern that the state could be
liable for damages if the tax changes allowed for development of
a competing project even if the state's intent was not to
facilitate a competing project.
2:58:48 PM
SENATOR WIELECHOWSKI referred to language that says the
treatment must be offered "for the purpose of facilitating
construction." He said there must be an intent to facilitate
construction of a competing natural gas pipeline project and a
party seeking damages would have to prove intent.
2:59:59 PM
REPRESENTATIVE SEATON asked whether the legislature can describe
or narrow the scope of its approval.
MR. BULLOCK responded that how a legislature approaches the
consideration of a recommended licensee is within the discretion
of the legislature.
SENATOR WIELECHOWSKI said that his understanding is that the
legislature can "talk about anything," but if the license is not
approved within 60 days, then the bill fails and no license is
issued. He opined that at that point the executive branch may
decide to award the license despite lack of legislative
approval.
3:02:15 PM
CO-CHAIR JOHNSON asked whether the legislature can amend the
bill requesting issuance of a license for the gas pipeline
project.
MR. BULLOCK replied that the legislature could amend the bill
requesting issuance of the license, but that AGIA is designed to
allow the legislature to approve or disapprove the recommended
licensee. He reminded the committee that the separation of
powers limitations may limit the legislature's ability to amend
the bill.
3:04:17 PM
REPRESENTATIVE GUTTENBERG asked whether the governor could amend
AGIA to conform to a licensee she had approved.
MR. BULLOCK replied that the governor can request a bill through
the House Rules Standing Committee and the legislature can do
what it wishes with it.
[HB 177 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:05:40
PM.
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