Legislature(2007 - 2008)BARNES 124
04/20/2007 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 20, 2007
1:07 p.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
Representative Scott Kawasaki
MEMBERS ABSENT
Representative Vic Kohring
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
04/19/07 (H) Heard & Held
04/19/07 (H) MINUTE(RES)
04/20/07 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
JOHN KATZ, Deputy Associate General Counsel for Energy Projects
Federal Energy Regulatory Commission
Department of Energy
Washington, DC
POSITION STATEMENT: Provided a brief overview of the Federal
Energy Regulatory Commission and answered questions.
JACQUELINE HOLMES, Associate General Counsel for Energy Projects
Federal Energy Regulatory Commission
Department of Energy
Washington, DC
POSITION STATEMENT: During hearing of HB 177, answered
questions.
DONALD SHEPLER, Attorney at Law
Greenberg Traurig, LLP;
Washington, DC
POSITION STATEMENT: Provided a presentation on behalf of the
Palin-Parnell Administration regarding issues related to the
Federal Energy Regulatory Commission.
PAT GALVIN, Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: During hearing of CSHB 177(O&G), answered
questions.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 1:07:26 PM. Representatives
Gatto, Johnson, Edgmon, Kawasaki, Seaton, and Roses were present
at the call to order. Representative Guttenberg and Wilson
arrived as the meeting was in progress.
HB 177-NATURAL GAS PIPELINE PROJECT
1:07:34 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).]
1:08:51 PM
JOHN KATZ, Deputy Associate General Counsel for Energy Projects,
Federal Energy Regulatory Commission, Department of Energy,
explained that FERC consists of five members who are
representatives of FERC appointed by the President of the United
States. He further explained that the comments of commission
staff are that individual's opinion and don't necessarily
reflect the opinion of FERC or any of its commissioners. The
FERC is a deliberative body that officially speaks through a
majority vote. However, the chair of FERC has authorized staff
to speak to the committee and provide as much information as
possible. Mr. Katz pointed out that FERC is authorized under
the Natural Gas Act to certificate interstate natural gas
pipelines. He also pointed out that a few years ago Congress
passed the Alaska Natural Gas Pipeline Act, which created some
special provisions with regard to an interstate pipeline and
included some provisions that would make FERC's work more
expeditious and efficient. The aforementioned Act also included
provisions related to other federal agencies and the
coordination that would occur. In fact, the Act provided for
the establishment of an office of a federal coordinator, which
was filled by former Alaska Senator Drue Pearce. The FERC
essentially stands ready to process an application for an Alaska
natural gas project as soon as such a project is put before it.
He noted that FERC has worked with some of its sister agencies
to prepare for that day, but FERC is essentially a reactive
agency and doesn't have authority to impose requirements in the
abstract.
1:12:34 PM
CO-CHAIR GATTO asked if Mr. Katz has any thoughts as to when
such a project will arrive.
MR. KATZ replied no, adding that no one has told FERC that they
are preparing an application. He reiterated that FERC is a
reactive agency and must wait for an application before it can
start the process.
1:13:24 PM
REPRESENTATIVE SEATON directed attention to the expansions in
Section 7 of CSHB 177(O&G), which requires the main line entity
to propose and support recovery of all expansion costs through
rolled-in rates by not more than 15 percent above the initial
maximum recourse rates. Some contend that such a provision
supplants or defines what a subsidy is. However, he opined that
FERC will review the facts at the time and determine whether a
subsidy exists or not. Representative Seaton asked if Mr. Katz
is concerned that the proposed language presupposes and defines
for FERC what a subsidy is.
MR. KATZ replied no because FERC will have to make its own
decision as to whether there's an improper subsidy. The FERC's
2005 and 2005A orders, which addressed the open season
regulations for an Alaska gas project, indicate that generally
an Alaska project might be considered different because of the
nature of competition in Alaska and the large expense of such a
project. Therefore, FERC established a presumption for rolled-
in rates specifying that it would review whether there was a
subsidy by existing shippers of new shippers by expansion.
However, FERC didn't define what a subsidy would be. In fact,
FERC said that an increase in rates might not be a subsidy, but
that such couldn't be determined until the facts of the specific
case were known. Therefore, if the legislature chooses to offer
an inducement to a prospective pipeline applicant, that
applicant is free to accept or not accept that inducement. The
FERC will then review the facts and determine whether there's a
subsidy or not. Mr. Katz said that he didn't know what FERC
would do with respect to an [application] that discussed a
future expansion.
1:16:53 PM
REPRESENTATIVE SEATON surmised then that Mr. Katz didn't view
the provision that specifies that the mainline entity has to
make the proposal up to 15 percent above the initial recourse
rates as defining a subsidy.
MR. KATZ noted his agreement with Representative Seaton, adding
that the legislature can't bind FERC, which operates under
federal law. He said that it will be up to those going through
the Alaska process with regard to whether they want to accept
the state's inducements or not. The aforementioned is a matter
between the state and those pipeline proponents.
1:18:01 PM
REPRESENTATIVE SEATON recalled testimony that the mainline
entity itself should be able to determine whether there was a
subsidy or not. However, Representative Seaton related his
understanding that FERC would make that determination and a
pipeline entity may not view the facts and circumstances in the
same manner as FERC. He asked if that's Mr. Katz's
understanding also.
MR. KATZ replied yes. However, he acknowledged that a pipeline
proponent could make a case before FERC as to whether it
believes a subsidy will or will not occur in any given
situation. Still, FERC would make it's own decision based on
statements by anyone interested in the case.
1:19:17 PM
MR. KATZ, in response to Representative Guttenberg, said that
it's difficult to provide examples when FERC determined there
was a subsidy and when there wasn't. The difficulty lays in the
2005 and 2005A orders, which held open the possibility of
reviewing an Alaska project differently than that of a Lower 48
project based on the facts of the case.
1:20:29 PM
REPRESENTATIVE GUTTENBERG surmised then that this issue is
without precedence and that FERC will address matters based on
the facts at the time and won't look back on other precedence.
MR. KATZ answered that the commission might use precedent.
However, the aforementioned open season regulation orders of
FERC recognize that an Alaska project would be different than a
project in the Lower 48. For instance, most expect that there
will be one pipeline and thus there won't be "pipeline on
pipeline competition" and thus production in Alaska may only
have one pipeline that it can travel. Furthermore, the expenses
of an Alaska pipeline will dwarf those of any other project. He
noted that a Lower 48 standard is one in which FERC doesn't
allow a rate increase to existing shippers that don't receive
benefits, which FERC orders 2005 and 2005A specify might not
apply to an Alaska project.
1:21:52 PM
REPRESENTATIVE GUTTENBERG asked if there are any other examples
in the FERC orders that specify whether the rates and open
seasons are significantly different as well.
MR. KATZ said, "Not really, no." He reiterated his
understanding that the [FERC] commissioner recognized that an
Alaska project would be unique.
1:22:15 PM
REPRESENTATIVE GUTTENBERG asked if a similar situation occurred
in the early 1970s with the Trans-Alaska Pipeline System (TAPS).
MR. KATZ said that he isn't familiar with the ratemaking for
TAPS. However, he noted that the oil rate regime isn't the same
as the gas rate regime and thus he said he couldn't answer.
1:22:49 PM
CO-CHAIR GATTO inquired as to the difference in how expansion
rates are treated in the contiguous U.S. versus Canada.
MR. KATZ, noting that he's not an expert in Canadian rates,
related his understanding that TransCanada has testified before
the committee that rolled-in rates apply either way, whether
they increase or decrease rates in an expansion. Typically,
FERC is only concerned whether subsidies will occur, whether
rates will increase. If, through an expansion, rates lowered,
then FERC would require that to be rolled-in for a Lower 48
pipeline. He opined that there's a presumption for Lower 48
pipelines that if existing shippers have paid for cheap
expansibility, they shouldn't be deprived of that and the new
shippers shouldn't come on and pay for all the mainline costs.
Furthermore, in the Lower 48 if the rates are lower through an
expansion, those benefits would go to all shippers whereas if
the rates increased, those costs would be paid by the expansion
shippers. He noted that although the aforementioned is the
basic presumption under which FERC operates, parties could agree
to something else.
1:24:40 PM
CO-CHAIR GATTO then invited an explanation of the difference
between incremental rates of the contiguous U.S. versus Alaska's
rolled-in rates.
MR. KATZ explained that typically an incremental rate would be
applied in the U.S. if, for example, there were significant
costs associated with adding capacity and the only benefiting
entities were a small class of shippers, or one shipper that
would become a new shipper on the pipeline. If the costs of
those additional facilities, if rolled-in, would result in an
increase in rates to existing shippers, FERC would point out
that the existing shippers have a contract and an agreed upon
rate and shouldn't have to pay higher costs in order to bring on
a new shipper. In further response to Co-Chair Gatto, Mr. Katz
said that it's standard operating procedure in the Lower 48 to
be incremental only if the costs would increase to existing
shippers. However, if the costs for existing shippers would
remain the same or be lowered as a result of expansion, then
those rates are rolled-in. He noted that often there are
proceedings in which new facilities are rolled-in, and therefore
the standard operating procedure depends upon the features of a
proposed expansion and the costs.
CO-CHAIR GATTO asked if [FERC] makes all the determinations on
that matter or is there a contract prior to entering the
discussion.
1:26:22 PM
MR. KATZ said that there may be contracts.
JACQUELINE HOLMES, Associate General Counsel for Energy
Projects, Federal Energy Regulatory Commission, Department of
Energy, interjected that FERC would make the determination on
the tariff recourse rate, although companies may have negotiated
rates with particular customers that would call for a different
rate than the recourse rate. Ms. Holmes specified that the
recourse rate would be incremental if the cost would be higher
to existing customers and rolled-in if the cost would be lower
to existing customers.
1:27:19 PM
REPRESENTATIVE SEATON referred to Section 6 of CSHB 177(O&G),
which requires expansion in reasonable engineering increments.
He asked if those are parameters that FERC usually has.
MR. KATZ said that he doesn't believe FERC specifically includes
those type of parameters. However, FERC reviews whether a
proposed expansion is in the public interest and performs an
engineering analysis. Therefore, Mr. Katz indicated that there
may not be a large difference between [Section 6 of CSHB
177(O&G)] and the aforementioned FERC review. If FERC's
engineers found that an expansion was very inefficient in
engineering or environmental terms, FERC may require changes in
the proposal to make it reasonable from an engineering
perspective. He related that FERC's policy for the price of
expansion in the Lower 48 is left to the market to decide.
1:28:55 PM
CO-CHAIR JOHNSON requested an explanation of negotiated rates.
He then posed a situation in which negotiated rates turn out to
be a subsidy and asked if FERC has the ability to address or
change those negotiated rates.
1:29:26 PM
MR. KATZ said that FERC would listen to the pros and cons of
expansion rates and make a decision as to whether the negotiated
rates are reasonable.
MS. HOLMES interjected that in a rate case, although a company
may have negotiated a rate with shippers, FERC would treat the
volumes under the negotiated rate as though they were paying the
maximum recourse rate. The difference would likely go to the
company rather than to the shippers, she opined.
1:30:41 PM
CO-CHAIR JOHNSON asked whether FERC gets involved with rate of
returns on pipelines.
MR. KATZ replied yes. He said that when there is a full rate
case before FERC it reviews [the rate of return] along with the
other costs. He mentioned that sometimes the aforementioned is
controversial.
1:31:38 PM
CO-CHAIR JOHNSON surmised then that FERC probably has an average
rate of return for a pipeline.
MS. HOLMES related her belief that currently for new pipelines,
the average return on equity that FERC will grant is 13.5 - 14
percent In further response to Co-Chair Johnson, Ms. Holmes
said that she didn't know the average return on equity in
Canada.
MR. KATZ opined that with FERC recognizing the unique nature of
an Alaska project, a pipeline proponent may argue for a higher
return due to the risk while others may argue for a lower return
because there won't be any competition.
1:32:54 PM
CO-CHAIR GATTO asked if Mr. Katz viewed the Alaska pipeline as
risky.
MR. KATZ said that it depends. If there's a pipeline that is
fully subscribed, then [the state] is probably in good shape.
He didn't doubt that there is a market for an Alaska pipeline or
that there would be customers for the gas. Furthermore,
Congress directed FERC to assume that there's a need for a
pipeline. However, Mr. Katz opined that it would be exceedingly
risky for an entity to move forward on the pipeline without
contracts. Still, it remains difficult to pen down where the
Alaska pipeline falls on the risk spectrum without more
knowledge of a specific proposal.
1:34:24 PM
CO-CHAIR GATTO asked whether it's common or uncommon for there
to be proven reserves when a pipeline is built, although there
is no agreement to place those reserves in the pipeline.
MR. KATZ specified that it's more typical for a pipeline to have
the contracts in hand prior to building, although that's not an
absolute requirement. He related that [FERC staff] view the
possibility of a pipeline being built as increasing along with
the amount of contracts the pipeline proponent is able to
secure.
1:35:21 PM
REPRESENTATIVE GUTTENBERG inquired as to how a failed first open
season would be perceived by FERC and those in Washington, D.C.
MR. KATZ opined that there would be some disappointment in that
[those in Washington, D.C.] have perceived an Alaska project as
crucial to America's energy future. However, if the first open
season doesn't succeed, it doesn't mean the project is gone. In
fact, it's possible that a proponent could hold an open season
and proposed shippers were unhappy with the terms offered or the
size of the pipeline. Still, there's no reason that the same
proponent couldn't change its proposal and be successful in a
succeeding open season, he noted.
1:36:57 PM
REPRESENTATIVE SEATON posed a scenario in which the rate of
return was 13.5 percent. He asked if that's calculated on the
recourse rate or the mix of recourse and negotiated rates.
MR. KATZ clarified that it's based on the cost.
MS. HOLMES further clarified that it would be the cost that
would go into determining the recourse rate.
1:37:35 PM
REPRESENTATIVE SEATON mentioned that there is an idea to allow
vouchers that would allow buyers of gas, end users, to subscribe
for firm transportation (FT) as well as shippers. He asked if
FERC would have any problems with the aforementioned.
MR. KATZ said that he didn't because FERC doesn't necessarily
care who owns the capacity on the pipeline, but is concerned
with whether there are enough people paying on the pipeline to
make it worthwhile for the pipeline to build.
MS. HOLMES noted that FERC does have a requirement that the
shipper on the pipeline holds the title to the gas being
shipped. She said she wasn't sure whether that requirement has
any implications for the aforementioned concept.
MR. KATZ, in further response to Representative Seaton, agreed
to provide the committee with guidance as to related FERC
regulations.
1:39:43 PM
REPRESENTATIVE SEATON then inquired as to whether FERC has any
control or policies on the dismantlement, removal, and
restoration (DR&R) funds. He further inquired as to whether
those DR&R funds accumulate in a company account, a trust
account, or an account that grows with interest.
MR. KATZ responded that typically FERC hasn't addressed those.
He explained that under the Natural Gas Act if a pipeline wants
to give up its facilities or service, abandonment, it must
request the authority to do so from FERC. Usually FERC will
examine the environmental and other impacts of the abandonment
of service and places whatever requirements necessary to address
any environmental damage. He noted that FERC has, for some
offshore pipelines, allowed for negative salvage such that the
pipeline has been allowed to accumulate some funds through a
charge to decommission or salvage the project. Typically, for a
long-line onshore pipeline FERC hasn't done anything like that
prospectively. In further response to Representative Seaton,
Mr. Katz said that he didn't believe there is anything in FERC
regulations that would prevent the state from negotiating
anything it sees fit with a prospective shipper. However, FERC
would review such when it received an application.
1:41:53 PM
CO-CHAIR GATTO asked if the rate of return assumes the [DR&R] is
included in the cost.
MR. KATZ replied, "Typically, it's not."
CO-CHAIR GATTO surmised then that the [DR&R] expense is going to
be borne by the pipeline owner. He inquired as to how the
pipeline owner controls that expense without any reimbursement
for it.
MR. KATZ explained typically that is something that FERC imposes
on the pipeline at such time as the pipeline chooses to abandon
service on portions of its facilities. The pipeline has to make
that call as to whether there are expenses that it has to bear
to do that.
1:42:43 PM
CO-CHAIR JOHNSON recalled testimony from a pipeline company that
said its big problem with AGIA is going all the way to FERC
certification after the first failed season. The pipeline
company said it would be hugely expensive and it wasn't prepared
to do that. He then inquired as to the costs or timelines
associated with continuing to FERC certification after a failed
first season.
MR. KATZ said he could address that in detail because the timing
of an application and the work leading to an application is
largely in the hands of the perspective applicant. However, he
recalled that everyone he has heard discuss the project has
assumed that it will take at least a couple of years to perform
the necessary field work.
1:44:27 PM
CO-CHAIR JOHNSON inquired as to how much of the material would
be pertinent when trying to reach a second open season after a
failed first open season.
MR. KATZ answered that such would be up to the applicant because
the open season proposal is developed by the applicant.
However, there's certainly no reason why a substantial amount of
the information from the first open season couldn't carry over,
it depends upon how much the proposal would be changed.
1:45:42 PM
MR. KATZ, in response to Representative Wilson, clarified that
FERC doesn't negotiate with shippers, producers, or pipelines.
He explained that people come to FERC to file applications, FERC
conducts a hearing, and decides what it thinks is in the public
interest.
1:46:59 PM
REPRESENTATIVE WILSON referred to page 7, subparagraph (C) of
CSHB 177(O&G) and related her understanding that this provision
specifies that an applicant must agree to the rolled-in rates
unless they're over 14 percent.
MR. KATZ clarified that the negotiations would be between the
shippers and the pipeline proponent and they would reach an
agreement. He suggested a situation in which the shippers and
the pipeline proponent reach an agreement and they're the
state's selected entity under AGIA, and therefore they've agreed
not to protest rates unless they are over a specified amount.
Those agreements would be between the state and the pipeline
proponent, but that wouldn't be between those entities and FERC.
Therefore, if an entity came to FERC and wanted to do something
inconsistent with what they agreed to do with the state, they
could do so and FERC would consider that proposal. However,
that entity may be in violation of its agreement with the state
and could be sued in state court or held liable at the state
level. Still, the agreements at the state level wouldn't
preclude FERC from considering whatever options that appear to
be in the public interest. "In other words, they could reach
those agreements, but they wouldn't be binding on the
commission; they might well be binding on the proponent vis-à-
vis the State of Alaska," he stated.
1:49:12 PM
REPRESENTATIVE WILSON posed a scenario in which a pipeline
company builds the pipeline and the process is at the point of
shipping the gas. She inquired as to who would be responsible
if there was a hostile takeover of the pipeline company.
MR. KATZ said that it would depend. If someone purchases 100
percent of the stock of a company, that's not something that
requires FERC approval. If the takeover was structured in
another fashion, FERC approval would be required. He pointed
out that in any case whoever took over the pipeline would be
required to continue under the FERC certificate with the same
terms and conditions as the previous entity operated. Any
change would require FERC authorization.
1:51:29 PM
CO-CHAIR GATTO announced that the committee would now turn its
attention to a presentation by Don Shepler. He then reminded
committee members that amendments would be accepted from now
until about 3:00 p.m. Sunday. He confirmed that amendments
should be to CSHB 177(O&G).
1:52:55 PM
REPRESENTATIVE ROSES related his understanding that there will
be amendments from the administration. He asked if those would
be available for review in order to avoid the introduction of
duplicate amendments.
CO-CHAIR GATTO said that the administration's amendments will be
made available as soon as they are in possession.
1:53:38 PM
DONALD SHEPLER, Attorney at Law, Greenberg Traurig, LLP, said
that he is present on behalf of the Palin-Parnell Administration
to address FERC issues. Mr. Shepler pointed out that the
handouts to the committee are the full text of FERC's orders as
they relate to pricing of expansion capacity while the slides of
the PowerPoint are pertinent portions of those orders. He then
reviewed his background, which prior to working as an attorney
with the Law Firm of Greenberg Traurig, LLP, included 30 years
as in-house FERC counsel for various interstate pipelines in the
Lower 48. Prior to that, he said he worked at FERC and its
predecessor agency, the Federal Power Commission, as both a
trial and advisory attorney. In that capacity he wrote opinions
for FERC.
1:56:10 PM
MR. SHEPLER said that due to the excellent testimony of Mr.
Katz, he wouldn't go through those parts of his PowerPoint that
have already been covered. He said that slides 1-5 provide
background regarding from where FERC was coming and the
congressional mandate it was addressing when it issued the 2005
series of orders. As related on slide 2, the 2004 ANGPA [Alaska
Natural Gas Pipeline Act] mandate to FERC stated: "promote
competition in the exploration, development and production of
Alaska natural gas." In order to achieve that, FERC concluded
that incremental pricing of expansion capacity could place
expansion shippers at a significant competitive disadvantage and
discourage exploration, development, and production. As
mentioned by Mr. Katz, FERC did find that in light of the
uniqueness of the Alaska project, a rate increase isn't
necessarily a subsidy. The aforementioned led FERC to posit
that a subsidization definition "could be whether the expansion
rate is no higher than the actual initial rate or of an initial
rate without built-in subsidies."
1:58:18 PM
MR. SHEPLER explained that the reference to built-in subsidies
refers to the fact that when FERC receives an application for a
certificate or an expansion, it will review that application and
the proposed rate structure to determine how the expansion will
be priced, on an incremental or rolled-in basis. The FERC, in
considering a case-specific application, has said it would be
willing to consider the argument relating to whether the federal
government's loan guarantees and accelerated depreciation
amounted to a "subsidy" of initial shippers' rates. In other
words, whether the recourse rates were pushed down as a result
of the government subsidies consisting of the loan guarantee and
the accelerated depreciation.
1:59:24 PM
REPRESENTATIVE GUTTENBERG, referring to slide 4, asked if the
loan guarantees would have to be used or would it merely be a
matter of whether they influence the process or loan rates.
MR. SHEPLER answered that the assumption is that because the
loan guarantees would tend to reduce the debt cost, the
expectation under AGIA is that the licensee would make
substantial use of those federal loan guarantees in order to
reduce the debt cost. Therefore, [FERC] does assume that the
licensee does take advantage of the loan guarantees or obtains
financing at a cost no higher than the licensee could've
obtained had they used the federal loan guarantees.
2:00:32 PM
REPRESENTATIVE GUTTENBERG asked if the aforementioned could be
used as an argument for increasing the tariffs. For example, if
the licensee wanted to exclude the federal loan guarantees from
the rate, could the licensee argue either way.
MR. SHEPLER clarified that if the licensee didn't use the
federal loan guarantees and their borrowing cost is higher than
it would have been if they had used the loan guarantees, there
would be a question as to whether that was appropriate financing
of the project. He reminded the committee that the goal is to
obtain the lowest cost project. The aforementioned would be
problematic from the standpoint of the state as well as FERC, he
opined.
2:01:40 PM
MR. SHEPLER, moving on to slide 6, highlighted that the seven-
year accelerated depreciation is another benefit to the project
sponsor as it tends to reduce rates when it's run through the
ratemaking mechanism. Additionally, the AGIA contribution to
the project would also tend to reduce the rate to initial
shippers. Furthermore, whoever builds the North Slope gas
treatment plant (GTP) will qualify for 15 percent income tax
credit. He pointed out that slide 6 includes the percentages
presented by Antony Scott, Division of Oil & Gas, Department of
Natural Resources. Collectively, the value of the government
subsidies have the result of reducing the initial recourse rates
by more than 15 percent. He characterized 15 percent as a good
approximation of the minimum value of those government
contributions.
2:03:21 PM
CO-CHAIR GATTO asked if the additional 15 percent federal income
tax credit given to owners of GTP is utilized nationwide.
MR. SHEPLER replied no, that provision was enacted as part of
the comprehensive legislation included in the Alaska Natural Gas
Pipeline Act in 2004. He noted that a GTP is very expensive to
construct.
2:04:01 PM
CO-CHAIR GATTO asked if the cost of a GTP is kept separate or is
the pipeline worthless without it.
MR. SHEPLER said that although someone is going to have to build
a treatment plant, AGIA doesn't address that issue. However,
AGIA does ask that [an applicant] specify how it will deal with
the GTP, regarding who is going to build it. If the GTP is part
of the AGIA project, then the GTP [builder] has to pursue FERC
certification and receive FERC jurisdictional rates. Mr.
Shepler emphasized that FERC isn't dictating who is going to
build the gas treatment plant. However, he highlighted that
given the gas quality, someone is going to have to remove the CO
2
and sulfur before it reaches the mainline because it's corrosive
in the pipeline and wouldn't be acceptable, merchantable,
commercial quality natural gas to be transported. In further
response to Co-Chair Gatto, Mr. Shepler acknowledged that the
percentages specified on slide 6 add up to less than 15 percent
and noted that the value of the 15 percent of income tax credit
on the GTP wasn't included. That wasn't included because the
cost of the GTP is unknown. Mr. Shepler then turned attention
to slide 7, which specifies that AGIA caps the roll-in filing
commitment roughly at the level of governmental subsidies.
2:06:34 PM
MR. SHEPLER opined that FERC recognized in its order that the
argument relating to whether the federal government's loan
guarantees and accelerated depreciations amounted to a subsidy
would be considered by FERC. He explained:
What we have done is we have calculated the impact of
what those contributions are and said that as a
condition of obtaining the AGIA license that the
applicant would agree to propose to the FERC rolled-in
treatment up to the point that the rate increase got
to the 15 percent level, which ... is what we
calculate to be the value of those government
subsidies which ties back in to the FERC's point that
they would consider that issue in determining whether
there was a subsidy when they were presented a fact-
specific case.
2:07:33 PM
CO-CHAIR GATTO pointed out that AGIA sets the rate at 15
[percent], but when the aforementioned numbers are added
together it probably amounts to more than 15 [percent].
MR. SHEPLER said, "I wouldn't try to put too sharp a pencil to
it; it's in rough numbers it's about 15 percent. We've
calculated it being more than 15 percent."
2:08:00 PM
CO-CHAIR GATTO surmised then that conceivably, whatever the
charge for rate increases, it could be that there's really no
increase until more than 15 percent is reached.
MR. SHEPLER said, "I think I'm agreeing with you, Mr. Chairman."
He explained that the recourse rate has already been pushed down
by at least 15 percent. Therefore, until the cost of expansion
exceeds the starting recourse rate plus the 15 percent that's
already a subsidy from the government, that wouldn't be an
inappropriate subsidy by existing shippers for new shippers, he
opined.
2:08:57 PM
REPRESENTATIVE WILSON related her understanding that the GTP can
be built by the shippers, the pipeline company, or an
independent group. Still, FERC reviews the price and determines
what the people that use the GTP are to be charged.
MR. SHEPLER responded that it depends. He reiterated that the
GTP has to be built because the gas must be treated. The GTP is
going to be very costly and will require payment by the people
whose gas flows through it. Therefore, [the administration
believes] since the owner, whoever that is, is receiving a
federal income tax credit for building the GTP, that should flow
through into the rates of the treating service. As a result of
the aforementioned, it will cost something less than what it
would've cost without the tax credit. Whether FERC takes that
into consideration or not depends upon whether the plant is
deemed to be under FERC's jurisdiction or not. He said that's
an issue that would be decided further in the process.
2:11:16 PM
REPRESENTATIVE WILSON opined that someone has to ensure that
it's a fair rate for everyone who uses it.
MR. SHEPLER said, "I really can't answer that question, I would
think so." If FERC regulates the GTP and certificates it, then
FERC will set a rate for it. He recalled that the 1977 Alaska
Natural Gas Transmission System statute required that the
treatment plant be certificated as a part of that project.
However, in light of the 2004 statute it's apparent that the
Alaska project can be built outside of the terms and conditions
of the 1977 statute. Mr. Shepler pointed out that in the Lower
48 the gas treatment conditioning isn't typically a pipeline
function and isn't included in jurisdictional rates rather it's
a service provided by another entity.
[CO-CHAIR GATTO passed the gavel to Co-Chair Johnson.]
2:13:38 PM
MR. SHEPLER, returning to the PowerPoint, directed attention to
slide 8. He then related that [the administration] hasn't
contemplated that AGIA would intrude on FERC's authority. In
the pipeline world, the following adage exists: "The company
proposes, but the FERC disposes." He said that AGIA merely
requires that the pipeline owner file a proposal to use rolled-
in rate treatment up to the 15 percent. [The administration],
he related, is perfectly content with allowing FERC to decide
whether rolled-in treatment will be required or not.
2:14:59 PM
MR. SHEPLER, in response to Co-Chair Johnson, explained that the
pipeline has to propose a certificate and a rate recovery
mechanism. He related that FERC has said that it has
established a rebuttable presumption that will use rolled-in
pricing for an Alaska project.
2:16:02 PM
REPRESENTATIVE WILSON asked then if the producers have the
opportunity to argue however they want or are they locked in.
2:16:36 PM
MR. SHEPLER said that would be answered later in the
presentation. He then returned to his presentation [slide 9]
and recalled staff asking whether rolled-in pricing went both
ways in the U.S. as opposed to Canada. The FERC goal is for the
lowest possible rates for as many shippers as possible.
Therefore, if an inexpensive expansion would result in a rate
reduction to all of the customers using the pipeline, the FERC
has universally required the use of rolled-in pricing going
down. In fact, in the Lower 48 FERC doesn't allow rolled-in
pricing going up. However, as stated earlier, FERC has a
presumption that it would establish rolled-in pricing going up.
2:17:55 PM
MR. SHEPLER moved on to FERC Order 636, as presented on slide
11, which required that interstate gas pipelines "unbundle" and
offer gas transportation service separate from the gas sales
service. In the past, the pipeline purchased the gas at one
end, owned the pipeline and service, moved the gas to market,
and then sold it for the price of the gas plus the cost of the
transportation. The price of the gas was regulated by FERC for
many years, he noted. In FERC Order 636, the pipelines were
told they would be contract carriers and wouldn't own their own
gas in the pipeline, and couldn't sell gas at the downstream
end. Therefore, the pipelines would simply be transporters.
This order, he mentioned, was based upon complaints that the
pipelines had a competitive advantage over producers and gas
marketers who were trying to sell to gas users and distributors
at the downstream end.
2:19:34 PM
MR. SHEPLER, referring to slide 14, related that FERC has
established two species of rates. One rate is a recourse rate,
which is a cost-based rate that is set by FERC under
conventional public utility ratemaking methods. A minimum and
maximum rate is established by FERC. The current policy of FERC
requires that virtually all system costs be recovered through a
"reservation charge." Such a charge is paid regardless of
whether the gas was shipped. However, there are some
exceptions, including in the following circumstances: if the
pipeline isn't ready for service when the contract provides for
shipping; if the pipe isn't capable of providing service, a
credit is typically given for charges during that time; and
force majeure typically results in a partial credit for charges
back to the shipper.
2:21:25 PM
REPRESENTATIVE SEATON asked whether the minimum and maximum
recourse rates set the parameters for a negotiated rate or is it
totally independent.
MR. SHEPLER, referring to slide 15, said that negotiated rates
are the second species. He explained that FERC will allow a
willing buyer and seller of capacity to agree on an arm's length
deal to a rate that's different than the regulated rate. He
further explained that although it may be somewhere within that
band, it may be fixed for the term of the contract. Therefore,
at some point it could go outside that band and even be above
the recourse rate. The FERC says that at all times a potential
shipper must have access to the service at the recourse rate in
order to protect the small players. The negotiated rates are
becoming more common, especially in new projects. As a matter
of policy, FERC has required that pipelines and shippers try to
negotiate cost-sharing arrangements in order to address the cost
of new projects, including cost overruns. In fact, the Rockies
Express Project that's currently being built will utilize fixed
rate contracts for the services that will go forward once the
pipeline is in service. Whatever the parties negotiate, FERC
will tend to accept, he opined.
MR. SHEPLER recalled that there was a question to FERC as to
whether it would look into the subsidy issue if the rate was
below the recourse rate. He noted his agreement with the FERC
representative who said that FERC would review such and would
tend to allow it as a deal between parties, although the
pipeline company would be required to design its recourse rates
as if it collected the full amount of the recourse rate from
that shipper. Therefore, the pipeline is at risk for the degree
to which it negotiates a rate that's below it's cost-based rate.
He noted that sometimes the pipeline company will do the
aforementioned in order to meet competition or other reasons.
Mr. Shepler pointed out that typically a pipeline company
doesn't have to make a rate filing on any particular timeline.
However, FERC usually requires [a pipeline company] after about
three years of service of a new project to return to FERC and
rejustify whether the initial rate, based on estimates, is the
appropriate rate given the actual costs.
2:25:16 PM
REPRESENTATIVE SEATON recalled that Mr. Shepler mentioned that
negotiated rates could be higher than the recourse rates. He
then asked if there is language in AGIA that protects the state
from entering into the TAPS settlement problem.
MR. SHEPLER characterized AGIA as a totally different animal
than TAPS. He highlighted that no one has to enter into a
negotiated rate as the recourse rate is always available. If a
rate higher than the recourse rate is negotiated, he said he
sensed it would be on one of the rate components. For example,
a rate dependent upon the amount of volume actually shipped may
be negotiated. The FERC policy, he reminded the committee, for
recourse rates is such that almost all of the costs are
recovered through the reservation charge and relatively little
is covered through the commodity charge. Mr. Shepler did note
that at different times the ratemaking policy of FERC has been
different. There's no reason that a willing shipper and a
willing pipeline couldn't negotiate a rate that had a lower
reservation charge but a higher commodity charge than if the
recourse rate or FERC's straight fixed variable method of
establishing rates was applied.
2:27:15 PM
REPRESENTATIVE SEATON asked if Mr. Shepler is convinced that the
state doesn't have to worry about a rate being charged that
would then be charged against the state's royalty gas.
MR. SHEPLER said he supposed that's a risk. He reiterated that
nothing in AGIA addresses a situation in which a willing buyer
and a willing seller negotiate a rate above the cost-based rate.
In further response to Representative Seaton, Mr. Shepler agreed
to review whether a provision is necessary to protect the state
from under-valuation similar to under TAPS.
[CO-CHAIR JOHNSON returned the gavel to Co-Chair Gatto.]
2:28:38 PM
MR. SHEPLER turned the committee's attention to slide 16, which
addresses Representative Wilson's earlier question regarding
upstream inducements and whether shippers could protest the
rolled-in treatment. When introduced AGIA contemplated that as
a condition of receiving the upstream inducement, the tax
certainty and royalty relief, a party would commit that it
wouldn't oppose FERC at the pipeline filing required in AGIA.
He explained that the rationale for the aforementioned is:
We're asking the pipeline to propose something that is
in the best interest of the State of Alaska in terms
of facilitating the maximum development of the
resources so that rates are low for everybody for as
long as possible. And, so if the state wants rolled-
in rates for maximizing the resources, it should do
what it can to ensure that FERC actually approves
those rates -- that rolled-in treatment. So, that was
our rationale for linking ... the access to the tax
certainty to the agreement not to protest the rolled-
in, but only up to the 15 percent.
2:30:20 PM
MR. SHEPLER, in response to Representative Roses, clarified that
the rolled-in language is in the legislation twice. The rolled-
in language in the pipeline context specifies that the project
sponsor agrees to propose and support rolled-in pricing for the
expansion. In the upstream inducements portion of the
legislation, it specifies that the recipients of the tax
certainty and the royalty relief agree not to protest the
rolled-in rate.
2:31:06 PM
MR. SHEPLER moved on to DR&R, slide 17, and pointed out that
DR&R is an oil pipeline term. In the gas pipeline industry the
same concept is referred to as negative salvage. He opined that
FERC didn't quite understand what it was being asked. Negative
salvage, he explained, is allowed for gas pipelines. However,
it comes about through rate cases not in the certificate process
when the pipeline is being permitted. On the gas side, FERC
requires that the dollars associated with negative salvage be
booked in a separate account in order to track the accumulated
negative salvage dollars that the pipeline company has
collected.
2:32:17 PM
CO-CHAIR GATTO noted his confusion with the term "negative"
because salvage normally has a positive value.
MR. SHEPLER pointed out that the term "negative" [refers to the
fact] that it's going to cost more to take up [the pipe] than
can be obtained when it's melted.
2:32:48 PM
REPRESENTATIVE SEATON, referring to subparagraph (C) on page 7
of CSHB 177(O&G), related his understanding that the
aforementioned provision precludes the pipeline company from
negotiating any contracts or rate with a shipper that would
place them in contractual obligation or allow them to contract
to oppose rolled-in rates.
MR. SHEPLER replied no, and specified that the concern is
regarding how to protect the recourse rates for the shipper.
[The legislation] specifies that the recourse rates must reflect
rolled-in pricing to a certain level. The [administration]
didn't want the pipeline company to negotiate a totally flat,
fixed, or capped rate for some customers under the negotiated
rate mechanism that wouldn't allow them to recover that roll-in
from that shipper. In other words, if 80 percent of a pipeline
is subject to negotiated rates and there is a commitment not to
raise the rates beyond a specified amount, even if there's an
expansion, then the roll-in can only be recovered from 20
percent of the pipeline customers that are under recourse rates.
Therefore, [that 20 percent] will face a substantial rate
increase for any expansion.
2:35:38 PM
CO-CHAIR GATTO surmised then that at the same time that price
rises, it becomes substantially higher for the pipeline company
as well.
MR. SHEPLER responded, "As a recourse rate shipper, yes." The
idea [behind the legislation] is to spread the costs throughout
all the shippers without limiting the ability to recover from
the negotiated rate group of shippers.
REPRESENTATIVE SEATON suggested then that would basically result
in incremental rates.
MR. SHEPLER noted his agreement that such is the effect.
2:36:43 PM
REPRESENTATIVE SEATON returned to the notion of FT being
purchased by shippers. He recalled that there was some question
regarding the aforementioned.
MR. SHEPLER related that [in Alaska] it's generally assumed that
the people who contract for capacity on the pipeline are going
to be the producers. Although that may be the case, in the
Lower 48 it's just as likely that the holder of capacity on a
pipeline is going to a gas utility, known as a local
distribution company (LDC) or an electric generator. The
voucher system is an attempt to create a mechanism by which the
party contracting for the capacity who had no use for production
tax credits or royalty relief could transfer that relief and
value back to the producer with the production tax and who is
subject to the royalty agreement. Therefore, even if an LDC or
electric generator purchased half of the capacity in the
pipeline, the upstream inducements would remain available to the
parties supplying gas into that FT contract. In further
response to Representative Seaton, Mr. Shepler noted that it's
FERC policy that an entity holding capacity in the pipeline has
to have title to the gas that's moving in that entity's
capacity. He offered to refresh his knowledge on the
aforementioned and provide the committee with the policy basis
behind the provision.
REPRESENTATIVE SEATON related his understanding then that a
downstream entity has to purchase gas from someone in order to
have title to it and be able to ship it. He surmised that it's
not a "mechanistic" problem with having downstream purchasing.
MR. SHEPLER replied no.
2:41:43 PM
PAT GALVIN, Commissioner, Department of Revenue, inquired as to
whether the committee had any questions for him.
2:42:18 PM
REPRESENTATIVE SEATON requested that Commissioner Galvin inform
the committee of any other provisional changes or ideas that
have been vetted in other committees considering the
legislation.
2:42:43 PM
COMMISSIONER GALVIN related that in the Senate Judiciary
Standing Committee the administration suggested language
clarifications regarding the rolled-in rate treatment and some
clarity with regard to the relationship between the recourse
rate and negotiated rates. The administration also suggested
language clarifying that the 15 percent is viewed as a set limit
from the time the initial shippers set the rates. Both of those
suggestions were incorporated into the Senate companion
legislation.
2:44:05 PM
COMMISSIONER GALVIN then turned to the abandonment section and
reminded the committee of yesterday's discussion with regard to
the use of arbitrators in setting up arbitration when one party
thinks a project is economic and another does not. Furthermore,
there needs to be clarification with regard to what the
arbitrator would be deciding and what the standard would be to
rule the project uneconomic. The aforementioned resulted in the
development of a test with regard to the determination, which
was included in the Senate companion legislation. Basically, to
find the project uneconomic one must find that it doesn't have
existing financing and it isn't going to provide a reasonable
rate of return for the resource owner.
2:47:15 PM
REPRESENTATIVE GUTTENBERG asked if this is an appropriate place
to review community impacts.
CO-CHAIR GATTO pointed out that the experience of the community
is that the workers bring their families and thus there's a need
for services on a temporary basis. The aforementioned was
addressed in the TAPS issue such that once the pipeline workers
left the area, there was a need for balance.
2:48:38 PM
REPRESENTATIVE GUTTENBERG recalled that in Fairbanks there was a
moratorium on property tax until the production was flowing
through TAPS. Still, the City of Fairbanks, which doesn't
receive property tax from the pipeline, experienced huge impacts
for various services. He inquired as to how such impacts will
be mitigated going into this gasline project.
COMMISSIONER GALVIN said that the administration does recognize
that as the project moves into the construction phase the
primary issues will be related to the socioeconomic reaction to
the oncoming work. With regard to AGIA, Commissioner Galvin
opined that it's too early in the process and there are many
unknowns. However, there will be adequate time as the process
moves forward to address these issues. He noted that as part of
the administration's evaluation prior to the introduction of
AGIA was the review of a property tax waiver during
construction. Such a waiver wasn't included in the legislation
because there needs to be investment in the communities during
that period of time. He opined, "We didn't want to exacerbate
it by putting a stop to those payments. In the end, it didn't
have as much of an impact on the finances of the project as some
of the other things that we've included in the bill."
2:50:55 PM
REPRESENTATIVE GUTTENBERG recalled that out of the previous
Stranded Gas Act was borne the municipality assessment group
(MAG), which reviewed the impacts of a pipeline. He highlighted
that a pipeline traveling down the highway impacts more than
just Fairbanks. He expressed the desire to include those who
worked on the aforementioned in the process because impacts
start early and linger.
2:51:54 PM
REPRESENTATIVE ROSES referred to page 8, lines 11-15 of CSHB
177(O&G), and inquired as to why it's important to have the
language "regardless of whether any shippers bid" versus "if any
shippers bid".
MR. SHEPLER explained that beyond specifying that there have to
be five off-take points, it restates FERC policy that the
applicant, the natural gas company, still has to offer the
service even if no one contracts for it.
2:54:12 PM
REPRESENTATIVE GUTTENBERG recalled when Mark Hanley, Anadarko,
showed the committee Anadarko's holdings, a considerable amount
of which are in the foothills. He questioned whether it would
be prudent to also include possible input points.
MR. SHEPLER said that he would need to think about that
question.
COMMISSIONER GALVIN mentioned that when [the administration] was
conventionalizing delivery points, they were also viewed as
entry points. "Once you tap in, the gas can flow either way
based upon the demand," he related. He then said he would
ensure that no language change is necessary in order that the
aforementioned isn't precluded. Ultimately, through the AGIA
process the state will end up with a pipeline designed to ship
gas for the demand that is present.
2:56:33 PM
CO-CHAIR GATTO asked if the gas from Cook Inlet requires any GTP
at all.
COMMISSIONER GALVIN said he isn't aware of any gas treatment in
the Cook Inlet.
CO-CHAIR GATTO questioned whether anyone has evaluated the gas
in Nenana. He suggested that requiring a conditioning plant
before the gas can be injected in the pipe may overwhelm the
value, depending upon how much gas is present and the quality of
it.
COMMISSIONER GALVIN commented that the aforementioned is the
nature of the evaluation process. At this point, the gas hasn't
been discovered.
2:57:47 PM
REPRESENTATIVE GUTTENBERG suggested that the infrastructure may
already be available to get the gas off the AGIA line to
Anchorage, which would be stuck with exporting it.
2:57:56 PM
CO-CHAIR GATTO pointed out that it's pipeline quality gas as it
has been treated. The treatment plant, he opined, has a big job
to do as this gas isn't the quality of that found in Cook Inlet.
He mentioned he has heard that Cook Inlet gas is the cleanest in
the world.
2:58:36 PM
REPRESENTATIVE ROSES posed a situation in which there were four
bidders and each bidder met 19 of the 20 requirements in AGIA.
In such a situation, he related his understanding that the
language on page 9, line 14 of CSHB 177(O&G) would mean that the
commissioners would have to reject all four of those bidders.
He asked if that is the intention.
COMMISSIONER GALVIN replied yes, and related the
administration's belief that the 20 "must-haves" is a reasonable
list and an application that doesn't meet them all should be
rejected. Commissioner Galvin said that [the administration]
believes it's important for the state to make a clear statement
of what it expects so that apples to apples can be compared with
the applications. Therefore, it was a deliberative decision to
use the term "shall".
3:00:26 PM
COMMISSIONER GALVIN, in response to Representative Roses,
pointed out that there is a fiscal note from the Department of
Labor & Workforce Development regarding the provision on page
24, lines 21-24 of CSHB 177(O&G) that specifies the currently
projected costs of this program. The original structure of HB
177 was to include this training program as an inducement to get
the projects. Based upon the discussions in the previous
committee, the decision was made to not make the training
program exclusive to the AGIA-licensed projects. Therefore, it
was pulled out and made available as a separate training program
for any similar project. With regard to the funding for the
training program, Commissioner Galvin said the state would come
up with the money, likely through the general fund, to pay for
it in order to ensure that the project has an Alaskan workforce.
3:02:22 PM
REPRESENTATIVE ROSES acknowledged that there is money set aside
in another area. However, he expressed concern that anticipated
costs never seem to anticipate enough. Therefore, he questioned
whether not addressing this at all, precludes [the state] from
requesting that there be matching funds from the bidder to help
develop the workforce.
COMMISSIONER GALVIN said there wouldn't be a direct opportunity
to place an additional requirement on the licensee to make such
a match in order to continue to enjoy the benefits of the
license. He said that he didn't think that AGIA is intended as
a vehicle to provide such a matching arrangement.
REPRESENTATIVE ROSES surmised then that nowhere in that RFA or
RFP would there be any language referring to expenditures for
training.
COMMISSIONER GALVIN related that in the past when there were
similar arrangements for projects to creative incentives for
something in return, there was usually a request associated with
training. The aforementioned always met resistance that seemed
to exceed the actual monetary cost of the training program.
Therefore, when developing AGIA it was decided to promise [to
the licensee] that the state would provide training so that
there would be a workforce for the project and thus it wouldn't
be included in an RFA.
3:06:02 PM
CO-CHAIR JOHNSON, recalling the testimony from Antony Scott,
Division of Oil & Gas, asked if the Department of Revenue is in
agreement with Dr. Scott's testimony and numbers.
COMMISSIONER GALVIN said that the administration supports Dr.
Scott's testimony. He did acknowledge that there are economists
in the Department of Revenue and Department of Natural Resources
who will hold different opinions.
3:08:12 PM
COMMISSIONER GALVIN, in further response to Co-Chair Johnson,
informed the committee that DNR has a model that it developed to
be able to run a variety of scenarios to generate an 85 percent
expectation of a particular number and a 50 percent expectation
of other numbers. He noted that DOR doesn't have an alternate
way to develop that type of sophisticated result. Therefore,
DOR doesn't have a way to generate an alternative view.
3:09:52 PM
CO-CHAIR JOHNSON asked if it would serve a purpose to have DOR's
economist plug DOR's numbers in DNR's formula.
COMMISSIONER GALVIN said that the numbers and assumptions are
basically the same. He acknowledged that there's a question
with regard to Dr. Scott's numbers and how the FT commitment
should be treated in the upstream economic forecast. The
question is whether those should be treated as a debt equivalent
or not. Dr. Scott made it clear that the administration
believes that the FT commitment shouldn't be considered a debt
instrument when considering upstream economics. He noted that a
DOR economist may hold a different view. In my opinion and that
of the gasline team, that DOR economist's opinion isn't backed
by that of the experts and isn't appropriate. Commissioner
Galvin, drawing from everything he and the gasline team have
heard, said considering the FT commitment a debt instrument when
considering upstream economics isn't an appropriate position to
hold with the economic analysis of the upstream.
3:11:55 PM
CO-CHAIR JOHNSON asked if FERC weighs in on this.
COMMISSIONER GALVIN replied no, it's not relevant to FERC's
analysis. In further response to Co-Chair Johnson, Commissioner
Galvin said that one would have to review how the financial
community would treat a similar situation. In discussions with
the financial community, they wouldn't recognize FT commitments
as debt in upstream economics. Therefore, he said he is
confident in the type of analysis being performed. Commissioner
Galvin clarified that the numbers were based upon the
information from the financial communities, in terms of how the
financial communities would view the project not based on [the
administration's] desired outcome. Still, he acknowledged that
views based upon the desired outcome can be obtained, but the
administration went with the analysis of those who don't have an
interest in the outcome.
3:14:19 PM
REPRESENTATIVE ROSES related his understanding that if there is
a FT commitment, then it becomes an asset at that point because
they can now borrow against that. Furthermore, it remains an
asset until the amount to which there is commitment exceeds what
is shipped. He suggested that the FT commitment becomes a debt
when the potential for not being able to ship what was committed
becomes a liability. Therefore, it depends upon the point of
the process.
COMMISSIONER GALVIN highlighted that it's an obligation to make
a payment as well as an opportunity to get gas to market. So
long as one recognizes both ends of the obligation and
opportunity, then it's being given a fair review. Ultimately,
there has to be a fair representation of the economic impact of
a decision. Commissioner Galvin reiterated that the
administration believes Dr. Scott's numbers are the fairest
representation.
3:17:08 PM
REPRESENTATIVE ROSES then turned to the producer and pointed out
that it has shareholders and stock that it sells on an open
market. He opined that on the day there's a pipeline contract,
an absolute commitment, the stock of those companies will
actually rise in value. He further opined that when those
companies can't meet the obligation, there would be a decrease
in their stock value. The aforementioned would prove that it
was a liability/debt, he opined.
3:18:15 PM
COMMISSIONER GALVIN, in response to Co-Chair Johnson, reiterated
the need to recognize both sides of the decision. If a FT
commitment is going to be made, there's suddenly many reserves
to book because there is an opportunity to place them into
market. He emphasized that the FT commitment isn't a debt.
Although there can be an argument that it is debt, Commissioner
Galvin stressed that it isn't appropriate to make a FT
commitment a debt-like instrument for the purposes of economic
evaluation. The aforementioned is supported by the information
from financial communities, oil and gas companies, and others
without an interest in making this argument.
3:19:30 PM
CO-CHAIR JOHNSON commented that if this is accurate, it is
really damning information and really sways his opinion.
COMMISSIONER GALVIN said that there is a tendency to want to
view everything as someone's view of the truth. Ultimately, the
administration and the legislature is striving for the truth,
not just a version of it. He suggested that the committee
review what the administration has presented as well as the
legislature's own economic advisors from a year ago. The
numbers presented a year ago are consistent with Dr. Scott's
numbers, he pointed out. Commissioner Galvin stated, "We're
doing the best in our ability to identify what is the
appropriate way to evaluate this project because in the end the
state's interests are borne by having the best information we
can provide for you rather than trying to push us in a direction
that ends up failing."
3:23:04 PM
REPRESENTATIVE SEATON, from a fisherman's standpoint, said that
there's a debt when three is a payment and an interest rate.
When FT is taken, there's no payment or interest unless the
product isn't shipped at which point the part not shipped is
converted to debt.
CO-CHAIR JOHNSON, from a parent's standpoint, said if a child
asks a parent to co-sign on a loan for a car, the parent doesn't
face payments or interest. However, the parent's credit rating
is impacted, which is a debt. This is the problem, he opined.
CO-CHAIR GATTO said that the FT commitment could be referred to
as debt. However, it's not a fair appraisal because although
the obligation of debt is there, it produces an asset and the
asset overwhelms the debt.
3:26:41 PM
REPRESENTATIVE SEATON asked if the legislation specifies that a
community dividend and the 60 percent profit sharing with the
state will only be countered if contractually obligated in the
license. He also recalled that there was something related to
municipal revenue sharing payments and whether those will be
counted as part of the net present value anticipated cash flow
to the state from the proposal. He inquired as to what
categories will be considered net present value and cash flow to
the state.
3:29:15 PM
COMMISSIONER GALVIN said that the administration hasn't prepared
nor is it in the process of preparing an amendment to the
section described by Representative Seaton. He acknowledged
that the provision doesn't include cash flows to a municipality
of the state. The administration hasn't made the determination
that it's necessary to expand it to include such cash flows.
With regard to whether or not additional revenue that would
result in a cash payment to the state would be included, he
opined that would likely fall under "other factors found by the
commissioners to be relevant to the evaluation of net present
value of cash flows to the state" and could be expanded more
fully in the RFA. "As far as the payments to the
municipalities, we're not currently including that in our
interpretation," he specified.
3:31:07 PM
COMMISSIONER GALVIN related that he didn't believe [the
administration] would object if the legislature feels that cash
flows to municipalities should be included as part of the
evaluation criteria. He characterized it as a policy call.
From the state's perspective, it's a matter of whether it
actually provides an offset to other obligations that the state
would have to make.
3:31:33 PM
REPRESENTATIVE SEATON recalled that the administration brought
forward an amendment to the Senate's companion legislation
regarding carbon emissions. He asked if that amendment will be
brought forward for HB 177.
3:31:46 PM
COMMISSIONER GALVIN replied yes. In further response to
Representative Seaton, Commissioner Galvin confirmed that the FT
voucher amendment will also be brought forward. He then
explained that the administration is in the process of reviewing
CSHB 177(O&G) and CSSB 104(JUD) to identify the differences
between the two and prepare amendments for them. He clarified
that there will be amendments that arise to improve the
legislation as well as amendments made by the Senate committee
for discussion. There will also be amendments that are due to
the drafter's refinement of the language. Commissioner Galvin
informed the committee that the intent is to make amendments
available to align the two versions.
[HB 177 was held over.]
3:33:54 PM
ADJOURNMENT
CO-CHAIR GATTO recessed the House Resources Standing Committee
at 3:34 p.m. to the call of the chair until 1:00 p.m. April 21,
2007.
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